Financial and Fiscal Commission Annual Submission 2013/14

Meeting report

Financial and Fiscal Commission Annual Submission 2013/14
Chairperson’s Opening Remarks
The Chairperson welcomed the Financial and Fiscal Commission (FFC) representatives, and reminded Members that their Annual Submission gave recommendations for the Division of Revenue Bill/Act (DORA) for 2013/14. The FFC was  obliged to make recommendations to Parliament 10 months before the tabling of the budget, and the mandate of this Committee included giving consideration to those recommendations. Numerous other Parliamentary committees also engaged with the FFC. He believed that the Committee could improve on linking the recommendations with comments on the budget, as well as to improve its coordination role.

Ms Tanya Ajam, Commissioner, FFC, presented the apologies of the Acting Chairperson, Mr Bongani Khumalo, who was  travelling abroad.

The Chairperson interjected to note that there had not been any dialogue between the committee and FFC this year on appropriations and he felt that the FFC’s Parliamentary Liaison Officer could be more proactive in ensuring this in the future.

Ms Ajam took the point.

Ms Ajam stated that the main challenge in the country was  to move people out of poverty. The Intergovernmental Financing system was  not the major driver of this, but it could play a vital role in enabling or impeding this aim. She noted the ongoing process of government fiscal consolidation, and the challenges to South Africa’s economy, particularly in light of the weak international economic outlook. She stated that the goal must be sustainable job creation, and South Africa was  competing with other emerging economies, such as Brazil, India and China, as economies transformed into knowledge economies. She said the main question was  whether government would be able to ensure that this shift would decrease South Africa’s economic divisions rather than deepening them.

She wanted to focus on three areas; inclusive growth, climate change and environmental sustainability, and institutional development for inclusive growth.

Mr Ramos Mabugu, Research Director, FFC, reported on the notion of supporting inclusive growth which he said was  linked to jobs, knowledge and regional development. He noted that while there had been steady improvement in employment since the economic crisis, there had been a set back in the first quarter of this year. South Africa’s employment figures still lagged behind the figures prior to the recession.

He noted that higher government spending alone would not be enough to address job creation issues. Infrastructure spending alone would also not address these challenges. There were no easy solutions. Higher taxes and/or higher debt would have detrimental effects. For these reasons, he argued that fiscal policy alone was  not enough to address significant challenges, and complementary policies for the short and long term must also be implemented. The sooner that long-term policies were implemented, the more effective the policies would be.

Based on this assessment, he made several recommendations. It was  critical to re-direct government spending towards activities that would directly or indirectly create jobs. The sectors where the greatest job impact could be attained were health care, durable goods manufacturing, agriculture, community services and hospitality and food services. Promoting lower-paying positions would generate the highest job gains.

Unemployment could also be addressed by tackling factors beyond weak demand for goods and services, including providing funds through block grants to small and medium sized enterprises, to maximise employment impact. The Departments of Labour and Performance Monitoring and Evaluation could encourage companies that had the highest unemployment levels to create jobs, by offering incentives. All players in certain sectors could be engaged to produce job plans for the sector.

Ms Ajam said that e-education was  critical, as it was rapidly becoming the basis of the new and changing global economy, despite challenges in providing basic education. However, there had been some difficulties in implementing e-education plans because they had not been considered priority areas and have therefore received limited funding from national and provincial governments, except Gauteng and the Western Cape. This was despite the fact that a White Paper on e-education was prepared as early as 2004. There were a number of e-school projects being run, and the main focus at the moment had to be on financing them through the Department of Basic Education’s budget.

Financing was currently left to each province’s discretion, and this was the cause of the great disparities between provinces. The FFC had measured internet access at schools by looking at which schools had email addresses, and found that 27% of schools overall, but 97% of schools in the Western Cape, had e-mail addresses. She said provinces should be encouraged to spend a set minimum amount on e-learning. E-learning did not always require advanced internet connections, because of mobile access, but advanced e-learning did generally require stable and fast connections. Ideas were being considered, for the linking of schools to government’s virtual private network, for advancement of  broadband networks in metropolitan areas, and for establishing mobile broadband networks via wiFi or wiMax.

