Division of Revenue 2019/20 submission: Financial and Fiscal Commission briefing

Meeting report

Opening remarks
The Chairperson said that Prof Daniel Plaatjies, Chairperson, Financial and Fiscal Commission (FFC) was not present because he was double booked, but Dr Kay Brown, Chief Executive Officer (CEO), FFC and the rest of the team were present. He asked Committee Members for their input and whether they could proceed without Prof Plaatjies.

Mr M Monakedi (ANC, Free State) said they could proceed with the meeting.

Mr O Terblanche (DA, Western Cape) agreed with Mr Monakedi that the Committee proceed with their meeting but asked how it happened that Prof Plaatjies was double booked.

The Chairperson asked Dr Brown to give clarity on the double booking and what the arrangement was between herself and Prof Plaatjies.

Dr Brown apologised and stated that she was under the impression that the Members were aware of the logistical arrangements. The agreement between herself and the Prof Plaatjies was that he would make his way back as soon as he was able to. If the Committee agreed to proceed with the meeting, she had the mandate to lead the briefing until Prof Plaatjies arrived.

The Chairperson said that the meeting was an important one. South Africa was in an environment referred to as a ‘constrained fiscal environment’. The objective, as outlined by President Ramaphosa was to have policy certainty, to have higher growth, development and transformation interventions, to restore cooperative governance and sound financial management, root out corruption, increase monitoring evaluation control for the action plans and implementation, and to reduce unemployment. As a Committee, they had the benefit to the FFC and National Treasury (NT) in that they did a lot of oversight outside Parliament and at grassroots level to monitor the implementation, to follow the money, and to see what was happening in different provinces.

The Chairperson allowed FFC to proceed with their presentation.

Briefing by the Financial and Fiscal Commission (FFC)
Dr Brown stated that the country was in a fiscally constrained environment and the theme of the 2019/20 submission is: Re-engineering the IGFR system in a fiscally constrained environment for National Development. The focus was on the intergovernmental fiscal relations (IGFR) system, looking at its performance and effectiveness in order to see what they would want to recommend in terms of fiscal instruments and incentives in order to assist in the realisation of the National Development Plan goals.
The submission followed up on the three previous submissions made by the FFC. In 2016 the focus was on rural development, in 2017 the focus was on urban development.

The submission had six chapters. The first chapter made a case for re-engineering the IGFR. The second chapter focused on recentralisation of functions from the subnational level to the national level, and whether they found improvements with such function shifts. They looked at both fiscal recentralisation, where the control of the money moved, and at administrative recentralisation, where the actual service delivery moved. Chapter three focussed on health, specifically with the aim of looking at what fiscal adjustments were in place, and how they worked within the fiscally constrained environment. Chapter four looked specifically at the intergovernmental grant system, and at equitable share, conditional grants and the incentive effects within those, and the responses to the fiscal constraint and how it impacted on those institutions that were receiving the grants, particularly, the municipalities. Chapter five looked at the infrastructure sector and the responses to the fiscal constraint there, and looking at the cases of health, education, and transport and whether the cuts in infrastructure sector had any effects on service delivery. Chapter six looked at the water sector, focussing on the instruments that were used to manage the sector, and what the effectiveness of them was. 

Chapter one used an econometric model to look at past economic growth and had a forecast to project how far the current economic trends would get them. The conclusion reached was that if they remained on the same path it would not take them where they needed to be. By using the econometric model they looked at past growth and tried to project the level of growth they would need in order to make a structural shift focussed particularly on aggregate consumption expenditure and what the distributive effects of that would be, and how it would impact on poverty and inequality.

Since the 2008/09 global economic and financial crisis, economic recovery had been slow. At the time economists were unclear whether it was a temporary correction. Initially, South Africa ran a counter-cyclical fiscal policy. In other words they ran a budget that still continued to grow spending as a counter cyclical measure. Beyond 2013 in terms of budgets, it became clear that there as a structural break and that growth would not be recuperated as projected, resulting in fiscal constraints, the narrowing of the fiscal gap and now the negative fiscal gap.

South Africa’s growth patterns were not good compared to the rest of the world, emerging markets, and sub-Saharan Africa. South Africa faced a challenge of unemployment in the economy. In 2017, there were 201 000 job entrants, and only 102 000 were absorbed into the job market. The level of unemployment was growing and had a negative impact on poverty and inequality.

From a budget point of view, the key indicator to monitor was the budget deficit – the extent to which spending exceeded revenue. The budget deficit was growing year after year, and this was noticeable in the recent budget. In the outer year forecast it was evident that the deficit would be less than that of previous years. In successive budgets that have been released, it was also evident that the deficit would never be less than that of a previous. The deficit was increasing with every passing year. Every year that there was a deficit there was also an addition to debt. The problem with the addition of the debt was that interest on the debt increased. Interest payments in the current financial year, 2018/19 sat at R170 billion. This was money that could have been used for service delivery.

Fiscally speaking, the country was in a huge problem relative to where they were ten years ago. Revenue collection was not what it should have been. In 2017 there was R36 billion under-collection and cut in spending of R26 billion. This added to the budget deficit. The FFC was particularly interested in the service delivery impacts of the fiscal framework and noted their concern about the cuts in infrastructure budgets. They understood that there was underspending in some of the infrastructure so if budgets were to be cut, it would be best to cut where monies would not be spent, or where it would be rescheduled so that there was a rationale for that.

