EXECUTIVE SUMMARY

Introduction

This FFC submission is made in terms of Section 214(2) of the Constitution, read together with Section 9 of the Intergovernmental Fiscal Relations Act. In this respect, the Minister of Finance’s response to the FFC submission is presented to Parliament in Annexure E of the Budget Review.

The analysis contained herein is based on financial, demographic and service delivery data provided by the National Treasury, South African Reserve Bank, Statistics South Africa and various government departments. The data used is the most recent available from these sources.

the FFC’S COMMENTS ON GOVERNMENT’s response (Annexure E OF BUDGET REVIEW 2003)

In April 2002 the FFC submitted a number of proposals and recommendations to Parliament. The Commission’s recommendations have implications for the intergovernmental fiscal system in general and the annual division of revenue within the MTEF cycle in particular.

The FFC notes that government has taken into account some of its proposals regarding the efficiency and effectiveness of own revenue collection by provinces. The FFC further acknowledges that government favourably received its recommendations on the Provincial Tax Regulation Process Act, and looks forward to its process proposals being taken into account in the drafting of regulations to the Act.

Government concurs with the FFC proposal to maintain, for now, the status quo of the mechanism of conditional grant funding for early childhood development until the programmes can be funded through the provincial equitable share.

With respect to the FFC’s proposal on maintaining a conditional grant for HIV/AIDS, government highlights the difficulty of separating this programme from the rest of the provincial budget, given that most departments cater for the effects of HIV/AIDS through current programmes. The FFC recognizes this difficulty and will however continue to research the most effective way of financing intergovernmental programmes and present its proposals in forthcoming submissions.

Government’s response to the FFC’s comments on the recommendations of the Comprehensive Social Security Review acknowledges the principle that social security needs should be dealt with nationally to ensure equity, the observance of national norms and standards, and to ensure that provinces’ ability to deliver other constitutionally mandated basic services is not compromised.

The FFC made various proposals relating to local government finance. Some of the FFC’s proposals on the division of powers and functions between district and local municipalities have been implemented, in particular those relating to health services and electricity distribution. With regard to water and sanitation services, government has decided to adopt an asymmetrical approach whereby districts with marked backlogs will be allocated the authority function.

Government agrees with the broad approach put forward by the FFC on the issue of electricity restructuring. Government agrees on the need for municipalities to be compensated for any significant loss in their revenue stream, and supports the FFC proposal that the national grants system should play a primary role in subsidising low-income households.

Government supports the FFC proposal to combine market discipline with a rules-based approach in the area of municipal borrowing. It is putting in place policy measures to assist municipalities with limited access to loan finance, for example by targeting national grant programme at municipalities that are not able to attract private finance.

The FFC called for clearer lines of accountability between national, provincial, and local government in the Municipal Finance Management Bill (2001). The most recent version of the Bill stipulates the lines of accountability in detail.

With respect to the remuneration of municipal councilors, government supports the FFC’s recommendation that resources for councilor remuneration be channeled through the existing Institutional grant of the local government equitable share.

The 2004 budget will mark the tenth anniversary in the evolution of a uniquely South African system of intergovernmental fiscal relations. Following two MTEF budget-planning cycles during this period, it is clear that the system is stabilizing. Over the course of the last MTEF cycle, the FFC and government acknowledged the need for a comprehensive review of current allocative formulae for the equitable share mechanism in particular and the intergovernmental fiscal system in general. Government noted many of the proposed principles put forward by the FFC over the past three years. The Commission is pleased that, in this review, government will consider its proposals relating to budget allocation mechanisms and taxation.

The FFC also proposed that a more defined legal basis be provided for the contingency reserve. While Government agrees with the thrust of the FFC proposals, it does not see the need to divide the current contingency reserve into a "policy reserve" and "contingency reserve".

With regard to disasters and emergencies, government agrees that the three relief funds administered by the national Department of Social Development should be combined and administered centrally. National government accepts responsibility to fund those disasters whose resource requirements go beyond those of provinces and municipalities, but does not support the FFC’s proposal that a maximum "threshold" of disaster expenditure be set for provincial and local government.

Overview of government spending & financing trends and projections

Over the past 5 years, economic growth has averaged 2.75% p.a. and GDP inflation 7.0% p.a. Expectations of both inflation and [export-led] growth were adjusted upwards for the 2002 MTEF cycle in view of the nearly 40% depreciation of the Rand during 2001/02. The 2003 MTEF cycle projections reflect an expectation that the reversal of the Rand’s losses during 2002 / 03 will enable the inflation target to be reached over the medium-term.

During the 5 years prior to 2001 / 02, the growth of nationally raised revenue exceeded that of nationally budgeted expenditure thereby enabling the national deficit to fall to an estimated 1.52% of GDP in 2001 / 02. Real growth of nationally budgeted expenditure averaged 1.32% p.a. over the previous 5 years.

Projections for next year suggest a significant real increase in budgeted spending, primarily deficit financed. Over the medium-term though, revenue receipts are anticipated to grow faster than nationally budgeted expenditure (4% p.a. vs. 3.62% p.a.) keeping the projected deficit below 2% of GDP.

