FINANCIAL AND FISCAL COMMISSION
EQUITABLE SHARE
RECOMMENDATIONS, 2001
18 August 2000

SUMMARY OF FINAL RECOMMENDATIONS
· The provincial equitable share should provide for constitutionally mandated basic levels of social service provision, and provinces should be held accountable for the delivery of such services;
- The FFC has used the costed norms approach in arriving at the formulae for basic education, welfare and health services;
- Each province should be allocated a Basic (B) Element, which will include the provision of services not defined as constitutionally mandated basic services;
- Each province should be allocated an Institutional Element set equal to the minimum cost of operating government institutions;
- In view of urgent need, national conditional grants should be allocated to provinces to support the reduction of social infrastructure backlogs.

Final Recommendations differ from Preliminary
· In education, learner/educator ratios have been replaced by relative need weights;
· In health, primary health care services are costed,
· For welfare the costed norms approach is applied to social security,
· The Basic element incorporates the education, health and welfare programs not costed in the "S" element.

WHY USE THE COSTED NORMS APPROACH FOR THE "S" GRANT?
· Provides a basis for objective formulae to determine minimum amount of money a province needs to ensure delivery of basic social services,
· Facilitates reconciliation of decisions on budgets with service delivery to ensure accountability,
· Recognises the different resource needs of different provinces, but maintains a province’s budget-making competency,
· Provides for the allocation of resources in a transparent manner, and
· Formula allows for flexibility and responsiveness to policy needs.

THE VERTICAL DIVISION AND THE COSTED NORMS APPROACH
The costed norms approach as a tool facilitates and assists political discussions around the vertical division.
· It can provide a set of alternative benchmark norms, with each norm being costed.
· It provides for the consequences of budget changes for norms and standards to be assessed easily and calculated immediately for each sector.
- Trade-offs become clearer,
- Allows for better-informed decisions.

ISSUES IN IMPLEMENTATION
1. Expressing nationally mandated basic service levels in terms of norms and standards
2. Consideration of factors beyond control of provinces and their effects on fiscal requirements
3. Total costs of providing basic education, social security, and primary health care chosen as key drivers of provincial budgets

APPLICATION OF THE COSTED NORMS APPROACH TO THE S COMPONENTS:
Education, health & welfare
· Basic Education: Differences in resource needs for learners with different characteristics are taken into account,
· Health: The health formula relies on a tentative per capita cost for primary health care services, and accounts for differences in utilisation rates
· Welfare: formula relies on the costs for social security as defined by legislation and proposes phase-in parameters towards full take-up.

THE REMAINING ELEMENTS OF THE PROVINCIAL FORMULA
THE INSTITUTIONAL ELEMENT
· Is allocated to provinces to fund the provision of a basic administration and legislature.
· The FFC recommends that this element continue to be taken from the total provincial allocation.
· It should be lower than currently is the case with the remainder directed to other elements.

THE BASIC ELEMENT
· The purpose of the basic element is to:
1) give provinces the ability to deliver on other constitutional mandates.
2) provide provinces with budget flexibility.
3) support the redistributive thrust of the formula.
· The FFC recommends that the current basic, economic activity, and backlogs components be combined into one basic element.

CONDITIONAL GRANT FOR CAPITAL BACKLOGS
· A capital model is being developed to supplement provinces’ capital spending through the use of a conditional grant from national government.
· Two components of the grant will compensate provinces for (a) their inherited social backlogs, and (b) their (on-going) social infrastructure needs.

Summary of Equitable share formula
PES = (E + H + W) + B + I +T
Where:
E = Basic Education,
W = Social security,
H = Primary health care,
B = Combined Basic Element,
I = Institutional,
T = Fiscal Capacity (set at zero)

CONSULTATION ON RECOMMENDATIONS
· FFC has consulted widely including:
- Portfolio and Select Committees at Parliament
- MinMecs; education, finance, health and welfare
- Heads of line departments
- Executive Councils of provinces
- NGO’s & CBO’s
· Responses to date have been favorable, but with issues around implementation raised.

CLARIFICATION IN RESPONSE TO SOME ISSUES RAISED IMPLEMENTATION ISSUES
· FFC argues that implementation starts with basic services first.
· Concerns about data quality are common for the existing and proposed formula.
· Refinement of norms and standards will occur over time, and also of cost factors.
· Progressive realisation of rights and entitlements as fiscal circumstances permit (Constitutional provision)
· Certain elements not yet included in "S" transfers, but are in the "B" element.

WORK IN PROGRESS AND FFC PROJECT 2002 PLAN
· Need to apply MTEF resource allocations using the FFC formulae and model,
· Refine use of the costed norms approach as it applies to the social sector
· Examine local government financing issues
· Further elaboration of capital/infrastructure funding model
· Further examination of issues around the potential expansion of provincial revenue sources, including its implications for provincial borrowing

Summary
· FFC appreciates that its recommendations engendered substantive & constructive debate
· FFC believes the costed norms approach facilitates the reconciliation between the constitutional obligations and budget decisions
· Finally, the FFC recognises the limitations of its approach given the data availability and the "state of the art" of application of a costed norms approach.
· However, FFC believes that the costed norms approach can add value immediately and that it must be improved upon over time

IMPLEMENTATION
· The FFC believes that the costed norms approach can be implemented side by side with the current formula and fully implemented in 2002
· The Parliamentary Committee could request the results of the costed norms approach formula as applied to the MTEF