The key message in the first chapter was that “business as usual” was not going to assist particularly if they wanted to focus, and this was what they did in their economic modelling. FFC identified a need to focus on the SDGs of reducing poverty to half, eliminating hunger, and to determine what they needed in terms of growth and the changes to be made. In their estimation, they needed to halve poverty and take it down to 27.5%. To do that, they would need to lift growth from their projections of about 2% to 4.5%. It was a tall order. They would also need to have an increase in investment to the extent of about 5.7%, and consumption expenditure would need to increase by 2.5%. In addition, if they look at the distribution flows coming from consumption spending, they would also need to add a measure of 10% increase in social grants. To make sure that they had the pointed and specific effect in terms of the rural economic spaces, they needed to focus on increasing the level of skills because the absorption for employment was in hiring skills.

Dr Brown said the rest of the submission focused on specific areas of the budget and looked at specific changes that were required there.

Mr Chen Tseng, Research Specialist, FFC said that his presentation was an overview of the socio-economic profiles of provinces, capturing some of the social economic bases as well as factors on the ground. With the backdrop of a protracted, decelerated economic growth, narrowing fiscal space and weakened governance, as the International Monetary Fund (IMF) alarmingly concluded in the 2018 Article 4 consultation, “some of South Africa’s economic and social achievements after the end of Apartheid have recently unwound.”

Chapter two was on fiscal recentralisation, the impacts on service delivery, and fiscal intergovernmental relations. By way of introduction and supported by Rand evidence as the Chairperson stated, following the money, table one on page eight provided a comparison between the 2017 and 2018 budgets for the 2018/19 and 2019/20 financial years by spheres of government. The data showed that the provincial and local spheres of government, especially local and provincial conditional grants were the brunt of the fiscal consolidation efforts in the 2018/19 financial year. Total appropriation by national votes – national sphere of government before direct charges was only reduced by R1.568 billion in the 2018 budgets compared to the 2017 budgets for the 2018/19 financial year. In contrast, provincial government transfers were reduced by R1.2 billion and R6.4billion for equitable share and conditional grants respectively, and local government transfers by R3 billion. When looking at the 2019/20 comparison, data showed that additional funding for national departments was R17.7 billion, mainly for higher education and training, and the total main budget expenditure reduction was R19.621 billion. With mainly the results of money re-prioritised from provisional allocation for contingencies not assigned to votes at R12.258 billion, a reduction of contingency reserves at R12 billion as well as the reduction in the subnational spheres of government with provincial government equitable share at R1 billion reduction, conditional grants at R7.55 billion, and local government by R3.6 billion. Hence the fiscal recentralisation was personified or modified.

Ms Poppie Ntaka, Researcher, FFC said she would be taking the Members through chapter two and three of FFC’s submission. Chapter two focussed on recentralisation. Recentralisation was essentially a reform that brought about a reduction in the autonomy of subnational governments. It referred to an increasing role and control by national government. Examples of recentralisation or the national government expanding its footprint included the shifting of functions from subnational government to the national sphere, such as shifting of the social security grants from provinces to the South African Social Security Agency (SASSA), or the case of the Technical and Vocational Education and Training (TVET) Colleges that were shifted from provincial departments of Education to the National Department of Higher Education and Training. In a financial sense, recentralisation occurred when there was a reduction in the autonomy of subnational governments over their fiscal resources as a result of excessive use of conditional grants relative to the streams of revenue that a subnational government would have discretion over.

Recentralisation was often based on the perception that national government was better at service delivery or at ensuring that results were achieved. From FFC’s analysis it appeared that governments were more prone to recentralise during periods of fiscal stress. However, recentralisation raised various concerns and one such as that it ran contrary to the spirit and principles underpinning the multi-level system of government. If it was the case that national government was expanding its role, or its footprint and the result was improved cost-efficient service delivery, and this was happening alongside the upscaling of subnational government capacity, then it could be argued that recentralisation was justifiable. Another concern was that the relocation of functions came with definite financial implications for the sphere gaining the functions, and the one losing the functions.

With regards to the key findings, there was a slight change in the way government responded in the times of fiscal stress. During the 2007/08 financial crisis, national government’s footprint was seen expanding, and this was evident in the strong real growth of the conditional grants relative to the more muted or even declining growth in the block grants or discretionary funds. From the period 2015/16 up until the current MTEF which was also characterised by low growth, the response was quite different. Block grants showed a more growth relative to the conditional grant funding, but whilst the number of conditional funding had not grown rapidly, what was starting to show was the growth in the number of earmarked conditional grants which were the pockets of funding within the existing conditional grants that had stringent conditions. Therefore, this could have been a subtle approach of the centralising of fiscal control by national government.

Another key finding related to the earmarked funds within the Human Settlements related grant. Their analysis found that national government was not necessarily better, raising the question behind recentralisation. For example, there were still high levels of employment between 2016/17 and a similar performance of the grant in upgrading of informal settlements in mining towns. In terms of performance of service delivery, the mining town grant showed that in 2016/17 only 41% of the targeted sites were upgraded.

With regards to the third finding which was derived from the case study on TVET Colleges, the colleges were relocated to the national sphere in 2012. Their study evaluated the performance of the TVETs before and after relocations and found that some did improve after the reform. However, there were several colleges that were efficient while under provinces which had now seen a decline after the reform. This implied that taking a blanket approach to reform was not necessarily ideal.

FFC recommended: government not automatically resort to increasing the role of national government since historical performance data did not generally show support for this leading to improved performance; to improve service delivery and attainment of specific priority outcomes, and control measures other than the implementation of earmarked conditional grant funding needed to be developed and strengthened; when recentralising a function was deemed necessary, a differentiated approach needed to be adopted – ideally government needed to focus on where the weaknesses within performance existed instead of applying a blanket approach which could negatively affect good performers.
 