Until last year, debt-servicing costs have been declining in real terms, thereby releasing funds available for division between the 3 spheres of government. Funds available for division have therefore grown faster than that of the national budget. Average real growth of funds available for division has been 2.05% p.a. over the past 5 years. This is higher than the projected population growth of 1.96% p.a. and enables real growth in spending per capita.

Of the funds available for division, approximately 58% was distributed to provincial governments and 3% to municipalities over the past 5 years. Transfers to municipalities have been growing and are projected to continue growing rapidly, in part to enable the consolidation of the new local government system. Over the medium-term, the provincial share is anticipated to rise relative to the national sphere so as to enable real increases in welfare and health spending.

Over 85% of provincial spending is funded through unconditional Equitable Share transfers from nationally raised revenue and this proportion is set to rise over the medium-term. Provincially collected own revenue has declined from an average of 3.9% over the past five years to a projected 2.6% over the MTEF cycle. Provinces appear to exhibit little interest in taking up opportunities for new revenue sources presented by the enactment of the Provincial Tax Regulation Process Bill.

Provincial budgets have been declining in real terms over the past 5 years. Of all the provincial functions, only health and welfare spending have increased. This reflects take-up of the child support grant and the impact of the HIV-AIDS epidemic on health services. Spending on education, housing and other services have all declined in real terms. This is projected to change over the forthcoming medium-term with real increases in all services assigned to provincial governments.

While conditional grants remain an important tool for driving specific ear-marked government programmes, there nevertheless has been a declining reliance on them relative to unconditional equitable shares. Significant growth is indicated in some conditional grants to provinces, namely the infrastructure, child nutrition and HIV-AIDS grants.

Municipal budgets are difficult to analyse in the absence of financial data presented in terms of standardised reporting formats. Available information suggests that metropolitan authorities raise a large portion of their own revenues, while many rural municipalities are heavily reliant on intergovernmental transfers.

A growing concern for the intergovernmental fiscal system is the increase in municipal deficits over the past three years. It would appear that further increases are expected for the next two years.

Significant real increases in both unconditional Equitable Share and conditional grant allocations are anticipated this year and over the medium-term. This will assist in accommodating spending pressures in areas such as infrastructure, free basic water and electricity supply to low-income households, and institutional re-structuring.

Progressive realization of constitutionally mandated basic services assigned to provinces

In accordance with the Bill of Rights, the FFC defines Constitutionally Mandated Basic Services (C.M.B.S.) assigned to provinces as consisting of school education, adult basic and further education and training, primary and secondary health care, social security and housing spending programs.

Progressive realization of these rights can be measured in terms of financial inputs and, where data is available, to service delivery. Ultimately, progressive realization should be evaluated in terms of policy outcomes (such as literacy and infant mortality rates).

Progressive realization occurs within a context of resource availability. Compared to a real decline of 1.19% p.a. in provincial government spending, provincial governments have, on average, shifted resources to enable a marginal increase in spending on Constitutionally Mandated Basic Services of 0.15% p.a. between 1997 / 98 and 2001 / 02. Nevertheless, real per capita spending declined by 1.35% p.a. over the period of the analysis. This is indicative of projected population growth (of 1.96% p.a.) exceeding the real growth rate of fiscal resources to CMBS.

With respect to expenditure on education, a combination of declining enrolments and fiscal resource shifts towards basic education translate into a national average real growth in spending per learner of 1.94% p.a. between 1997 / 98 and 2001 / 02.

On average, real primary & secondary health care spending per capita declined by 1.33% p.a. between 1997 / 98 and 2002 / 02, despite higher than average real growth of spending on these basic health services.

Average annual take-up rates have generally exceeded the real rate of growth in social security spending. This is exhibited in a decline in real spending per beneficiary of 9.28% p.a. This simply indicates that proportionately more social security beneficiaries are taking up the Child Support Grant, which is less than a third of the value of other social security grants such as old age and disability pensions.

Approximately 3% of provincial government expenditure is on housing. Expenditure on housing has declined nationwide by an average of 7.32% p.a. between 1997 / 98 and 2001 / 02. On average, 202 508 houses were delivered per annum nationwide over this period.

SECTION 1:

THE COMMISSION’S RESPONSE TO ANNEXURE E

Local government finance

With respect to municipal borrowing, Particular note is taken here of proposals to:the FFC:

Reiterated its proposal that there be a combination of market discipline and a rules-based approach applied to the municipal borrowing market;
Proposed that there be a differentiated approach to the borrowing market, with classes of municipalities being treated differently according to objective criteria; and
Proposed that deliberate policy measures should be put in place to build the creditworthiness of municipalities with limited access to loan finance.

National government supports the proposal for combining market discipline with a rules-based approach. Furthermore, it is putting in place policy measures to assist municipalities with limited access to loan finance, for example by targeting national grant programmes at municipalities that are not able to attract private finance. Government welcomes more specific proposals from the FFC as to how a differentiated approach can be applied to the municipal borrowing market.

With respect to the Municipal Finance Management Bill (2001), the FFC called for clearer lines of accountability between national, provincial, and local government.

The most recent version of the Bill (January 2003) outlines the lines of accountability in detail.

With respect to the division of powers and functions of district and local municipalities, the FFC:
Proposed that local municipalities be responsible for the delivery of municipal services, except where they lack the capacity to do so; and
Advised that issues of redistribution should not determine the division of powers, given the primary role that national government should play in funding redistribution.

