FINANCIAL AND FISCAL COMMISSION

 

 

COMMENTS ON THE 2006/07 DIVISION OF REVENUE BILL

 

 

SUBMISSION TO THE PORTFOLIO, JOINT BUDGET, AND SELECT COMMITTEES ON FINANCE

16 FEBRUARY 2006

 

 

1 Introduction

The Financial and Fiscal Commission’s response and commentary on government’s Annual Division of Revenue Bill is submitted in terms of Section 214 (1) of the Constitution and Section 35 of the Intergovernmental Fiscal Relations Act (1998). The IGFR Act requires that the Minister of Finance consult the Commission prior to the introduction of the Bill.

Over the course of the 2005/06 fiscal year, the Commission held several consultations with the Minister of Finance and officials of National Treasury with respect to the Commission’s recommendations and Government’s policy objectives and priorities for the 2006/07 Division of Revenue Bill.

In preparing its commentary on, and its response to, the Division of Revenue Bill, the Commission assesses and analyses the equitable allocation of revenue amongst the three spheres and, horizontally within each sphere of Government. The assessment and analysis takes into account key principles of intergovernmental fiscal relations in South Africa.

Firstly, the Commission is required to comment on whether nationally collected revenue as reflected in the Division of Revenue Bill is equitably allocated among and within all spheres of government. In making its comments the Commission is legally mandated to take account of all constitutional and legal requirements. Secondly, the Commission considers Government’s obligation to provide constitutionally mandated basic services (as reflected in the Bill of Rights) taking into account considerations listed in Section 214(2) a-j of the Constitution.

Thirdly, the Commission’s comment is based on government’s stated policy objectives, policy targets and norms and standards. In addition all legal institutional and administrative policy instruments and other strategic considerations contained in the Medium Term Expenditure Framework Plans are reviewed and assessed for their effectiveness, efficiency and compliance with legislated IGFR principles.

The Commission’s submission on the 2006/07 Division of Revenue Bill first provides a general and then, specific comments on the Bill itself. Second, the submission comments on government’s response to the Commission’s Annual Submission for the Division of Revenue 2006/07. Government’s response to the FFC Annual Submission is published in Annexure E of the Budget Review attached to the 2006/07 Division of Revenue Bill. Finally, this submission offers commentary on the relationship between national and provincial priorities in allocating budgets and unspent funds.

The main focus of the 2006/07 Division of Revenue Bill is the need to accelerate the delivery and provision of all basic and necessary services to citizens. Constitutionally, Government seems particularly concerned about provincial and municipal compliance with certain requirements listed under Section 214(2) of the Constitution. These are:

In its past submissions and its 2005 submission, the Commission made several proposals and recommendations with respect to the above. The FFC is therefore pleased that the 2006/07 DOR Bill seeks to put in place the necessary policy instruments, structures and frameworks to ensure compliance with the clauses listed above.

While the 2006/07 DOR Bill positively addresses all the focus areas, in the next few paragraph the Commission would like to draw the attention of Government to a few issues of a general and specific nature.

2 General and Specific Comments

2.1 General Comments

There is a need for consistency in approach with respect to all grants as to the appropriate determination of ceilings for the use of portion of the grants for acquiring capacity, administration and set-up costs. There could be cases in which this is not applied to some grants in which case a clear set of reasons should be articulated for the purposes of transparency.

Where evaluations of the performance of grants are required, a minimum set of criteria should be determined for receiving and transferring officers. This would aid efforts at a national level to undertake a consolidated analysis of the performance of grant allocations.

With respect to the procurement of services for construction and maintenance projects by provincial departments, greater flexibility should be encouraged for such services to be procured from private agencies in addition to the services rendered by the relevant department for public works and other public entities. Over the past three years, it has become evident that there are serious delays and blockages with the implementation of programmes for infrastructure and operation and maintenance thereof.

 

 

2.2 Specific Comments

Provincial Infrastructure allocation

Section 9 (2) (b): Provincial departments have their own supply chain management policies and tender committees for the purposes of procurement of services. This means that they can procure the services of private bodies or agencies other than or in addition to that of the provincial department dealing with public works and other public entities. This clause should be extended to include the procurement of services for construction or maintenance from private agencies/service providers to allow for greater flexibility in choices available to provincial departments.