Chapter three looked at the provincial fiscal adjustment mechanisms in the Health Department. Understanding that provinces played a critical role in providing primary health care, provincial health departments appeared to be under severe pressure due to massive healthcare demands, coupled with poor growth and transfers. In the context of the current fiscal environment which placed health departments under severe pressure, the analysis sought to find out what means were available for provinces to respond to the ongoing trend. The intergovernmental fiscal arrangement was assessed to check whether there was scope for provinces to adjust.

The key findings were that: intergovernmental fiscal arrangements limited provincial scope for effecting necessary budget adjustments required during periods of fiscal constraint; there was little evidence of an impaired provincial fiscal position that could necessitate fiscal adjustment; provinces tended to use imprudent fiscal devices such as expenditure accruals to conceal negative budget balances and to plug fiscal gaps; major provincial fiscal adjustments tended to cascade from the centre through the cuts or additions made to transfers; notwithstanding claims of provincial fiscal strain, alternative views attributed the source of pressure to episodes of fiscal mismanagement; incidents of cutting health delivery outputs to manage pressure were scant because of fiscal risks associated with such practices.

The FFC recommended that: national and provincial treasuries in collaboration with the national and provincial departments of health develop a framework or criteria for determining serious financial strain, with clear measurable financial and non-financial factors that could be monitored, reported, and used to trigger automatic fiscal adjustment overseen by the provincial legislature; NT and the Department of Health through their respective Ministers should allocate part of the 2018/19 MTEF health infrastructure budget towards gradually offsetting expenditure accruals which arose from unavoidable demand pressures for which allocated budgets were depleted. This was conditional upon meeting targeted reductions in accruals; the Minister of Finance through NT needed to ensure that the framework for health infrastructure conditional grants – Health Facility Revitalisation Grant and National Health Insurance (NHI) (non-personnel component)) – accommodate flexibility during periods of protracted fiscal constraint so that provinces could re-allocate their available capital allocations towards maintenance.

Chapter four looked at the incentive effects of intergovernmental grants as evidenced by municipalities. Mr Tseng said their analysis was on how responsive intergovernmental grants received by municipalities to revenues generated by municipalities were. They also assessed whether South Africa’s grant allocations resulted in grant-driven crowding out of behaviour among recipient municipalities.

The key findings were that: for metropolitan (category A) municipalities – conditional grant transfers positively correlated with own revenue collection and generated increased funding of capital outlays. On the other hand, increased equitable share funding (ESF) was associated with lower capital and operating expenditures; for secondary cities (category B1) municipalities – ESF was positively correlated with own revenue while unconditional grant transfers negatively impacted operating expenditure; for large towns (category B2) municipalities – ESF had positive effects on own revenue and expenditure per capita but conditional grant allocations induced lower per capita outlays on capital and operational goods; for small towns (category B3) municipalities – ESF was beneficial for own revenue and capital, and recurrent  components of municipal spending, while conditional grants yielded higher per capita spending on capital and operational goods and services; for rural (category B4) municipalities – ESF was beneficial for own revenue and different components of municipal spending, while conditional grants tended to lower capital expenditure.

FFC recommended that the Minister of Finance through NT allow small and rural municipalities (categories B3 and B4) greater flexibility in the use of grants to encourage innovative approaches to resolving local problems. They also recommended a fiscal capacity component be introduced into the equitable share formula to make it more efficient and incentivising. The component needed to incorporate two aspects, namely; recognising the revenue-raising effort of municipalities; and recognising the redistributive element of addressing horizontal imbalances.

Chapter five provided the assessment of key provincial infrastructure programmes in the Education, Health, and Transport sectors. Mr Tseng said the analysis focused on how provincial governments could achieve the same level of infrastructure with less money in the prevailing fiscal context.

The key findings were; cuts to baseline funding for provincial infrastructure slowed down infrastructure delivery in the short-term. In the medium-term provinces could absorb spending cuts through efficiency gains if infrastructure procurement and built environment personnel at sector departments/public works were increased; aligning planning, budgeting, and implementation functions of provincial infrastructure delivery resulted in better outcomes. Those functions were currently separated between sector departments and implementing agents, thus distorting incentives and weakening the accountability chain; the analysis of the infrastructure value-chain revealed that a lack of oversight at key delivery points was increasing incentives to engage in fiscal misappropriation.

The key challenges that emerged due to lack of oversight were that; consultants were incentivised to over-design projects because their payment was often based on a percentage of the project cost; there was no third-party review of tenders awarded by implementing agents even though they were solely responsible for appointing contractors with very little participation from sector departments. They awarded projects to contractors without the proper grading and proven track record which was a key driver of inefficiencies in provincial infrastructure provision; permanent onsite supervision of contractors was largely absent, allowing for the concealment of defects and the use of poor quality material.

FFC recommended that the national sector departments of Education, Health, and Public Transport needed to develop clear performance evaluation frameworks for the provincial infrastructure grants under their control; the national sector departments of Education, Health, and Public Transport needed to include greater scrutiny of requisition variation orders, such as automatic review and approval requests to provincial treasuries when the value of the contract was above acceptable levels of the project costs; the Minister of Finance, through NT set and publish the criteria to be measured when monitoring and evaluating infrastructure grants. The assessment criteria regarding infrastructure cuts also needed to be published.

Chapter six provided the assessment of the effectiveness of intergovernmental fiscal relations’ instruments in addressing water challenges. Mr Tseng said their study assessed whether the fiscal instruments and other measures introduced through the IGFR framework helped to achieve the NDP’s goal of ensuring affordable and reliable access to enough safe water and hygienic sanitation for all.