In line with the FFC’s proposals, district municipalities are the service authorities for municipal health services, and local municipalities will continue to be service authorities for electricity distribution. With water and sanitation services, Government has decided to adopt an asymmetrical approach whereby districts with marked backlogs will be allocated the authority function. While the FFC supported a district role where local capacity was lacking, the current configuration is permanent in nature and does not foresee the transfer of water and sanitation to local municipalities as capacity is developed.

With respect to the remuneration of municipal councilors, the FFC proposed that resources for councilor remuneration be channeled through the existing Institutional component of the local government equitable share, and that this grant be reviewed in light of recent legislation and regulations.

Government supports the FFC’s recommendations and is seeking to ensure that the Institutional grant reflects both the resources needed by municipalities and their fiscal capacity.

With respect to the restructuring of the Electricity Distribution Industry, the FFC proposed:
That no stakeholder should experience a deterioration in its circumstances owing to the restructuring process;
That tariff support to low-income consumers be financed primarily by a national grant;
That current surpluses on municipal electricity accounts be replaced by a municipal levy on electricity, which would be available to all municipalities; and
That consideration be given to introducing a centrally collected "local government levy" for large customers.

Government supports the broad approach put forward by the FFC. Government agrees that municipalities need to be compensated for any significant loss in their revenue stream, and supports the FFC’s proposal that the national grants system should play a primary role in subsidizing low-income households. It does not support the proposal that a local government levy be imposed on large customers.
further consider the division of functions between local and district municipalities noting existing local government policy and the primary role of national government in creating channels for redistribution;
incorporate considerations of councilor remuneration in the I-element of the LES;
consider the relationship between regional and municipal electricity distributors noting the option of utilising the levy to compensate distributing municipalities for asset transfer losses and to enable inter-municipal revenue sharing. National grants could be used to provide free basic electricity and overcome capital backlogs for the poor.

Provincial government

With respect to provincial taxing powersthe Provincial Tax Regulation Process Bill (PTRB), the FFC proposed that:
Provinces be allowed the flexibility to set tax rates within bands; This could induce compensatory measures in equitable revenue sharing.
Implications for and procedures relating to the capacity of SARS be clarified in advance;
Regulations for dispute resolution between SARS and provinces be specified, where such disputes arise; and
A clause dealing with the impact on local government finances of a proposed provincial tax or surcharge be included.Further consideration could be given to developing the capacity of the tax authority.

National government agreed with most of the FFC recommendations on the PTRB and gave effect to them during the passage of enactment of the Bill through Parliament. Government indicated that it would address some of the other recommendations of the FFC, as and when provinces propose specific taxes.

With respect to education, the FFC proposed that conditional grant funding mechanisms for Early Childhood Development continue until incorporated into the Provincial Equitable Share mechanism.

Government concurred with the FFC’s recommendation on ECD and noted that decisions on a methodology for incorporating the programme into the equitable share formula need to be made in conjunction with a more comprehensive review of the PES formula. Part of this review would entail the determination of the most appropriate adjustment to the PES formula to take account the phasing in of ECD. Furthermore, government indicated that conditional grant funding for ECD will cease at the end of 2003/04 and that the programme will become part of the provincial equitable share funding.

With respect to the funding of HIV-AIDS, the FFC proposed tA hat a conditional grant remains the most appropriate mechanism for targeting the impact of HIV-AIDS whilst a suitable information base is established.

While in agreement with the general thrust of this proposal, government noted that decisions on an HIV/AIDS conditional grant cannot be seen in isolation from the rest of the provincial budget since budgets for health departments (mainly from non-conditional grants) cater for HIV/AIDS effects through current programmes. For example, current hospital and clinic budgets cater for the treatment of persons with HIV/AIDS. The government is therefore of the view that while there is a need to increase conditional grant funding for HIV/AIDS programmes, unconditional funding to provinces should also be increased to reinforce relevant HIV/AIDS programmes funded from own provincial revenue. Furthermore, government concurs with the FFC proposal that a strong data and information base needs to be built to support decisions on both PES and conditional grant allocations.

Cross-cutting equitable share issues

The FFC proposed guidelines for reviewing the Comprehensive Social Security Report and proposed the establishment of a national social security agency to administer the payment of pension and child support grants over the medium- to long-term. National government has responded as follows:
"Building on the Comprehensive Social Security Review, government is reviewing institutional arrangements pertaining to the delivery of social security grants. In this process various models are being explored, including possible shifting of payment of social security grants to a national agency. Key considerations would be the legal framework, governance and accountability, service delivery practices and the need to avoid disruptions in service delivery."

The FFC believes that national government and the FFC share common perspectives and goals with respect to comprehensive social security reform, for example, with respect to establishing a national agency. Recommendations with respect to social security go far beyond issues pertaining to institutional arrangements and service delivery. Impacts on the formula for the equitable shares are of paramount concern to the FFC. In this context, the FFC will wish to keep fully apprised of proposals for social security reform, and will make further recommendations in future.

