ATC101116: Report Medium Term Budget Policy Statement

Standing Committee on Appropriations

Report of the Standing Committee on Appropriations on the 2010 Medium Term Budget Policy Statement, dated 16 November 2010

 

Having considered the 2010 Medium Term Budget Policy Statement and heard comments from identified stakeholders, the Standing Committee on Appropriations (the Committee) reports as follows:

 

1.  Introduction

 

The Minister of Finance tabled the Medium Term Budget Policy Statement (MTBPS) on 27 October 2010, outlining the budget priorities of government for the medium term estimates. The MTBPS was tabled together with the Adjustments Appropriation Bill and the Division of Revenue Amendment Bill in Parliament. The MTBPS was referred to the Standing and Select Committees on Appropriations (the Committees) to consider and report, in accordance with their respective mandates as outlined in the Money Bills Amendment Procedures and Related Matters Act No. 9 of 2009. Among its responsibilities, as per Section 6(8) of the aforementioned Act, the Committees are required to consider and report on the following issues:

• the spending priorities of national government for the next three years;
• the proposed division of revenue between the spheres of government and between arms of government within a sphere for the next three years; and
• the proposed substantial adjustments to conditional grants to provinces and local government, if any.  

 

This is the second MTBPS introduced in the Fourth Parliament particularly after the introduction of the Money Bills Amendment Procedures and Related Matters Act No. 9 of 2009. The MTBPS provides the framework within which each sphere has to then prepare detailed budgets. The Money Bill Amendment Procedures and Related Matters Act affords Parliament an opportunity to make recommendations and changes to the fiscal framework and the Division of Revenue. While Parliament is required to make recommendations, it is important for Parliament to take into account inputs from other stakeholders such as civil society, labour, businesses, Chapter 9 institutions and others. Through the 2010 Medium Term Budget Policy Statement, it was indicated that South Africa needs to forge a new growth path to focus on its own specific transformation challenges which include the structural of wealth, ownership and control of resources, options for empowerment and broadening participation in the economy, access to land and, improving public education and health. 

 

2. Medium Term Spending Priorities

 

Government prioritises its resources in the following areas:

• job creation initiatives and realigning support to business to enhance employment opportunities;
• enhancing the quality of education and skills development;
• improving the provision of quality health care;
• driving a more comprehensive rural development strategy; and
• intensifying the fight against crime and corruption.

 

 

 

3. Budget Estimates for the 2010/11 Financial Year

 

Table 1 (below) summarises Budget Estimates for the spheres of government

 

Table 1: Budget Allocation for the 2010/11 Financial Year

Sphere of Government	Column A	Column B	Column C
	2010/11 allocation	2010/11 adjustments	Amount adjusted
National	R’000	R’000	R’000
	527 001 492	519 980 624	7 020 868
Provincial	260 973 745	265 139 448	-4 165 703
Local	30 167 706	30 558 566	-390 860
Total	818 142 943	815 678 638	2 464 305

 

The total allocations to national departments decreased by R7.0 billion, allocation to provinces increased by R4.1 billion and allocations to local government increased by R0.3 billion.

 

4. Hearings of the 2010 Medium Term Budget Policy Statement

 

The Standing and Select Committees on Appropriations jointly invited the National Department of Cooperative Governance (DCoG), South African Local Government Associations (SALGA), Financial and Fiscal Commission (FFC), Human Science Research Council (HSRC) to comment on the MTBPS as they were considered strategic in the implementation of policy priorities. The MTBPS Hearings took place on the 2nd and 3rd November 2010.

 

4.1 Financial Fiscal Commission

 

The Financial and Fiscal Commission (FFC) highlighted the potential risks to the moderate economic growth projections for the South African economy, which include: interruptions in the global recovery, exchange rate volatility, human resource needs and the proposed fiscal austerity/consolidation framework over the medium-term.