The key findings were that; despite significant spending, access to safe and reliable water services was declining; inadequate expenditure on operations and maintenance was leading to service failures; the current IGFR system incentivised the over-provision of infrastructure without providing for related operating/maintenance costs; the goal of providing basic minimum infrastructure was almost achieved. Priority needed to shift to sustainable operations and maintenance; provision of higher than basic water standards with limited revenue collection aggravated municipalities, the water board, and the National department’s financial deficits; poorly defined grant objectives allowed for substantial deviations from policy, such as the Regional Bulk Infrastructure Grant’s (RBIG) wide mandate which marred accountability, and aggravated financial shortfalls; many municipalities did not pursue cost recovery for services provided at a level higher than basic, which resulted in a poor quality of service provided and inadequate funds to maintain infrastructure, leading to high level of infrastructure system failures.

The FFC recommended that; there be a review of the basic norms and standards for water services, and the associated Local Government Equitable Share (LES) needed to be undertaken by the Department of Water and Sanitation (DWS); municipalities needed to indicate what standards they intended to provide, and how their capital and operational costs were to be funded; in times of fiscal constraint, operating and maintenance costs needed to be prioritised; clearer statements of grant objectives to achieve, and defined basic service levels or sustainability of services needed to be established by DWS; stronger conditions needed to be attached to financial transfers in order to ensure compliance and proper spending for the purposes indicated; grant funding needed to be withheld from municipalities that did not have the necessary measures to monitor and control water consumption, or which did not meet criteria or have valid abstraction licences; the IGFR system needed to shift towards incentivising sustainable operations and maintenance, and introduce a dimension of outcomes-based support for higher levels of service.

The central message that underlay the various recommendations made was that in the context of the country’s intergovernmental fiscal system, three key issues needed be faced; first, there was an urgent need to properly understand the economic challenges in SA, and how they planned to address them with a more purposeful and focused intent; second, there was a need to focus their budgets and efforts on addressing the challenges. In making the necessary changes, they would need to be mindful of the fiscal position so that they focus on redress as far as poverty and inequality were concerned; thirdly, the efficiency of all government activity needed to be sharpened so that residents received the best possible value for money from the taxes they paid to the state. There was a great need for efficiency in the coordination of activities, with the key focus being to address poverty and inequality.

Discussion

The Chairperson said that their experiences during oversight in various provinces and municipalities were also captured in the FFC’s assessment of the case studies they presented. Efficiency of all government activity was the crucial thing, followed by expertise to do what was supposed to be done.

Mr T Motlashuping (ANC, North West) welcomed the presentation, stating that it was straightforward. Institutions such as FFC were created to advise Parliament to address issues such as inequality, poverty and unemployment. Since 2014 there were a lot of recommendations. He was not sure how it was characterised, but the emphasis was placed on addressing issues relating to early childhood learning; that was where the investment needed to be. When the FFC made recommendations, it needed to consider the impact of the recommendations, suggestions, or findings that they had made and directing the country where to invest. They made quite several interesting projections in terms of economic growth; however, what was worrisome was that none of the projections they made was ever met before. FFC made a lot of interesting projections but the results did not show. They took their time and researched their projections around economic growth.

Mr Motlashuping said that on slide nine the FFC stated that recentralisation would not be the only methodology to be applied although it was included in terms of the six areas that they are looking into. He was worried about their analysis that national government was doing well in terms of their expenditure, and if they were doing well with regards to transferring of funds. He asked if they were talking about the money that was transferred from national to provincial government, and local government. He asked if FFC investigated the powers and functions of government regarding recentralisation when they were doing their analysis.

Mr Motlashuping said the National Council of Provinces (NCOP) had a programme called ‘Taking Parliament to the People’ wherein they physically went to areas and investigated issues. They went to the Free State, Eastern Cape and recently to Gauteng. The state of health facilities was bad. He asked how service would be provided ff they were to redirect the funds and leave infrastructure. Health services needed to be provided in infrastructure that was conducive for providing such services. Infrastructure was dilapidated and needed serious attention, so the FFC’s proposal for funds to be redirected was worrying.

Mr O Terblanche (DA, Western Cape) said that he agreed with the summary regarding efficiency. He stated that in the Committee’s oversight visits what always came up was the inefficiency, and how capital projects were implemented by government. A lot of money was wasted because there were no proper supply-chain management people and contract management staff, or even project management on site. A lot of money was lost through corruption because of poor management. A lot of money was wasted on fruitless, wasteful and unauthorised expenditure. This was a serious concern and needed to be jacked up to improve savings.

With regards to recentralisation, Mr Terblanche expressed his concern that apparently there was an expectation that local government or municipalities would be able to raise more funds. If they were to do that it meant the citizens would be taxed more because municipalities could only raise more funds by increasing electricity prices, and the payment of rates and taxes on their properties. This was a serious concern that needed to be resolved without increasing taxes.

Mr Terblanche said the presentation was good, and his points came from that premise. However, things that needed to be done by government in terms of policy certainty were a great impediment to investment in the country and needed to be addressed. They seemed to be dwelling on the practical things that were happening on the ground.

The Chairperson said that the Minister of Finance would table the Medium-Term Budget Policy Statement (MTBPS) on 24 October 2018 and would address the policy issue.