The FFC has taken account of a Budget Council resolution to take part, together with government, in a "comprehensive and fundamental review of the equitable share formula". Broad consultation with the stakeholders in each of the three spheres of government will be required. This work should begin in earnest upon completion of the 2003 Budget process.

The FFC believes that issues relating to capacity should not be viewed as an obstacle to progress. A plan for building appropriate capacity in each sphere, commensurate with the responsibilities assigned to each government, should be part of the next MTEF plan.

21. 2.3 CROSS-CUTTING EQUITABLE SHARE ISSUES

The FFC offered guidelines for reviewing the Comprehensive Social Security Review and proposed the establishment of a national social security agency to administer the payment of pension and child support grants over the medium- to long-term.


The FFC proposes that it, with Parliament and Government, review the inter-governmental fiscal system in the light of the Bill of Rights and Section 214 (2) a-j. Particular note is to be taken of data collection and inter-governmental fiscal capacity building requirements.
With respect to disaster management funding, the FFC proposed that:
Central funding mechanisms for disaster management be introduced;
Start-up costs for emergency preparedness for local government be funded from a national conditional grant;
On-going institutional costs for emergency preparedness be incorporated into the equitable share;
Funding for prevention/mitigation projects be provided by national government to provinces and municipalities on a matching-grant basis; and
A portion of the contingency reserve is used to fund emergency response activities once provinces and municipalities exceed a specified financial threshold of disaster response expenditure.

Government recognizes that disasters and emergencies cannot be budgeted for beyond a certain level. It notes that the current framework does not set predetermined proportions to be contributed by each sphere in the event of a disaster, but does not indicate whether the FFC’s proposal for "thresholds" has been accepted. Government did not respond to the FFC’s specific proposals on start-up and on-going institutional costs for local government and prevention/mitigation project costs.

With respect to the central contingency reserve, the FFC proposed that:
A more defined legal basis be provided for the contingency reserve;
The contingency reserve be allocated for two emergency purposes, namely macroeconomic stability and response to natural or human-made disasters; and
The "new spending priorities" of the outer years of the MTEF are categorized separately as the "policy reserve".

Government agrees with the thrust of the FFC proposals, but does not see the need to divide the current contingency reserve into a "policy reserve" and "contingency reserve".


A tiered system of municipal, provincial and national funding thresholds was proposed for various aspects of disaster management.

SECTION 2:

OVERVIEW OF GOVERNMENT SPENDING & FINANCING TRENDS AND PROJECTIONS

DATA AND METHODOLOGY

This analysis compares government spending and financing trends of the previous 5 years (1997 / 98 to 2001 / 02) with projections for the current year (2002 / 03), the short-term (2003 / 04) and the forthcoming 2003 Medium-Term budget cycle.

The indicators used include the real growth rate (stripped off the effects of inflation) and the proportion of the relevant sphere’s expenditure and of Gross Domestic Product.

GDP and inflation data is sourced from the South African Reserve Bank. Government financing and expenditure data is taken from the most recent Budget Reviews and before 2000 / 01 from the most recent Intergovernmental Fiscal Review publications of the National Treasury.

2.1 ANALYSIS OF THE NATIONAL BUDGET

2.1.1 Macro-Economic Context

This year’s adjusted macro-economic projections reflect the impact of the nearly 40% depreciation of the Rand last year.

These include expectations of higher [export-led] economic growth. Projections are that economic growth, which has averaged 2.75% p.a. over the previous 5 years, will have increased to 2.9% in 2002 / 03 and average 3.8% over the forthcoming medium-term.

Projected inflation for 2002 / 03 has been adjusted to 9.3% p.a. Exchange rate shocks largely account for these higher inflationary projections. Inflation has averaged 7% p.a. over the past 5 years.

With the Rand recovering most of last year’s losses during 2002 / 03, economic growth projections may be reviewed. Attainment of the inflation target over the 2003 medium-term is anticipated.

2.1.2 Financing the National Budget

The value of nationally raised revenue equalled an average 22.66% of G.D.P. over the past 5 years. This ratio is expected to be proportionately lower over this and the forthcoming 3 years. Recent past experience is that revenue collection has usually exceeded projections.

The national deficit has progressively declined to 1.52% of G.D.P. in 2002 / 03. This is anticipated to rise next year above the 2% level before falling below it over the medium-term.

This additional deficit financing would partially enable national budget expenditure to rise (in real terms) by an estimated 5.9% next year and average 3.6% p.a. over the medium-term. Over the past 5 years, nationally budgeted spending has increased by an average 1.32% p.a.

2.1.3 Preliminary Division of Revenue

Over the medium- to long-term, a higher national deficit impacts on debt-servicing costs. Nevertheless, further containment of the national debt as a proportion of GDP, together with lower average borrowing rates, allows projected debt servicing costs to decline to between 16% and 15% of National Budget Expenditure from 20% in the period 1997 / 98 to 2001 / 02.

Debt servicing costs displace funds otherwise available for division between the three spheres to deliver services. The projected decline in debt servicing costs as a proportion of the budget results in real growth of funds available for division projected at nearly 6% next year and 3.16% over the medium-term.

With population growth estimated at 1.96% p.a., this rate of increase would enable real growth in per-capita spending on Constitutionally Mandated Basic Services.