We are also aware that provincial departments do, in any case, enter into contractual arrangements with service providers for other types of services.

Section 9 (3) ( c ): The FFC would like to propose that the principle of setting a ceiling on the amount of the allocations in a grant that can be used for acquiring capacity be extended to other grants taking into account that there are already policy decisions with respect to some grants for a percentage of the allocations to be set aside for administration and set-up costs, e.g. the housing grants. The treasury may consider applying this approach to all grants and or selected number of grants.

Re-allocation after stopping of allocation

Section 19 (1): The FFC proposes that the process of re-allocation should include the consideration of the re-allocation of funds within provincial/municipal departments and within provincial/municipal government programs over an above the current provision.

 

Allocations to public entities for the provision of municipal service or function

Section 22:

This section should state categorically that no costs and or additional costs resulting from the direct implementation of the National Electrification Program shall be shared nor borne by a municipality. This will ensure the minimization of possible unfunded mandates for municipalities.

Duties of the transferring national officer in respect of Schedule 5, 6, and 7 allocations

Section 24(6): After vetting and verification by National Treasury, these evaluations should be published in the Gazette (and/or made available to the FFC). Publication would be in line with objectives of the Act, one of which is to promote transparency.

 

Duties of the receiving officer in respect of Schedule 4 allocations

Section 25 (5): The FFC proposes that some minimum criteria be determined by the transferring national officer or the National Treasury to ensure that evaluations cover, at least a minimum set of critical factors. This would ensure a more consistent national consolidated analysis that compares similar factors. Without such criteria, the evaluations undertaken by receiving officers may differ considerably in the format and approach across provinces/municipalities and departments, making a national consolidated analysis a difficult exercise. Evaluations according to a minimum set of criteria should assist national efforts to monitor performance.

This proposal is not inconsistent with the Bill as in other sections of it formats are outlined for reporting and in one instance there is a request to disclose the criteria used in distributing funds – see Section 27 (1) (b).

 

Allocations by public entities to municipalities

Section 40: Consideration should be given to the inclusion of bodies such as the Development Bank of South Africa (DBSA).

3 Comments on Government’s response to the Financial Fiscal Commission’s Recommendations for the Division of Revenue 2006-07

This section presents the FFC’s comments on the response by the Government to the Recommendations of the Commission for the 2006-07 Division of Revenue.

The Commission tabled its recommendations, as per its constitutional and legislative mandate, entitled "Annual Submission for the Division of Revenue 2006/07" in Parliament in April 2005. Furthermore the Constitution and section 10 of the Intergovernmental Fiscal Relations Act require that government should take into account these recommendations of the FFC when determining the division of revenue between the three spheres of government.

The 2006 FFC provincial proposals covered a broad range of issues and were as suggested previously by government divided into two main parts. Part A dealt with issues applicable to the Division of Revenue for the 2006 medium term expenditure framework and focused on five main areas, namely a review of and proposals on the conditional grant system as it pertains to the National Tertiary Services and the Health Professions Training and Development grants, proposals on the financing of social welfare services in light of the fact that the social security grants function has shifted to the national sphere, an analysis and proposals on the framework on the assignment of powers and functions in the South African intergovernmental system, a review of the institutional and funding framework for housing in South Africa, and an assessment of and proposals on the current policy, legislative, and funding framework for transport provision in South Africa.

The FFC also made supplementary submissions in its recommendations that related to specific issues in local government finance as a follow up to its on-going work on the review of the local government equitable share. Specifically the Commission made proposals on the financing of municipal health services and further recommendations on the proposed developmental component of the Local Government Equitable Share Formula.

Government has responded in significant detail to the proposals of the FFC. The Commission notes that the government has generally responded positively to the recommendations that were made by the FFC.