Mr F Essack (DA, Mpumalanga) said that it is always great to receive a presentation from the FFC because they provided food for thought in terms of looking at circumstances objectively in one’s minds. He recalled that Prof Plaatjies always insisted that Parliament needed to insist on those things, and that their role as the FFC was just to advise Parliament. The question that always came to mind when the FFC presented before Parliament, which was twice a year, before the budget speech, and before the medium-term budget was what happened, why they were discussing the depressing scenarios, who was to blame, and who the buck stopped with. In his view, the buck stopped with Parliament - it was Committees like the Appropriations Committee that gave direction, they were the legislators.  The question that the FFC was asking was who and when did someone pay heed to what they were saying. The FFC had been advising them for the last four or five years. When they sat in Committees and interrogated provincial departments, the impression was that the spending was great, and then they saw the FFC’s presentation which spoke about accruals and how things were fictitiously engineered. Spending was one thing but spending effectively is another thing and they needed to take cognisance of that. They were where they were because of their own doing. R170 billion in interest spent alone year on year, and in terms of the GDP and non-growth SA was headed for a train smash.

Mr Essack said FFC mentioned that provinces needed to adjust their budgets accordingly in chapter three, but provinces lacked the necessary levers. He asked where they could take it from there, and who in their opinion did what. He asked whom the FFC suggested could be held responsible for that, and if the Committee could then take it up with National Treasury or the Minister. Guidance was needed on that regard.

Mr Essack said on slide 22 the last bullet dealt with the assessment the FFC had done regarding contracts in terms of informal payments. They all knew where 10 of the 12% went, it was common knowledge. At the end of the day it was the taxpayer that suffered. Again, the FFC was making recommendations. He asked to what extent they had taken heed, and if they had engaged NT about this.

The Chairperson said that in terms of the Public Finance Management Act (PFMA) the buck stopped with the Accounting Officer and the political head of a department, which was the Minister or the Member of the Executive Committee (MEC) in the Provincial Legislature.

Mr Essack commented that they knew that.

The Chairperson responded that they should then implement what they knew.

Mr L Nzimande (ANC, KwaZulu Natal) said the presentation by the FFC was informative, and the studies that it did, helped a lot. He said that they were in a conundrum in the sense that as the Chairperson had earlier stated that they follow the money, and when they did follow the money, they found instances where there was a lack of capacity and ability. Therefore, when looking at chapter two and three of the submission, with regards to reclassification, one remained with the question of what then, and what now? Taking the history of the Accelerated Schools Infrastructure (ASIDI) Grant and its bad performance, and the Early Childhood Development (ECD) Grant, their observation was that provinces were given all the mechanisms, the plans were agreed upon, structures were set up and people to run the project were appointed, but when they were interrogated, some of them had no plans – they did not even heed to the conditions of the Grant(s). It is a real conundrum. He asked if the assumption was sufficiently evidenced that in the fiscal constrained era, where control needed to be done and there was a ballooning of irregular expenditure that it was a concern as FFC had said it was.

Mr Nzimande said the re-directing of funds was a concern in the health sector. FFC made a good deal of work around the health situation. When they discussed health, the medical claims became the key question that was always unanswered, and they were a serious threat to the Health budget. He asked FFC to provide more clarity on the concern of redirecting funds, and national government being a player there.

Mr Nzimande said equitable share was a question that should have been underscored since the FFC was always on that case. As the Committee, the movement towards resolving the issue of equitable share was just too slow compared to the question of reclassification.

Mr Nzimande asked if FFC had dealt with the questions of concurrence of functions, the separation of functions in terms of IGFR and PFMA. They had raised the issues of Health and Education, but the issue of concurrence, the issue of directing funds, and the issue of building one’s own revenue also needed to be addressed.

Mr Nzimande said the presentation was informative and a good platform for policy debate, leading to how policy changes and choices needed to be made.

Mr Monakedi said that the presentation was very informative and helpful. With regards to the issue of recentralisation, they had been able to make a case for it to be seriously considered given the serious inefficiency of service delivery in various government spheres and challenges of mismanagement as far as finances were concerned. Government, and especially municipalities needed to be encouraged to provide above basic service levels so that they were able to collect revenue which could then be used to maintain infrastructure. If no revenue was collected then the structures would decay and affect service delivery, which would lead to protests.

Mr Monakedi said FFC highlighted that low economic growth was at the centre of the crisis, but in terms of their recommendations, it had not come out clearly what measures and interventions they were proposing to boost the country’s economic growth. Without economic growth, they would always remain in the current situation. In terms of FFC’s recommendations he asked where they thought there was a possibility for challenges to be addressed.

The Chairperson asked whether FFC could make an input on the recommendations, and the package that was announced by the President to revive the economy. He asked if they could they more on the socio-economic and fiscal profiles of provinces on page seven of the presentation.

The Chairperson asked if the second bullet point on slide 16 where it said, “Ministers should allocate part of the 2019/18 MTEF” should rather read “2018/19”.

The Chairperson said slide 22 and 23 gave the key challenges that arose due to lack of oversight. The Committee visited a District Municipality in the Eastern Cape and some of the members who sat in that council saw some of the projects for the first time. This was what the Committee came across when they went on their oversight visits to provinces.

Response

Prof Plaatjies said that in terms of the Presidential Fiscal Stimulus and the job summit, they were preparing their response to MTBPS and asked to be called back on it after the MTBPS. This was because they had not looked at it yet. They would probably respond to the Presidential Health Summit as well. There were a couple of things that were going to be packaged in that as part of the fiscal incentives that had been provided, but also what it meant for the economy in terms of development and infrastructure.

Prof Plaatjies said in terms of the measures of interventions to boost the economy, they had given Parliament a submission which spoke to infrastructure and growth, in which they argued that investment in infrastructure would to lead to economic growth. It would attract investment. They also raised how it would help with the unemployment pressure on it, and how one needed to look at each budget as to what each vote was doing with regards to infrastructure investment, economic growth, and human capital. That was followed by the rural development submission, looking at development in what they called rural areas in SA. The definition was fluid. They made a submission on how that would develop rural economies and create better living conditions. They also submitted on urban development, in which they argued that metros were going to be the engines of economic growth. A set of recommendations was brought to both Committees in NCOP and in the National Assembly.