Vertical Division of Revenue

In comparison with the experience of the past 5 years, the projected vertical division of revenue indicates a counter-shift from the national to the provincial sphere and a continued shift to the local sphere. Over the medium-term, allocations to the national sphere grow in real terms but are lower than those to provincial and, especially municipal governments.

This enables real increases in funding for social security and health systems and for financing the consolidation of the new local government system.

ANALYSIS OF PROVINCIAL BUDGETS

Financing Provincial Budgets

The 2002 Budget Review anticipated the use of surpluses accumulated over the past 5 years to finance provincial government deficits over the medium-term.

Provincially collected own revenue as a proportion of provincial expenditure has declined from an average 3.85% over the past 5 years to a projected 2.59% over the medium-term. The FFC notes that provinces may not be taking advantage of the opportunities presented by the enactment of the Provincial Tax Regulation Process Act.


Unconditional Equitable Share funding continues to be preferred over conditional grants as a mechanism for funding provincial governments.

2.2.2 Provincial Expenditure Trends

Provincial budgets have declined in real terms over the past 5 years by an average 1.19% p.a. The rate of decline is highest for housing and education services indicating resource shifts from these functions.

Between 1997 / 98 and 2001 / 02, small real increases in spending have been recorded for health (0.11% p.a.) and welfare (0.82%) services. This reflects increased take-up of social security (especially child support) grants and the impact of the emerging HIV-AIDS epidemic on the [secondary] health system. This rate of increase however is lower than the projected population growth rate with the result that there has been declining per-capita spending.

Over the medium-term, real growth in spending on all social and infrastructure services is planned to be higher than the population growth rate. This would enable real growth in spending per capita.

Expenditure on welfare and economic infrastructure is expected to grow fastest this year (2002 / 03). However, growth of spending in education, health and housing services is expected to pick up next year. This may reflect early childhood (ECDP), adult basic education (ABET) and further education & training (FET) initiatives in the education sector and demands on the primary and secondary health care systems due to HIV-AIDS.

2.2.3 Composition of Provincial Conditional Grants

Conditional grants are the primary fiscal mechanism whereby national government can influence the expenditure decisions of provincial (and municipal) governments. Over the past 5 years, declining relative importance has been attached to conditional grants as a funding mechanism for provincial governments. Conditional grants constituted 13.1% of provincial budgets in 1998 / 99 and this is projected to continue falling to 9.47% next year.

The value of conditional grants geared towards institutional capacity building has declined most. Many conditional grants are designed to be of limited duration with the intent of incorporation into the Equitable Share funding mechanism (e.g. National Treasury’s Supplementary Grant and the Early Childhood Development Program).

Since 2001 / 02, there has been significant real growth of infrastructure capital grant allocations (26.1% in 2002 / 03 and 11% projected for next year). This counters past trends whereby personnel spending crowded out capital spending. Nevertheless, dedicated funds for infrastructure provision constitute less than 5% of provincial spending.

A number of conditional grants are designed to fulfil the requirements of the Bill of Rights. Both the nutrition and HIV-AIDS conditional grants are to be substantially consolidated. Real growth of 10% and 62% p.a. respectively over the medium-term is indicated. However, this is off a low base. The Early Childhood Development and the various Poverty Relief grants are to be phased out. Together, these grants constitute less than 1% of provincial spending.

2.3 ANALYSIS OF MUNICIPAL BUDGETS

2.3.1 Financing Municipal Budgets

Budget projections are not yet available for municipally collected revenue and hence for municipal budgets for the 2003 M.T.E.F. Data on local government finances is difficult to collate without standardized reporting formats. Further, continued institutional restructuring in many newly demarcated municipalities may disrupt reporting schedules.


Evidence from the past 5 years reflects that 89.5% of municipal revenue is collected from own sources. Most of this own revenue is, however, collected by Metropolitan authorities. Transfers from nationally raised revenue constitute 9.72% of municipal budgets. Many rural local and district councils are heavily reliant on these inter-governmental transfers. Between 1997 / 98 and 2001 / 02, municipalities financed an average 0.73% of their spending from deficit financing.

Municipalities recorded surpluses between 1996 / 97 and 1998 / 99. Since then, however, deficits have been recorded and are projected to continue increasing over the medium-term.


Real annual growth of 15.65% for Local Equitable Share (LES) allocations, 37.9% for infrastructure capital grants and 13,5% for institutional capacity building grants have been budgeted for this year. This would enables growth in per capita spending on basic municipal services. It should be noted, however, that the increases are off a low base.

Institutional capacity building is emphasized over the medium-term with a projected real increase in allocations of 17.65% p.a. to enable the municipal restructuring process. The rate of growth of infrastructure grants is expected however to level off over the next 3 years.

Municipal Spending Trends and Pressures

Consolidated data on spending trends on basic municipal services such as water, sanitation, waste disposal, electricity and transport services is difficult to compile and is hence not available for analysis at this time.

A survey of (a) metropolitan, (b) urban and (c) rural District Councils was conducted by SALGA to identify the primary spending pressures. These include the following budget bids on nationally raised revenue and corresponding estimates of municipal fiscal capacity to provide matching revenues.

Municipalities expect to be able to provide for between 45% and 65% of projected expenditure on infrastructure backlogs, indigent support and police services. The funding of free basic water & electricity and environmental health services are viewed as national government’s responsibility.