With respect to the recommendations on the Health conditional grants there is agreement between government and the FFC that the NTSG be retained as a conditional grant. The government stresses the need to review this grant in order to take account of the Modernisation of Tertiary Services proposals from the health sector. The FFC had indicated in its submission last year that it would continue to review the grant and part of the review that has been done did take into account the MTS proposals. Detailed information will be presented in the Annual Submission for the 2007 MTEF cycle.

In relation to the Health Professions Training and Development Grant, there is agreement that this grant needs to be retained as a conditional grant. Government also indicates that it is currently undertaking some work and investigating options of improving the efficiency of the grant with respect to targeting. The FFC has also done further work on this grant and will be submitting detailed proposals in the Annual Submission for the 2007 MTEF cycle.

With respect to the financing of welfare services, government agrees with the recommendations of the FFC. Government further indicates that it is currently undertaking work to define the basket of welfare services in line with the FFC’s recommendation.

The recommendations that the FFC made with respect to the assignment of powers and functions have all been supported and accepted by government. Government further notes that the Policy Framework for the assignment of powers and functions to local government has been transformed into Assignment Guidelines that were published in 2005. Government notes that; read with the relevant legislation, these guidelines should assist all spheres of government to find the right mix of options for the devolution of powers and functions to the local sphere. Government also supports the Commission’s recommendation that there is a need to extend the framework to all three spheres of government and to ensure that any assignment and agreements by parties take the funding implications into account.

With respect to the recommendations on the institutional and funding framework for housing, government agrees with in general with the FFC’s recommendations. However government emphasizes that the administrative costs associated with housing subsidies are partially accounted for through the provision that municipalities can retain up to 7.5 per cent of the Integrated Housing and Human Settlement Grant for administrative costs. The rest of the costs should be bone by the municipality. While the Commission agrees with the principle, given the fact that it is unlikely that poor municipalities with no revenue raising capacity would be accredited, this should not be assumed to apply all the time. There is a need therefore to clearly specify that those municipalities with sufficient revenue raising capacity should share in the financing of administration costs for housing subsidies.

In relation to the recommendation that there be an alignment of new housing subsidies to the MIG and the local government equitable share formula government indicated that this may prove to be very difficult given time lags that exist between the granting of subsidies and the actual construction of a house. Secondly, the fact that the MIG also targets infrastructure in existing settlements over and above new housing also complicates the issue. Given the need to ensure transparency and simplicity in the formula, the FFC agrees with the government that using the formula to address these issues may indeed complicate the formula and present technical problems. There is also agreement that there is a need for the ensuring that the growth in housing subsidy approvals be accompanied by changes in the same direction for the equitable share and the MIG in order to ensure that poorer municipalities are also able to provide and maintain basic services infrastructure.

In relation to transport funding issues government agrees with the FFC on all the recommendations and highlights the need for improving the efficiency of inter-modal transport planning. The FFC agrees with government’s observation that the Gautrain Rapid Rail link provides lessons on the difficulties the transport sector experiences in coordinating planning across modes under the current funding and institutional arrangements.

The FFC included in the Submission Document a supplementary submission that it had made with respect to the funding of environmental health. Government agrees with the recommendation that the environmental health care services be included in the basic component of the local equitable share formula. This recommendation has been implemented in the 2006 Budget through the provision for a phasing-in of environmental health care services until such a period that estimated costs are matched.

However, government is of the view that there is no need to develop an environmental health care package as its elements are adequately listed in the National Health Act (Act No. 61 of 2003). The Commission is of the view that the fact that the Act lists the element is not adequate. The Act provides a general framework. The development of a package is necessary to ensure implementation. This would also make the estimation of costs relatively easier.

The final area of recommendations was the supplementary submission made in December 2005 on the proposed developmental component of the local government equitable share formula. Government agrees with the recommendations contained in the submission and further indicates that it will await specific proposals from the FFC with respect to how the local government equitable share formula could fully take account of the expenditure needs of government. The FFC is currently engaged in a research project that is aimed at addressing the expenditure needs of municipalities. However the final proposals are only expected to be tabled in the Annual Submission for 2008, which will be made in 2007.