Prof Plaatjies said that before his time in the FFC – 2013 – and after his permanent appointment as Chairperson in 2017, they had made substantive recommendations. The question was not about the FFC determining the impact. They could not determine the impact if Committees and Parliament had not agreed and approved the recommendations. The different reports of different Committees never mentioned that the Committee had agreed on certain recommendations and pushed them forward to the Minister of Finance, who was the head of Treasury, or with the provincial treasuries. They sent the recommendations to both Houses of Parliament and it was amazing that both Houses asked what the impacts of the recommendations were.

Prof Plaatjies said the FFC was the only Constitutional structure that was supposed to advise Parliament on economic, fiscal and social policies to help them determine whether what they had been provided by departments in terms of their votes was correct, appropriate, and relevant, and would make changes to the system. It would have the necessary impact in the lives of the poor, and the historically disadvantaged given the deep levels of inequality and stubborn poverty in the country.

Prof Plaatjies said if Members of Parliament (MPs) did not accept or reject the recommendations, what would happen was a compounded effect. This was because they could go back to the recommendations that had been given to Parliament since the time he was working in NT in the 1990s to the time he left Treasury, and beyond that. There were stacks and stacks of recommendations on different things. On higher education they gave recommendations on how to deal with the looming student financial aid problem that was going to hit the country. When Fees Must Fall happened, they told Parliament that they had recommended in terms of it. At the ‘Herer Commission’ they tabled what they had tabled in Parliament some time ago. If the different Committees did not believe that the FFC was an appropriate institution to be able to bring those recommendations that would help Parliament to be able to interrogate properly what the departments were saying, and what Treasury was saying, then they needed to say so. They did not use their reports. If Parliament needed to review the FFC, then they needed to do that. It was an important institution to be utilised.

Prof Plaatjies asked who took their recommendations seriously. Treasury would say they looked at the direct and indirect impacts that it had on the budgets. FFC made other recommendations such as how to change the system of delivery. The delivery system had not been properly costed and priced. If a department claimed that it was under-budgeted, FFC could prove that was not true. The reason for this was that they had not costed and priced service delivery, and they had not costed and priced legislation and policy. During the time that they were in National Treasury, the Public Management Act made it very clear that any policy that was introduced to Parliament that had an implication for subnational government needed to be costed. If no costing and pricing was done, one would never know if they were underfunded or not.

Prof Plaatjies said the recommendations that were made cut across the spectrum and were sometimes specific to certain departments. And the National Treasury’s cherry-picking of what was direct and indirect did not help. The reason being that they were not sure whether the two Houses of Parliament had looked at Annexure W1 in the Budget Review, which was the responses that they were happy with. The researchers of each Committee needed to look at those responses and see whether the Committee agreed or disagreed with the responses. If they disagreed with something then the FFC could change it, but if they did not indicate whether they agreed or disagreed then it was difficult to change anything.

Prof Plaatjies said there are four things that always stood out in the Health sector; the first was human capital management and recruitment. The Minister shared months ago that one of the things he struggled with in the health system was having people in certain province where the Head of Health had a Basic Education degree qualification. They needed to stop thinking about how they dealt with that shared function because the unfortunate situation that emerged in a transitioning economy like SA was that when things went wrong in a municipality or province, people did not look at the Provincial or Municipal Executive, they looked at the National Executive and at Parliament. That was where people sought their answers from and that was a problem that needed to be thought about.

Prof Plaatjies said the second important thing was the maintenance of Health infrastructure. On the one hand was the issue of buildings and other infrastructure, and on the other hand was medical technology and equipment that required maintenance.

Prof Plaatjies said the third issue was Health finance, the point raised by the FFC was that with the difficulties one would find people finding creative ways to offset the pressures on their budgets and programmes so that they could deliver on services. There was also the Auditor-General (AG) who looked at those things. But that was how people responded in an environment that was tightly constrained and had certain rigidities. On the one hand there was legitimate practice around it, and on the other hand there was irregular behaviour going on.

Prof Plaatjies said the third thing in terms of the Health conundrum was supply-chain, and goods and services, or the lack thereof. Because of the concurrent nature of the function to use proper power, particularly in terms of pharmaceutical prices that were expensive, they were imported.

Prof Plaatjies said the issue of governance, management and leadership sat firmly with the Chairperson. Section 100 spoke volumes about that. The point was that in every cycle since the days of President Mandela, they always had section 100 and section 39, and the question was why, why they had it. There was a need to further interrogate how government and administrative issues were dealt with.

Prof Plaatjies said that Due to the effects of the economy and unemployment, there were several houses that were in economic shock. The reason they did do not have the pass-through costs was because some municipalities were undercharging. If they bought electricity for 40kw for example, they would sell it to the households for R7. They did that because some municipalities were extensive pockets of poverty, where households cannot afford high electricity costs. This was common mostly in the local municipalities; it did not exist in the cities.

Prof Plaatjies said the point on political certainty was rested. The response was that it was the Executive’s responsibility.

Prof Plaatjies said on the point of the payment of adjustments, the key point was that the responsibility for accounting was with the accounting authority in the executive; the Minister. It was also at the provincial and municipal level. The Premier needed to be called in together with the head of the Premier’s office, and the appropriate accounting officer, the MEC.