Ms Ajam noted that there were effective policies for e-education on paper, but some of the main challenges were the need for concerted cultural and technological adaptation, whilst it was also necessary to have an explicit budget allocation for e-education, supporting strategies and funding, and building of public accountability for policy implementation. The national and provincial education sector required firm and expert guidance on designing e-education. She also noted that there was limited data available on e-education expenditure at the provincial level, which would be remedied if explicit allocations were enforced.

Ms Ajam then moved to present the budget review of public universities in South Africa. She emphasised that South Africa was transforming from a low added-value economy to a more knowledge-intensive one. She stressed the importance of an effective post-school education system to ensure these skills were available in South Africa.

She noted that the current performance analyses indicated that the higher education system was moving towards, but was not yet meeting its national development goals. There were significant challenges stemming from high student failure and drop out rates, and funding below targets. The current funding system was being reviewed, as it was too general to address the specific needs of universities, and there were continued funding disparities between previously white universities and previously black ones . The historically white universities were able to access more private funding, and the FFC was considering a differentiated funding framework, which would have three funding frameworks based on each cluster.

Mr Henry Eksteen, Parliamentary Liaison Officer, FFC, moved on to discuss the impact of climate change on South Africa’s rural areas. It would significantly affect agricultural productivity, and subsistence farmers were particularly vulnerable. He noted that 20 municipalities had been identified as most vulnerable, through a vulnerability index. He recommended that the Department of Environmental Affairs and the National Disaster Management Commission (NDMC) should develop a municipal vulnerability index, which would assist municipalities in proactively assessing and addressing their vulnerability. The Department of Cooperative Governance (DCoG) should adjust the objectives, terms and conditions of grant frameworks for climate adaptation and mitigation investments that prioritised and directly assisted the poor. DCoG should also restructure the special Municipal Infrastructure Grant window to allow municipalities to acquire or rehabilitate ecological infrastructure, and provide a funding window for rural municipalities to receive resources. Department of Agriculture, Forestry and Fisheries (DAFF) should expand provision of rural agricultural extension services for small scale farmers, to encourage climate-resilient farming techniques, which would help to mitigate the local impact of climate change.

Ms Nomonde Madubula, Researcher, FFC, presented on Alternative Financing Mechanisms for Disaster Management. She noted that the severity and frequency of natural disasters was increasing. Internationally, there was increased emphasis on disaster risk mitigation, rather than addressing crises after the fact. In South Africa, the challenges included policy and funding frameworks that were not adhered to by some spheres of government, extended bureaucratic processes for disbursement of funds, and inadequate funding for disaster management at the provincial and municipal levels. She recommended that the Minister for Cooperative Governance and Traditional Affairs should streamline the guidelines, and gazette uniform standards for the classification, declaration, assessment and response to disaster events. The Department of Cooperative Governance should insist upon disaster plans from municipalities, especially the most vulnerable. In addition, government should develop a policy framework for municipal disaster risk financing that differentiated between municipalities, leveraged private resources to fund long-term disaster risk management, and encouraged market-based financing. The National Treasury should require environmental management and vulnerability objectives to be explicitly incorporated into the design of existing key municipal grant programmes.

Ms Madubula also commented on the financing of waste management in South Africa. Currently, the poor costing of capital, operation and maintenance and environmental implications of solid waste in municipalities was leading to unsustainable and poor cost recovery models and limited revenue generation. This was despite the potential of solid waste recycling to create direct and indirect green jobs.

She recommended that government adapt a phased approach to municipality-level solid waste management, by the end of the 2015/16 financial year. Government must take greater advantage of the opportunities for job creation in the solid waste sector, by enhancing the structure of incentives for municipalities to create green jobs through labour-intensive service delivery approaches. FFC recommended that the Department of Environmental Affairs (DEA) should delay the implementation of policy on the regionalisation of solid waste landfills until the fiscal risks and benefits for municipalities were better understood. Government must emphasise expanded access to solid waste services to poor communities while strengthening the policy framework for the provision of free basic refuse removal services.

Ms Ajam then presented on institutional development for inclusive growth and innovation. The primary question was whether South African provinces and municipalities were useful in promoting economic growth. The FFC research discovered that provinces had a negative impact on revenue assignment and expenditure assignment, while municipalities had a positive impact on revenue assignment and a negative impact on expenditure assignment. She argued that it was essential for national strategies such as the New Growth Path to impact on both provincial and local strategies. These national frameworks must be translated into sub-national strategies, with full details for implementation, including capital and labour inputs and multi-factor productivity. The research indicated that economic development powers would be best placed at the provincial level, while economic growth powers should be located at the municipal level. Municipalities should be encouraged to engage more directly in economic growth, with increased revenue and tax handling, and all elements of the fiscal framework assigned to support their growth-enhancing roles. She also noted that municipalities were not always working effectively when collecting revenues. Improved revenue collection could contribute positively to economic growth.