 

The FFC indicated that for the South African economy to grow faster; a more inclusive economic growth strategy that is multi-faceted is required in its approach. The strategy should focus on poverty alleviation, the labour absorption capacity of the economy, the productivity of public expenditure (i.e. quality improvements in access to social services), accelerated implementation of approved infrastructure projects and increased spending on maintenance and rehabilitation and the rooting out of corruption in all sectors of economy. The FFC requested that more detail be provided in relation to the economic policy direction of government which frames the fiscal environment in which the intergovernmental fiscal relations system must operate for effective Commission engagement.

 

The FFC raised concerns with respect to the downward revisions of agriculture and health spending over the medium term, particularly in light of the fact that these sectors contribute positively to economic growth and form part of the identified 12 national priority outcomes.  The FFC further raised concerns about lack of consultation by some government departments when making financial decisions as per Section 1(3) (1) of the Financial and Fiscal Commission Amendment Act No 25 of 2003.

 

The FFC noted that national government’s share of the Division of Revenue declines over the 2010/11 Medium Term Expenditure Framework (MTEF), whereas the provincial and local government shares increases over the same period. The FFC submitted that the current formula for determining the Local Equitable Share (LES) may be unconstitutional in respect of the Revenue-Raising Component (RRC). Furthermore, the FFC cautioned against potential negative effects on middle income municipalities resulting from the government’s approach to focus on targeted funding for poorer municipalities to the detriment of middle income municipalities.

 

The FFC also indicated that the biggest expenditure challenge in the provincial government is the rising personnel spending compared to other spending items that lead to growth and development. With respect to the local government sphere, the FFC said that the biggest expenditure challenges are the poor performance against conditional grants (particularly infrastructure) highlighted by rollovers amounting to R1.8 billion in the 2010 / 2011 financial year.

 

With respect to proposed substantial adjustments to conditional grants allocations to provinces and local government the FFC noted the following:

 

·         Education Conditional Grants: Dinaledi schools – Mathematics and Science proficiency are identified as key outcomes, but low pass rates do not augur well for the future;

·         Health Conditional Grants: Comprehensive HIV and Aids programme – There is a mismatch between the burden of disease and the population;

·         National Tertiary Services Grant: The health expenditure is dominated by tertiary hospitals, therefore the next tier of hospitals are negatively affected and hence the same effort should be directed towards primary health care facilities;

·         Eradication of Backlogs in Education and Health Infrastructure Grants – The government should reconsider its decision to discontinue grants in these areas;

·         Agricultural Grants: Namely, CASP, Ilima letsema and Mafisa – The FFC agrees that it makes economic sense to merge these conditional grants into one comprehensive agriculture finance programme as their impact individually is limited; and

·         Expanded Public Works Programme (EPWP) Incentive Grant for Infrastructure – The FFC noted low level of spending from this grant. The FFC is of the view that more effective reporting of EPWP projects will allow municipalities to access this incentive grant.

 

The Committee asked the FFC to elaborate what it meant by the unconstitutionality of the revenue raising component of the local equitable share formula. The FFC explained that the unconstitutionality of the LES formula refers to the current practice whereby deductions or additions to municipalities’ equitable share are based on actual revenue collection figures, which disregards the municipality’s capacity to collect revenue and the degree of effort made by the municipality to collect all revenues owed. The FFC advised that this is in contravention of the Constitution. Hence, the FFC recommends that the LES formula should contain a revenue-raising capacity variable.

 

4.2 Department of Cooperative Governance

 

The Department of Cooperative Governance (DCoG) provided the Appropriations Committees with an overview of key focus areas and budget priorities over the 2011 MTEF that will contribute to the national priority outcome 9: “A responsible, accountable, effective and efficient local government system”. Key strategies and programmes proposed by the Department for the 2011 MTEF include: a differentiated approach to supporting local government (i.e. covering aspects of finance, services and labour), propose a single window of coordination, support to municipal finance and administration capability, propose a refined ward committee model to deepen democracy, improved support to human settlements outcomes, implementation of the community work programme and accelerated access to basic services.