On the ECD Grants, Prof Plaatjies said that he was not sure whether the Grant was providing the appropriate services. The aim was to ensure coverage for vulnerable children, from cradle to grave. Non-profit organisations were subsidised to develop early childhood, there were municipal, provincial and national regulations that applied. situations of child abuse and the like occurred when some of the people were not qualified for the roles they occupied. The only people that could afford quality early childhood services were people that were part of the middle-class structure, the poor could not afford this. The intention of the ECD Grant was right but it appeared that the money went into administration and infrastructure, and then the money was no longer enough because it was also not properly costed. The State needed to take full responsibility, given the country’s history and, given the inequalities in the country. ECD looks the same in 2018 as it did in 1996. The issue was not that the volunteerism was not working, it is because there was no form of organised way of doing it.

Prof Plaatjies said that with resolving the equitable share question, part of the problem was that the FFC had started working with NT on it, there was no independence. FFC had a dark relationship when it came to equitable share. He stated that he was at pains to have the Commissioners form their own independent view on the equitable share. There were huge infrastructure backlogs in certain provinces, and there were still situations in which provincial and municipal officials were not doing the right things when it mattered. It would be great for the FFC to form its own view on it.

Prof Plaatjies said there was not much the FFC could say on the issue of concurrency rather than that there were always problems with concurrent functions because of the issue as to where the function began and ended for national government given that some of the things were national priorities.

Prof Plaatjies asked Dr Brown to speak on the recentralisation matter. Even the recentralisation debate was an efficiency debate because it sat with the concurrency question. The Constitution set the standard of measure of functionality for a province or a municipality. It did not set the standard of viability.

Prof Plaatjies said the outcry was that there were researchers doing the work who had the skills, but then it just became recommendations in all the Committees and that is where it stopped. If the Committees did not agree with the recommendations, then they needed to let the FFC know that they did not agree with them and the reason why, so they could go back to the drawing board. They needed to change the system because the system was not working. They could not do that if Committees did not respond to the recommendations. The system was not for Treasury to fix, because Treasury was on the trajectory of trying to manage the fiscus of the country.

The Chairperson said that they needed to take note of a study done by Wits University on the success and failures of interventions, and a study by the University of the Free State on the matter of the equitable share done in 2016.

Dr Brown said that one of the key things was accountability and what it meant. From their work as seen in the submission and as articulated by the Prof Plaatjies, there was a necessity to not think that it was 16 years ago and take it and play it as it was. There was a serious need to rethink some of the basic and fundamental issues and go back to the Constitution.

Dr Brown said that in terms of the fiscal framework, they were talking about the taxes in terms of their current system and set of taxes. Dr Plaatjies had already alluded to the fact that in terms of local government, there was a huge change in the tax behaviour of citizens and pressures. The question was, would they then look at property taxes or would they look more broadly at other ways of getting civic responsibility from the people.

Dr Brown said when they thought about the new approaches; they needed to think about how that was in the broad environment, and what the growth story is. With the level of uncertainty in the growth story, it was difficult to determine the broad framework of the equitable share.

Dr Brown said sometimes they responded technically, but in other areas, the interpretation needed to be different. For example, the equitable share was a technical exercise. They would try to use their best proxies and information to make it as equitable as it needed to be. However, in terms of their recommendations, Treasury would do it in terms of what it would table, yet when that equitable share came to a province, it did not come as predetermined in terms of certain factors, it came as a block grant. It was then up to those accountable to apply it in the best possible way in terms of its priorities in a province or in terms of equitable share for municipal development.

Dr Brown said in terms of recentralisation, they were not saying that they were against recentralisation explicitly. What they are saying was that they could not have an upfront position on recentralisation. They could not say that it worked, and if a function in a province was not working then it needed to be taken to the centre. They were arguing that it should be analysed on a case by case basis. There needed to be a proper case study put forward by government explaining why recentralisation was being done, and what the specific problem being resolved was, and how it would be that if moved into national, it would be better. There were financial implications, and because there were setup costs when moving something.

Dr Brown, said there could not be a blanket approach, there had to be specific ways of dealing with efficiency. The key was efficiency and not always about treating a category in a certain way. Perhaps there was a different interpretation of accountability, and perhaps there was a different interpretation of equity and how they would define it. The FFC needed to do work around that. It was important to treat everyone fairly but that did not mean everyone needed to be treated the same. For efficiency it is important to identify the specific problems in a particular domain and what the solution could be instead of a one-size-fits-all approach.

Mr Tseng said that slide seven was an overview of some of the basic social indicators in provinces and the color-coding was relative between provinces. Slide eight provided cautionary notes on recentralisation and the numerical exercise done there showed how ‘the end’, the real money outcome, and the different shifts between the budgets was in those financial years. It showed a disproportionate cut on how recentralisation was affected on the overall fiscal framework of the MTEF. It was disproportionate on a subnational level.

The Chairperson said that although National Treasury gave a formal response to the recommendations, he wanted them to comment on the FFC’s submission.

He asked that they give details about the reporting of the equitable share allocated money, if they were following the money, was the money going to the intended people – poor people, and that it was part of their oversight. The document submitted by the FFC was a monitoring tool for MPs and could be developed into a monitoring document for members going into the 2019 election.

Comments by National Treasury

Mr Steven Kenyon, Director: Local Government and Budget Framework, NT said that they responded formally to the recommendations and that the responses they gave in Annexure W1 were responses from different government departments and was endorsed by government. He stated that his colleague would speak on the process of preparing those responses.

Treasury respected the independence of the FFC. It was an important Constitutional institution and they valued the close working relationship that they had with FFC. Mr Kenyon did not want the Committee to go away with the impression that the FFC was in their pocket. They respected the FFC as a research organisation and had a close working relationship which was valuable because it gave the FFC insight as to how the decisions made by NT were reached. They also learned from the FFC. Earlier in the year they had a Lekgotla for all the provincial treasuries and NT. One of the agenda items was the ongoing review of the provincial equitable share formula, and the FFC gave a lengthy, detailed, and insightful presentation that really enriched the discussion. They received a lot of value out of the kind of working relationship and wanted to continue with it whilst also respecting the FFC telling them that they had not taken their advice, or that they had done something wrong.