This budget bid for 2003 / 04 of approximately R 16.5 billion exceeds the total value of planned transfers from national government to municipalities by approximately R 5 billion.

TABLE 2.3.2: MUNICIPAL SPENDING TRENDS AND PRESSURES

SECTION 3:

TOWARDS THE MEASUREMENT OF
PROGRESSIVE REALIZATION OF
CONSTITUTIONALLY MANDATED BASIC SERVICES ASSIGNED TO PROVINCES

3.1 DEFINITIONS AND METHODOLOGY

3.1.1 Defining Constitutionally Mandated Basic Services

The following excerpts from Chapter 2 of the SA Constitution of 1996 (i.e. the Bill of Rights) are relevant in defining Constitutionally Mandated Basic Services (C.M.B.S.) provided by provincial governments:

26. (1) Everyone has the right to have access to adequate housing.
(2) The state must take reasonable legislative and other measures, within its available resources, to achieve the progressive realisation of this right.
.
27. (1) Everyone has the right to have access to
a. health care services, including reproductive health care;
b. sufficient food and water; and
c. social security, including, if they are unable to support themselves and their dependants, appropriate social assistance.
(2) The state must take reasonable legislative and other measures, within its available resources, to achieve the progressive realisation of this right.

29. (1) Everyone has the right
a. to a basic education, including adult basic education; and
b. to further education, which the state, through reasonable measures, must make progressively available and accessible.

The accounting definition of C.M.B.S. currently applicable to provincial governments is hence made up of the sum of the following programme spends:

(1) Basic Education +
= [Public & Independent] Ordinary School Education +
Special Needs Education + Adult Basic Education & Training +
Further Education & Training
(2) Primary and Secondary Health Care +
= District Health Services + Provincial Hospitals
(3) Social Security +
= Child Support Grant + Foster Care + Care Dependency Grants +
Old Age + War Veterans + Disability Pensions

(4) Housing

Relevant to the prioritisation of target populations in progressively providing access to these Constitutionally Mandated Basic Services is the following excerpt from Section 28 of the "Bill of Rights":

28. (1) Every child has the right
to basic nutrition, shelter, basic health care services and social services;
3.1.2 Defining Progressive Realization

The progressive realization of rights of access to Constitutionally Mandated Basic Services (C.M.B.S.) can be measured in terms of financial inputs and, where data is available, to service delivery. Ultimately, progressive realization should be evaluated in terms of "outcomes" (such as literacy and infant mortality rates).

Progressive realization occurs within a context of resource availability. The real growth rate of provincial government spending may therefore be used to establish the resource availability baseline. Provincial government spending is dependent upon the:

Real growth rate (i.e. the growth rate stripped off the impact of inflation) of nationally raised revenue;
Decisions pertaining to the vertical division of revenue between national, provincial and local spheres of government;
With respect to specific provinces, the horizontal division of revenue between provinces according [primarily] to the allocation formula of the Provincial Equitable Share (PES);
Provision of conditional grants; and
Revenue raised by provincial governments.

Within this parameter of resource availability, provincial governments can shift spending to functions such as education, health care, welfare and housing & local government. A comparison of real growth rates of provincial government spending and those of these specific functions provides an indication of the extent to which provinces have recognized the public service needs of their unique populations and the manner in which provincial governments have prioritised these functions.

Fiscal resource shifts towards the specific spending programmes defined as C.M.B.S. - reflect the fiscal policy decisions of provincial government departments within their line department policy guidelines. This is measured by a comparison of the real growth rates of C.M.B.S. spending programmes and those of the relevant departmental spends.

A further measure of fiscal resource prioritisation towards (or away from) C.M.B.S. is the proportion of provincial government spending spent on the basic service.

Progressive access to a Constitutionally Mandated Basic Service is measured through comparison of the growth rate of beneficiaries to the growth rate of the target population or backlog. This enables measurement of the spread of service provision or the take-up rate. However, data is not readily available at this time to enable such comparisons. The growth rate of the target population or backlog is largely determined by demographic factors (e.g. birth, mortality and migration rates) and is largely beyond the control of provincial governments.

The real growth rate of spending per beneficiary is another, albeit imprecise, measure of progressive access. If the policy focus is on overcoming the backlog, fewer resources to more beneficiaries may be reflected in a real decline in spending per beneficiary. Caution should be exercised in interpreting indicators based on aggregates. For example, the social security system is characterised by a mix of beneficiaries with different levels of entitlement (e.g. pension vs. child support grant values). The value of transfers may be increasing whilst the mix of beneficiaries is shifting towards lower value grants (such as the child support grant) with the aggregate effect being a decline in spending per beneficiary.

Alternatively, a policy focus on increasing the quantity or improving the quality of service per beneficiary may be reflected by positive real growth of spending per beneficiary.

3.1.3 Data Availability and Constraints

Chapter 2 of the South African Constitution states that:

32. (1) Everyone has the right of access to
any information held by the state; and
any information that is held by another person and that is required for the exercise or protection of any rights.
Data availability can be measured by public access to government data (for example, through a government department’s website). The financial and a portion of the delivery or output data used in this analysis is readily available on the National Treasury’s and South African Reserve Bank’s websites.