Ms Ajam outlined alternative service delivery arrangements and municipal agencies. She stated that alternative service delivery (ASD) arrangements could provide creative ways for municipalities to deliver services, particularly given their limited financial and human capital resources. In South Africa, the use of agencies at the local level had dropped, due to the need for uniformity in the establishment and form of agencies and the onerous legislative requirements. Despite these obstacles, she argued that ASD arrangements still may provide a creative way for municipalities to deliver services. She recommended that government should review the existing legislation, particularly sections 77 and 78 of the Municipal Systems Act, as the current policy was exceedingly onerous. She also recommended that all established municipal agencies and ASD arrangements be strongly tied to adequate performance levels by the municipality, to ensure effective oversight. There should also be strict enforcement of legislation requiring municipal entities to publicise details of their performance. Non-compliance should be reported to the Auditor-General. Government should also establish a central portal to focus on financial and performance-related information of municipal agencies. A standardised list of criteria should be established, to assist municipalities to decide whether there was a need for the creation of new entities.

Ms Ajam also said it was important to understand some of the dynamics of the capacity challenge at local government level. Human capital was at the core of the public sector and service delivery. Municipalities were still struggling to attract quality public officials, but sometimes this masked the real causes of their problems. To date, municipalities’ attempts to improve capacity had not been tailored to local conditions and needs, and training initiatives were not accompanied by effective evaluation of their impact. FFC recommended that any capacity building efforts must be comprehensive and sustainable, rather than reactive and based on quick-fixes. Environmental constraints should be taken into account, alongside capacity development, so that any attempts to build capacity must target individual, organisational and institutional dimensions of municipalities. Middle and senior management at local government level should be shielded from political interference, to provide for stability, improve skills retention and enhance recruitment. Minimum competency requirements should be enforced to ensure that adequate technical skills were in place.

Mr Mabugu said that, in regard to gender, the FFC had found little connection between gender equality commitments and budgeting, with the main focus being on achieving equity and not on mainstreaming gender equality. There was also a lack of gender-disaggregated data. He recommended that national and provincial departments should pilot gender budgeting in targeted municipalities and ensure that gender planning was institutionalised in municipalities, by sector. Government should also provide gender-budgeting good practice guides, and provide guidelines for collecting gender-disaggregated data. Local governments should institutionalise gender responsive budgeting processes, build capacity for gender mainstreaming and gender responsive budgeting, ensure gender-responsive appropriations and ensure gender-sensitive public participation and consultations at the local level.

Ms Ajam finally concluded that what had been outlined represented the distillation of eighteen months of research by the FFC.

Discussion
The Chairperson asked that questions focus on what could be done with the information for the future..

Mr G Snell (ANC) asked for clarity on the relationship between the FFC and the National Treasury.

Ms Wendy Fanoe, Chief Director, National Treasury, responded that the FFC’s recommendations would receive a response from National Government, not just National Treasury. She noted that the National Treasury’s responsibility was to lead the process of consulting with relevant national departments on the recommendations. National Treasury would also consult with the provincial treasuries. At this stage, however, NT could not respond.

Mr N Singh (IFP) noted that it would be difficult to comment on specific issues from the presentation, given the depth of information that had been presented. Some recommendations resonated with him personally and his party. He specifically asked how to facilitate conversation between the departments mentioned in the presentation.

The Chairperson interrupted Mr Singh to ask that these issues be asked at the end; the presentation itself should be interrogated at this point.

Mr Singh again stressed the difficulty in isolating some issues, and said that whilst other Members may be interested in more details, he was interested to hear about the general direction of implementation.

The Chairperson recognised the difficulties in engaging with the FFC, given the detail of this presentation, as well as other recent and equally substantive presentations by other bodies, including by the Human Sciences Research Council (HSRC). This was not the first, nor the last presentation by FFC, as it would also be giving presentations to portfolio committees.