 

The DCoG indicated that it has requested additional allocations to the baseline allocations of municipal transfers, which include the Municipal Infrastructure Grant (MIG), Bulk Infrastructure Fund (BIF) and the Local Government Equitable Share (LGES): The Department of Cooperative Governance submitted that:

 

·         An additional allocation of R16.9 billion over the 2011 MTEF to the MIG baseline is requested on the basis of meeting sector target to eradicate infrastructure backlogs;

 

·         An additional allocation of R26.3 billion over the 2011 MTEF to the BIF is requested on the basis of unlocking the delivery of reticulation services by funding bulk infrastructure and procuring well located land towards addressing backlogs in order to ensure universal access to basic services. The DCoG explained that the BIF will be specifically used to upgrade, refurbish and rehabilitate bulk infrastructure such as Water and Waste Water Treatment Works; and

 

·         An additional allocation of R4.2 billion over the 2011 MTEF to the LGES is requested on the basis of complementing the institutional component of the LGES by funding critical skills in municipalities, prioritising water and sanitation over the MTEF in order to build long-term municipal institutional capacity through the proposed reconfigured Municipal Systems Improvement Grant (MSIG) into the Local Government Institutional and Systems Support Grant (LGISSG).

 

The DCoG further submitted that additional funding has also been requested for the following departmental programmes: Special Purpose Vehicle, Disaster Management, and the Implementation of the Masters Systems Plan for National Disaster Management Plan, Municipal Infrastructure Audit, Local Government Turnaround Strategy and the Township Renewal Programme.

 

The DCoG has identified a lack of cooperation and coordination between the three spheres of government as a risk and will attempt to mitigate the risk by proposing that the SPV be a single window for coordination among the three spheres of government. However, the proposed model still awaits cabinet’s approval.

 

 

 

 

4.3 South African Local Government Association

 

The South African Local Government Association (SALGA) indicated that the economic recovery was a welcome sign for local government. However, SALGA also cautioned that the economic recovery bears pressure on demand for quality municipal services and hence the ability of municipal services to support the expansion of productivity within local industries and the sustainability of key economic sectors operating within municipal boundaries.

 

SALGA further recommended a comprehensive review of the local government fiscal framework to address amongst others, the limited vertical share. There should be a systematic review of baselines to ensure:

 

·         Revenue allocations to local government as a whole are congruent with its full range of developmental and service delivery responsibilities; and

·         The vertical share of local government meets the increasing demand for municipal services.

 

Furthermore, this should be coupled with efforts to build the capacity of weaker municipalities to spend efficiently and effectively.

 

A concern was raised as to whether the proposed minor adjustments to the local government equitable share (LGES) formula to allocate more funding towards poorer municipalities are substantive enough to address institutional challenges, such as: the need to appoint skilled personnel to manage finances, human resources, service delivery functions and core administration functions. In addition the availability of credible data on key variables relating to the socio-economic demographic and spatial profiles of municipalities need to be addressed not only to update the data underpinning the LGES formula, but also a more fundamental review of the structure of the formula itself.

 

With regard to conditional grants, SALGA made the following submissions:

·         The management of grants should be reviewed;

·         The approach on conditional grants should not be a one size fits all, it should be according to municipal needs and its capacity to deliver;

·         Analyse past performance to improve the operational effectiveness of the grants;

·         A conditional grant for rural municipalities for job creation and economic development should be introduced;

·         Disaster management funding should reach municipalities faster;

·         Electricity Demand Side Management funding must be effectively targeted; and

·         Increase funding for the water services operating subsidy grant to assist municipalities struggling with refurbishment and maintenance.

 

Since infrastructure funding remains a challenge; it was argued that there should be an explicit link between municipal infrastructure grant (MIG) allocations and LES allocations especially in smaller municipalities. Funding should be set aside through MIG or outside for the funding of refurbishment and upgrade of existing infrastructure in smaller and poorer municipalities. SALGA welcomed the envisaged devolvement of the housing and public transport functions to cities and the increase in the Devolution of Property Rates Grant.