The demographic data utilized in this analysis is readily available on Statistics SA’s website, (as is most data released by Statistics SA). Projected population growth over the 5 year period ending in 2002, averaged 1.96% p.a. nationwide but varied considerably between provinces, ranging from 0.95% in the Northern Cape to 3.09% in Limpopo.

Demographic data projections from 1996 may be revised once the 2001 Census results are released. Age cohort and poverty projections would be helpful to the analysis of social service target populations and backlogs.

Departmental data appears to be limited prior to 1997 and estimates for 2002 have often not been released to date. The National Departments of Education, Health and Social Development do not appear to release any beneficiary or delivery performance data through their official websites.

3.2 TOWARDS PROGRESSIVE REALIZATION OF BASIC EDUCATION

Fiscal Resource Shifts

The real annual growth of provincial government spending establishes the baseline for comparison. Between 1997 / 98 and 2001 / 02, provincial government spending declined by 1.19% p.a.
This trend was most marked for the Western Cape, where it declined at 3.03% p.a. The highest provincial average annual growth rate of spending over the same period was Mpumulanga at 1.12%. In large measure, these differences can be attributed to the transitional allocation formulae of the Provincial Equitable Share (P.E.S.) and, to a lesser extent, of the various conditional grants.

On average, provincial spending on education declined by 1.86% p.a. between 1997 / 98 and 2001 / 02, greater than the 1.19% decline in total provincial government spending. However, spending by Provincial Education Departments on basic education programmes increased in real terms by 0.87% p.a.
The trend is most apparent in the Eastern Cape where spending on basic education has increased by 12.77% p.a. in real terms. By comparison, spending on basic education in the Western Cape declined by 3.68% p.a.

On average, the proportion of provincial government spending on basic education services was 33.66%.
Mpumulanga devoted the greatest proportion of spending to basic education (38.38%) and the Eastern Cape, the lowest proportion (30.54%).

3.2.2 Progressive Access to Basic Education

On average and in most provinces, there have been declining learner enrolments between 1997 and 2001. Several possible reasons have been posited for this trend and these will vary between provinces. Possible explanations include the policy of limiting inappropriate age learners to the education system, interrupted school attendance by children orphaned by AIDS, a declining fertility rate, migration to private schools etc.
The trend is most marked in the Eastern Cape, where learner enrolments have declined by 4.5% p.a. Learner enrolments have increased however in Gauteng by 2.18% p.a., probably the result of in-migration from other provinces and neighbouring countries.

A combination of declining enrolments and fiscal resource shifts towards basic education translate into a national average real growth in spending per learner of 1.94% p.a.

Whilst spending per learner in the Eastern Cape remains the lowest in the nation, the Eastern Cape recorded the highest average annual growth rate in spending per learner. This suggests that inter-provincial differences in per-learner spending are narrowing.

Data constraints currently limit a quantitative analysis of the growth of the target population of appropriate age learners. Hence, it is not possible to evaluate whether access to basic education for children aged 6 to 18 years is improving or not. Age cohort projections would enable this analysis.


3.3 TOWARDS PROGRESSIVE REALIZATION OF PRIMARY & SECONDARY HEALTH CARE

Fiscal Resource Shifts

Table 3.3.1. indicates that, on average, provincial governments have shifted fiscal resources towards the health function and most particularly into primary and secondary health care. This may reflect the impact of the HIV-AIDS epidemic, and rising cholera and TB incidence.
Kwazulu - Natal recorded the highest real annual growth between 1997 / 98 and 2001 / 02 of 3.13% compared to the national average of 0.61% p.a.

On average, provincial governments devoted 16.3% of their spending on primary and secondary health care.
Kwazulu-Natal spent 20.5% of its budget on basic health care. This is the highest proportion in the nation. Limpopo devoted the lowest proportion of its spending on basic health services (13.24%).

3.3.2 Progressive Access to Primary and Secondary Health Care

The beneficiaries of spending on basic health services are clinic and hospital patients. Data on the number of patients was not readily available for this analysis. Hence, a per capita analysis was undertaken. On average, real primary & secondary health care spending per capita declined by 1.33% p.a. between 1997 / 98 and 2001 / 02, despite higher than average real growth of spending on these basic health services.
Spending per capita rose by 1.39% in Kwazulu - Natal and largely reflects the fiscal resource shift towards primary & secondary health care in that province. Real declines in spending per capita were highest in Free State (4.82% p.a.).

On average, R 427 (in constant 2000 prices) was spent per person per annum in South Africa on primary and secondary health care between 1997 / 98 and 2001 / 02.
Kwazulu - Natal spent the most per capita (R 518) and Gauteng the least (at R 338 per capita).

3.4 TOWARDS PROGRESSIVE REALIZATION OF SOCIAL SECURITY

3.4.1 Fiscal Resource Shifts

Compared to an average 1.19% p.a. real decline in provincial government spending, spending on welfare increased by 0.82% p.a. between 1997 / 98 and 2001 / 02. However, spending on social security declined by 0.34% p.a. in real terms. This trend has been offset in more recent budgets.
North West province has recorded the strongest growth in social security provision. Real growth of 8.66% is recorded for the period 1997 / 98 to 2001 / 02. The highest real rate of decline in social security spending is recorded for the Western Cape (at 5.87% p.a.).