The equitable share was about slicing a cake. There was the question about the absolute size of the equitable share to provinces and local government. The equitable share formulas divided the provincial equitable share in nine parts for each of the nine provinces. Gauteng and the Northern Cape were always going to be unhappy with that, because whichever province was gaining, the other eight were giving up some portion of the slice. And the one that was gaining never felt it was gaining enough. If they were setting a target where they thought that all provinces would nod and say that they were happy with the equitable share, then they had set an impossible target.

With that in mind, NT worked to refine, review and monitor how the equitable share was changing, and the challenge they had at the moment, particularly with the provincial equitable share formula was that there was no real growth in the overall envelope for the provincial equitable share. This made the differences more pronounced. The golden era of NT which Prof Plaatjies referred to was a period when they had revenue surpluses and even a fiscal surplus in the one year. They were able to smooth over differences between provinces by adding money to the formula. Now they were facing much tougher times, which meant that when adjustments had to be made, there were payments that had to be taken in that. When they had to make reductions in the growth of the provincial equitable share, all the provinces felt the pain and it put a lot of pressure on the system, and that was why there were a lot of complaints about the mechanisms. Hence the reason for working to review and refine them.

Mr Kenyon said the Chairperson’s question was the right one to ask, how the equitable share was spent when it reached the provinces. That touched a lot on the questions highlighted by Dr Brown around accountability, and with what Prof Plaatjies was saying in looking more broadly at the system they were in. In terms of the Constitution, the equitable share allocations were unconditional transfers, and the Constitution set up spheres of government with their own accounting structures. The provincial governments were accountable to their electorate, the municipal governments are accountable to their electorate, and the equitable share was a substantive contribution toward them being able to perform their functions as those elected governments choose to prioritise them. That is why the FFC reminded them that the equitable share formulas were not pro forma budgets. Although they allocated money based on education, health needs, etc. for provinces and on water, electricity, free basic services for local governments, they were not in any way requiring that those monies be used in those exact proportions in provinces and municipalities. They were there to contribute to the funding of overall budgets and the overall budget was what needed to make sense, particularly in the local government where so much of the revenues of local government were raised from own revenues, especially in urban and wealthier municipalities. Accountability was at the level of the whole municipal budget when it came to the equitable share fund.

When it came to conditional grants they monitored those line by line, and every cent that was spent against that purpose. On the equitable share fund, they monitored it as part of the overall budget. They had highlighted to the Committee in their submission at the beginning of the year that there were some real concerns on the municipal side about the budgets. Municipalities were tabling unfounded budgets which meant they were starting the year with a plan to fail. They did not have realistic revenues that would cover their expenditure, meaning that they were almost certain to get into trouble during the year. They had also mentioned on the composition of municipal spend, particularly in rural municipalities that there was a high proportion spent on salaries instead of service delivery.

Looking back at when they introduced the new equitable share formula in 2013, there were some rural municipalities that gained tremendously from the introduction of that formula. The research looked at what the impact was, and how the additional funds were used in those rural municipalities. The finding was quite striking. Most of that money, it appeared had gone into wage costs. They had expected that it would go into service deliver. They expected to see more spending on water and sanitation, electricity etc. The accountability for making those choices was with the elected councils. That is where there was a lot of scope to dig deeper. And with regards to the FFC’s recommendations in the submission, that is where they had stopped. They needed to dig deeper.

FFC recommended that rural municipalities be given more flexibility in how they used conditional grants in a fiscal environment, but they did not say what choices the municipalities would need to make with the flexibilities they would have, and what the implications of those choices would be.

They will respond to the recommendations that were directly and indirectly related to the division of revenue in the budget. Prof Plaatjies stated that NT cherry-picked those recommendations, and this was not true.

The Chairperson asked for the research that was done by Mr Pakkies. He is interested in the analysis. It was a concern if money was not going where it was supposed to be going. Parliament needed to intervene on that.

Mr Letsepa Pakkies, Senior Economist, NT, said that Prof Plaatjies had spoken about the classification of the FFC recommendations which NT and the FFC sat and tried to work out which of the recommendations would be responded to through the explanatory memo of the Division of Revenue. This year (2018), they had gone through the same process of ensuring that all recommendations that were directly and indirectly related to give effect to section 214 of the Constitution and the Intergovernmental Relations Act which required the Minister of Finance to table those as an explanatory memorandum when tabling the budget.

The big question was around the unrelated recommendations. Those recommendations noted by the House cut across the various sectors, departments, and spheres of government. Those recommendations were then forwarded to the relevant institutions or departments through two processes. The first was when they did the first consultation. After having consulted with the FFC, they sent out all the recommendations to sector departments in all provinces for them to take note. The second consultation processes which they had just started with, the Minister of Finance would still send letters to the specific Ministers on a political level highlighting the recommendations relating to their departments and ask them to respond directly to the FFC, and the FFC would be copied in that correspondence. Prof Plaatjies was saying that there was normally no response attained through that process, and that was where the Committee came in to hold those specific departments accountable. They were in the process of beginning their second consultation in which they had received from all the provinces and some sector departments their take on some of the FFC’s recommendations. They had consolidated preliminary findings from the first consultation to circulate again in the second consultation. This was to ensure that all recommendations found traction within government.

The Chairperson thanked FFC for the presentation and discussion.

The meeting was adjourned.