 

The Committees on Appropriations raised a concern as to the perceived lack of support provided by SALGA with respect to capacitating municipalities. SALGA responded that in support of municipalities they are partnering with universities who are service providers to strengthen the capacity of financial management, for example University of Witwatersrand is offering a course in financial management, expenditure and oversight. Furthermore, SALGA reported that they are reviewing the possibility of electing a permanent member to the National Council of Provinces (NCOP) to provide support to the Committees concerning local government matters.

 

Furthermore, the Committees on Appropriations sought clarity on the impact of the new demarcations and SALGA reported that there are 382 new wards in the country which will have a huge financial burden to the government particularly in Johannesburg where there are more than 60 new wards. This also implies the increase in the number of councillors which increases the amount allocated in respect of the institutional component of equitable share which funds the payments of councillors.  

 

 

4.4 Human Science Research Council

 

The Human Science Research Council (HSRC) applauds the Appropriations Committees and the Ministry of Finance for enabling public engagement with the national budget priority setting and decision making processes. Further, it applauds efforts to chart a new inclusive growth path that serves as an agenda for collective action.

 

The HSRC identified the following strengths in respect of the MTBPS:

·         Employment is clearly stated as the government’s top priority, however the MTBPS need to be complemented by more detail as to how the government will implement a new development path that will create 5 million jobs within 10 years;

·         It takes into account the scale of challenges faced in areas of poverty, education and health;

·         It recognises cities as engines of growth, thus requiring more investment in infrastructure to address bottlenecks and backlogs;

·         It recognises that expanding informal settlements need investment; It provides for faster growth in municipal spending compared to growth in provincial and national expenditure;

·         It recognises that investment in transport can improve living standards for workers, cut transport costs and increase productivity; and

·         It gives due attention to rural development, youth employment, the Industrial Policy Action Plan and the Community Works Programme.

 

The HSRC noted the insufficiency of progress with respect to broad education, health and economic indicators. The HSRC recommend that investment in these broad areas targeted for priority need to be further specified. With respect to Education, the challenge is how and where to intervene, in order to break the cycle of the education and development trap. Substantial investments in early learning, through reception year and foundation phase of schools are critical to breaking the stagnation of low performance scores.

 

The Aids epidemic is stabilising, however intensive efforts are still required. The 3rd national HIV prevalence, incidence and communication survey (2008) revealed a number of positive trends. A decline in the HIV prevalence in the teenage population (15-19 years) has been observed, as well as a decline in mother-to-child infections. However, HIV infection risks remain high in the country, with women aged between 25 and 29 years continuing to record very high levels of HIV infection.

 

In respect of economic growth, the HSRC noted the importance of a knowledge economy. A knowledge economy contributes to the growth of an economy. South Africa scores are low in respect of the knowledge economy index and the number of full time equivalent researchers per 1 000 people compared to its counterparts. Furthermore,  there has been slow uptake of the Research and Development (R&D) tax incentive by the private sector and to what extent has the requisite institutional reforms and actions to support the incentive regime been implemented by government. Hence, the HSRC calls for the government to continue to prioritise R&D and monitor and evaluate programmes that has to deliver on R & D outcomes.

 

The HSRC, furthermore placed emphasis on the need for research information to inform medium term expenditure decisions, with concern being raised as to whether national data collection needs in the areas of health and education are receiving sufficient allocations from national funding. The HSRC proposes a new national health survey (i.e. South African National Health and Nutrition Examination Survey [SANHANES]) that will provide real-time annual monitoring of the health status of the nation and fill the current gap in national health surveys. Furthermore, proposes accessibility modelling (that will identify access norms and standards, demand for services, service infrastructure supply etc.) and strategic use of Geographic Information Systems (GIS) capabilities for spatial optimisation of services, resulting in improved service delivery.

 

The HSRC commends the acknowledgement in the MTBPS of procurement and tender fraud which is currently under investigation and the efforts of the Inter-Ministerial Committee on Anti-Corruption in its efforts to address inefficiencies in, and improving the effectiveness of public management. The HSRC also proposes a closer examination of the nature and scope of service delivery protests to avoid future conflicts with communities and facilitate implementation, given the imminent increases in tariffs and user charges.