Ms Ajam noted the numerous committees with whom the FFC had engaged with in the past year. She also noted that the submission included only summaries of significant technical reports and there was more depth to each issue. She also said that the FFC would be holding a training session with Parliamentary researchers. She concluded that FFC had a Cape Town office and would try to be available whenever the Committee wished it to appear.

Mr S van Dyk (DA) said that Mr M Swart (DA) had requested him to ask whether the current labour regulations prevented the creation of lower income positions, as the presentation outlined that as one of the goals. Mr van Dyk also noted the recommendation for redirecting government spending to job creation, since many departments were failing to meet their targets. He asked how productivity could be enhanced given these challenges. He also noted the recommendations around employment and grants, and expressed the view that giving of grants often discouraged employment. He referred to page 8 of the presentation, and felt it was unrealistic to encourage companies to increase their labour levels, given the current labour regulations.

Mr Mabugu noted the different objectives considered by labour, government and the private sector and emphasised that the FFC was seeking ways to balance all concerns. In answer to whether grants discouraged employment, he noted that a balance must be achieved between short-term and long-term solutions. Grants were a short-term solution to address immediate problems. They were specifically needed, for instance, to assist disabled people who did not have opportunities to travel to locations where jobs could be found, and the proposed grants would facilitate them travelling to seek employment.

Mr van Dyk stated, in relation to e-education, that some areas did not have schools or any telecommunication connections. He also asked why the recommendations did not address challenges in administration.

Ms Ajam responded that it was necessary for government to simultaneously address basic school infrastructure challenges, whilst it was addressing other education issues, including e-education. The country could not afford to do one and ignore the other. FFC had a programme this year researching basic school infrastructure. She agreed that the practical elements to education were essential. She noted that teachers needed to be trained to be comfortable with relevant technology. She agreed that if budgeting was not measured, it could not be monitored at all. Since, however, this issue cut across numerous departments it was important not just to focus on the Department of Basic Education but to consider the other issues as well.

Mr van Dyk also noted the comments that farmers would face challenges around climate change, but did not see any recommendations to address them.

Mr Mabugu said that the FFC had made some recommendations focused on climate change, and from there, it was necessary to address food security. He emphasised the recommendation for increased support for smallholder farmers, which would be linked to support to food security and support to farmers to grow and develop. However, he conceded that perhaps the recommendations did not go far enough in supporting farmers, as they were primarily focused on climate change.

Mr van Dyk emphasised the difficulties in working with local authorities, given the backlogs in their collection of revenue.

Ms Ajam noted questions around the fiscal capacity of municipalities and whether their potential could be understood, and agreed that this had to be researched thoroughly. She said it was also important to consider whether by-laws passed by municipalities were able to address current fiscal challenges. Appropriate infrastructure, and capacity to utilise that infrastructure, must go hand in hand.

The Chairperson noted the tendency to approach presentations from a political angle even when politics were not relevant. In terms of the Constitution, the FFC was required to make recommendations to government, some of which were implemented and others which were not.

Mr Snell praised the work of the FFC, but felt that the research and recommendations did not fully address the challenges in implementation. He noted that national government had limited authority over provinces’ implementation of national policy, so that something like e-education would always be difficult as national government could not force provinces to enforce it. This difficulty would persist as long as the national and provincial spheres had their own areas of responsibility.

Ms Ajam argued that there were instruments available to national departments to coordinate policy. She noted that sector departments were responsible for ensuring that norms and standards were in place. She noted the numerous annual performance plans (APPs) and the gaps around implementing them. She argued that APPs should include e-education standards to empower the Auditor General to consider the level of implementation. She also noted that oversight by provincial legislatures was important, as it was these legislatures who passed the APPs. The capacity of provincial legislatures to provide this oversight could be supported.

Mr J Gelderblom (ANC) also thanked the Commission for the report, and was interested to see the references to other countries, such as China. He shared concerns about e-education and also wanted to know why South African universities were not seen as effective as other countries in Africa, specifically Zimbabwe. He asked for more specifics on the problems.

Ms Ajam said that the challenges in basic education led on to challenges in higher education. Whilst there were some good plans there were funding and implementation lags.

Mr Gelderblom also asked whether land reform was considered by the FFC, as this impacted upon other issues such as food security. He thought, overall, that the report contained a vast amount of information that would be effective for guiding policy.

Ms Ajam confirmed that no research had been done by the FFC into land reform but it was an issue that would be important to consider in the future.