On average, provincial governments spent 17% of their expenditure on social security.
The proportion is highest in the Northern Cape at 23.52% and lowest in Gauteng (at 11.85%).

Progressive Access to Social Security

The national average take-up rate by eligible beneficiaries between 1997 and 2001 is high at 9.85% p.a. This rate of take-up reflects a strong push towards improving access to social security and alleviating poverty nationwide, primarily through provision of child support grants.
North West recorded the highest growth rate of beneficiaries (13.84% p.a.). The Eastern Cape recorded the lowest take-up rate (7.51% p.a.).

Average annual take-up rates have generally exceeded the real rate of growth in social security spending. This is exhibited in a decline in real spending per beneficiary nationwide of 9.28% p.a. This is explained by rapid growth of beneficiaries against virtually zero real growth in spending. This is made possible by take-up of the Child Support Grant. As of April 2002, the Child Support Grant was R 130 per child per month, between a quarter and a fifth the value of Old Age, Disability and War Veteran pensions and the Care Dependency Grant. A greater number and proportion of Child Support Grant beneficiaries costing the state less than a quarter of its other beneficiaries reflects breadth of service over depth.

On average, R 6 785 (in 2000 prices) was spent per beneficiary between 1997 / 98 and 2001 / 02.
The Northern Cape spent the most per beneficiary and the Limpopo the least.

Annual age cohort and poverty projections would assist in ascertaining the growth of the target population for social security. It would then be possible to calculate the extent to which backlogs have been overcome.

3.5 TOWARDS PROGRESSIVE REALIZATION OF HOUSING

3.5.1 Fiscal Resource Shifts

On average, provincial governments spend only 2.85% of their annual expenditure on housing between 1997 / 98 and 2001 / 02.
Gauteng spent the most proportionately on housing (4.17% of provincial government spending), whilst Limpopo devoted the lowest proportion of its fiscal resources.

Provincial spending on housing has declined nationwide by an average of 7.32% p.a. in real terms between 1997 / 98 and 2001 / 02.
The trend is most marked in Gauteng where real spending has declined by 13.85% p.a. By comparison, an average real increase of 17.24% p.a. is recorded for Limpopo.

Progressive Access to Housing

Real declines in expenditure on housing are reflected in an average annual decline of 10.31% in housing delivery between 1997 / 98 and 2001 / 02.

On average, R 16 725 (in 2000 prices) was spent per housing unit delivered.
In the Northern Cape, an average R 13 255 was spent on each house completed or under construction. By contrast, average spending per beneficiary household in Kwazulu - Natal at R 30 190 per house (in 2000 prices) exceeded the monetary value of the housing subsidy.

On average, 202 508 houses were delivered per annum nationwide between 1997 / 98 and 2001 / 02. Significant fluctuations in recorded housing starts either confirm the volatility of the housing construction business, destabilizing public funding flows or the need to review the veracity of housing statistics.

Progress in overcoming housing backlogs has not been analysed in this draft. The data to enable this analysis is available from Statistics SA for the period 1996 to 1999 and should be available to 2001 once the Census results are released.

TOWARDS PROGRESSIVE REALIZATION OF ALL CONSTITUTIONALLY MANDATED BASIC SERVICES

3.6.1 Fiscal Resource Shifts

Provincial governments devoted an average of 69.84% of their expenditure on Constitutionally Mandated Basic Services (the sum of spending on basic education, primary and secondary health care, social security and housing) between 1997 / 98 and 2001 / 02.
Kwazulu - Natal devoted the highest proportion of its fiscal resources (75.62%) to CMBS and Gauteng the lowest (at 63.41%). Gauteng devoted a higher proportion of spending on other economic services and infrastructure.

Compared to a real decline of 1.19% p.a. in provincial government spending, provincial governments have, on average, shifted resources to enable a marginal increase in spending on CMBS of 0.15% p.a. between 1997 / 98 and 2001 / 02.
The Eastern Cape has shifted proportionately more fiscal resources towards CMBS, notably basic education, than other provinces whilst the Western Cape appears to have prioritised services other than those deemed Constitutionally Mandated.

3.6.2 Progressive Access to All Constitutionally Mandated Basic
Services

A per capita analysis of spending on CMBS indicates that an average R 1 829 (in 2000 prices) was spent per person per annum on basic education, primary and secondary health care, social security and housing between 1997 / 98 and 2001 / 02.
Inter-provincial variations are not extreme with the most being spent per capita in the Northern Cape (R 2 305 p.a.) and the least in Gauteng (R 1 520 p.a.).

On average, real per capita spending declined by 1.78% p.a. over the period of the analysis. This is indicative of population growth (1.96% p.a.) exceeding the real growth rate of fiscal resources to CMBS.
This national trend is not reflected in the Eastern Cape where per capita spending on CMBS increased by 1.78% p.a. Per capita spending also increased in real terms between 1997 / 98 and 2001 / 02 in Limpopo. This is despite the province being characterized by the highest projected population growth rate (of 3.09% p.a.) for the period of the analysis. At the other extreme, real per capita spending on CMBS declined by 5.39% p.a. in the Western Cape.