 

The Committees on Appropriations raised the following points of clarity in respect of the HSRC submission:

 

• The HSRC’s recommendations for improving educational outcomes in light of the poor outcomes observed thus far;
• Whether the government HIV/Aids awareness programme has been effective in light of the prevalence of HIV infections continuing to remain high among women aged 25-29 years;
• Concerns were raised that the current status of Tuberculosis (TB) in South Africa was not mentioned in the HSRC presentation, as the prevalence of TB is quite high as well;
• What conditionalities could be attached to social welfare grants?
• What is the optimal percentage share of GDP that need to be invested in R&D activities?
• What comparative studies has the HSRC undertaken in relation to the economic growth potential of cities?

 

The HSRC responded that government has been proactive by intervening in critical areas such as curriculum and teacher/educator training to bring about positive outcomes. The HSRC indicated that it would provide empirical evidence of factors affecting educational outcomes.    

 

The HSRC explained that the prevalence indicator could be misleading as it does not reflect the positive trends, such as the fact that HIV/Aids patients are living longer as a result of anti-retroviral treatment and more people are becoming aware of their HIV/Aids status. Prevalence is measured according to the number of new HIV incidents reported and the mortality rate of HIV infected people or Aids patients. The HSRC indicated that in the Western Cape, TB forms part the Burden of Disease Programme, whereby HIV/Aids and TB are diagnosed and treated together. This has resulted in cost savings and improved diagnosis and treatment of HIV/Aids and TB. The HSRC were of the opinion that the Western Cape model could possibly be implemented across the country.   

 

The HSRC proposed the following conditionalities related to certain social welfare grants:

• School enrolment could be a conditionality attached to the child-support grant;
• Teenage mothers should either continue with their schooling or enrol in an FET institution in order to gain access to the child-support grant; and
• Conditionality in respect of the proposed youth employment grant could be that the individual should show proof of actively seeking for work in order to qualify for the grant.

 

The HRSC reported that R&D as percentage share of GDP has declined, despite government committing to 1 per cent of GDP, Currently the R&D as percentage share of GDP is 0.93 per cent. The HRSC recommends an optimal percentage share of 1.5 per cent of GDP.

 

The HRSC reported that it forms part of a research group that is reviewing and assessing the socio-economic status of cities. Findings are that the economic performance of cities have benefited the country as a whole and have been the drivers of employment creation. On the other hand, it has placed greater demand on cities infrastructure and service delivery, resulting in greater pressure on the cities finances. Hence, the HRSC cautions the government and recommends a more balanced approach in investment and the distribution of investment between rural and urban areas.

 

 

 

5. Findings

 

• The Committee established that the 2010 MTBPS made more budget provision for the wage bill. Concerns were raised about the increase in the wage bill due to the higher inflationary wage settlement.

 

• Although Section 1(3) (1) of the Financial and Fiscal Commission Act (2003), as amended, provides for a Commission to act as a consultative body and make recommendations to organs of state in all spheres of government on financial and fiscal matters, the Financial and Fiscal Commission alluded, during the hearings on the 2010 MTBPS, to the fact that there has been a lack of consultation between the Department of Cooperative Governance and the Commission.   

 

• The Committee established that there was a lack of expenditure on conditional grants which has led to a roll-over of R1.8 billion in the 2010/11 financial year.  It is the view of the Committee that these grants are very instrumental in the infrastructure development and job creation and should therefore be spent appropriately.

 

• The Committee established that technical and vocational education system is one of the areas which contribute towards economic development and job creation.

 

• The Committee established that there is a lack of consultation by government departments with regards to section 1(3)(1) of the Financial and Fiscal Commission Act.

 

5. Committee Recommendations

 

The Standing Committee on Appropriations, having considered the 2010 Medium Term Budget Policy Statement and heard comments from identified stakeholders, recommends the following:

 

• That the Department of Higher Education and Training should continue to improve quality levels of qualifications obtained at Further Education Technical institutions; and
• That the House adopts the 2010 Medium Tern Budget Policy Statement.

 

 

 

Report to be considered.