Ms R Mashigo (ANC) emphasised the importance of research. She asked about the proposed redesigning of grants, noting that the shifts from one department to another, or the re-designing of grants, often prevented effective monitoring. She asked whether this was a concern for FFC. She asked for more clarity on skilled and unskilled labour, mentioned on pages 36 to 37 of the submission.

Ms Ajam acknowledged the challenges in the shifting of grant responsibilities, oversight and objectives. In the previous year, the FFC had recommended more effective planning before grants were instituted, to prevent the tendency that grants would need to be changed after the initial implementation. However, she also commented that it could take two to three years to see whether grants were having an impact, and it was important that they should not be changed drastically before their impact had been measured.

Ms Sasha Peters, Researcher: Local Government, FFC, added that the FFC was now requiring independent assessments of the impact of the grants, and this would be part of the monitoring process.

Ms Fanoe noted that some of the transfers in grant funding related to overall shifts in functions between departments, and this was not the responsibility of National Treasury.

The Chairperson noted that the specifics around grants were invariably related to specific issues, and that there may be further shifts.

Mr L Ramatlakane (COPE) asked that this presentation be considered as an introduction and asked for the opportunity to hold more detailed discussions on certain chapters in the report. He asked for clarification on comments about the current funding mechanisms. He felt that the Committee would need some time to digest the presentation, in order to formulate questions. He asked, however, about the differentiation between funding and funding targets, and asked if the targets looked to quantity or quality. He wondered if quality was the challenge to current funding at the moment, and if it was lack of quality that meant that graduate levels did not meet national targets. If the problems related to quality, then he wanted to hear what could be done to respond to the problem.

Ms Ajam said that the FFC was not only arguing for increased volumes of funding but was saying that funding needed to be closely linked to performance. Performance at tertiary level depended, to a large extent, upon what technical capabilities were present in the universities currently.  She noted that the indicators listed in the submission focused on quality rather than quantity, and agreed that it was desirable to establish links between funding offered and quality received.

Mr Ramatlakane also noted the comments about the issues of disaggregated gender data and data reliability, and asked how the FFC proposed that these be addressed.

Ms Ajam re-emphasised that when gender was not collected from institutions, it was impossible to manage or monitor the institutions properly. She said that if the data was used, it would then lead to more careful collection of data in future.

The Chairperson noted the recommendations around government funding for job creation, and noted the critiques that this could distort the economy by subsidising employers. He asked what research had been done around this point, and whether the current system was working.

Mr Mabugu again said that it was necessary to distinguish between short and long-term planning. He argued that there were currently systemic failures in the market, and that subsidies could target and remedy those. The research suggested that subsidies were merely a drop in the ocean, and could not drastically reduce the unemployment rate, and that was the bigger issue. He noted that the FFC had shifted its research to analyse the jobs impact, relative to certain levels of spending. 

The Chairperson also made the point that there were 38 departments, and it was impossible for the Committee to oversee all appropriations.

The Chairperson commented, in respect of e-learning, that the Ministry of Communications had a focus on promoting increased information and technology linkages and asked whether this could be linked to e-learning plans. He also cited research from HSRC, that had found that black students were less likely to be employed than their white counterparts, even when all students had attended the same universities and similar fields of study. He asked if the FFC had also seen this trend, and what it suggested to address this challenge.

Ms Ajam responded that the FFC had not done research in this area but acknowledged that it was an area worthy of further consideration.

Mr Mabugu added that the HSRC’s research had also noted some discrimination trends based on age and gender. He argued that the core problem was that the volume of jobs created was less than the population, and that created space for discrimination.

The Chairperson noted the recommendation for increased responsibilities to be transferred to the municipalities, as also the comments on disaster funding, and the recommendation that regionalisation of landfills be held in abeyance until the fiscal risks and benefits for municipalities were better understood. He asked whether this regionalisation had already been scheduled for implementation and whether this recommendation would impact upon the DEA’s plans.

Ms Ajam informed the Committee that the FFC was busy considering a proposal for a local business tax, and how this would impact upon municipalities.

Ms Madubula said that further research was being conducted around the regionalisation of landfills. That regionalisation was moving forward, but she emphasised that full cost analyses must be done and mechanisms for supporting municipalities must be put in place.

The Chairperson asked that Members consider questions around the overall approach for engaging with the FFC for the future, and the Committee would engage with the FFC again.

The meeting was adjourned.