In conclusion, the Commission notes and welcomes the government’s response to it recommendations and also appreciates the significant challenges that government faces in dealing with the division of revenue matters and ensuring that adequate resources are allocated to all the spheres of government and are utilized efficiently and equitably. In this respect the Commission welcomes the fact that the Division of Revenue Bill, for the first time provides a list of issues that government intends to be working on in the short to medium term. This is an important departure from the past in the sense that for the Commission there is now a fair amount of guidance with respect to the issues that are of key interest to government. The FFC can incorporate some of these issues in its work program and assist government through its recommendations in addressing some of the challenges.


4. Spending Performance Issues in Balancing National and Provincial Policy Priorities in Allocation

Many of the proposed clauses and sections in the DoR Bill are attempting to address the problems and difficulties associated with spending and delivery performance associated with the delivery of constitutionally mandated basic services. The Commission is pleased that the Bill is dealing with these problems and difficulties to ensure effective and efficient spending and the concomitant delivery of services. From its own assessment of spending performance the Commission would like to make the following observations.

4.1 Conditional Grants

National Government can most directly influence budget allocations between provincial government departments and programs within those departments by means of special purpose transfers or conditional grants.

Conditional grants are more frequently under-spent than Equitable Share allocations and/or may be spent for purposes other than that intended by the conditions of the grant. Reasons for such under-spending may relate to institutional and skills capacity to disburse, spend and monitor the grant by both national and provincial departments. Further, conditions may be either too onerous or too loose and ill defined to enable easy spending by recipient provinces.

The Commission is undertaking a research project to distinguish between these reasons on a grant-by-grant and province-by-province basis. Recommendations and proposals on these matters will be submitted to Government and Parliament in the Commissions forthcoming recommendations for the 2007/08 Division of Revenue Bill.

There is debate between national and provincial governments with respect to which sphere has the right to re-allocate unspent funds from conditional grants during the course of in-year re-allocations and rollovers to the following year. The FFC has previously indicated that conditional grants should be regarded as part of the National Equitable Share and, as such, it is the national sphere’s prerogative to re-allocate unspent funds on conditional grants to other provinces. However, in recognition of the desire of provincial governments to reallocate funds between provincial departments, the national sphere should only do so in consideration of provincial recommendations on appropriate re-allocation.

4.2 Equitable Share Funding

Most provincial revenues are derived from unconditional or general-purpose grants. Unspent monies from the Provincial Equitable Share can be re-allocated between programs by provincial departments and between departments by Provincial Treasuries, following policy priorities established through the interaction of Premiers’ Offices and Provincial Legislatures.

These provincial priorities are often given expression through Provincial Growth and Development Strategies (PGDS). Several provinces have established Growth, Development or Poverty Alleviation Funds with the purpose of stimulating regional economic development initiatives. Provincial Premier’s Offices have initiated many of these.

FFC research indicates that under-spending is low on spending derived from the Provincial Equitable Share and for most provincial departments. Under-spending or over-spending problems are generally restricted to new or relatively small programs or categories of spending. This reflects either (a) start-up and learning costs or (b) the capacity to counter under-spend on one program with an over-spend in another.

4.3 Performance Budgeting for Progressive Realization and Growth

The Commission is of the opinion that concern about under-delivery by provincial governments, whether from conditional or unconditional grants, is best addressed through performance budgeting systems, which link strategic planning and budgeting reporting formats to enable constant monitoring.

The data collated from these strategic plans and budgets should enable analyses of per beneficiary spends, coverage rates, levels or quality of service and cost-efficiencies and effectiveness. With these measures, it should be possible to measure progressive realization of access to Constitutionally Mandated Basic Services listed in the Bill of Rights.

Within the limits of ensuring that there is real per beneficiary growth in spending and improvements in coverage ratios and levels of service, provincial governments should be able to allocate funding for purposes of encouraging economic growth and development.

Some concern has been expressed at the apparent lack of transparency in accounting for these Growth, Development or Poverty Alleviation Funds. This may have more to do with the paucity of reporting formats and procedures accounting for growth than to deliberate obfuscation. Reporting for progressive realization can be further developed, reporting for the enablement of growth and empowerment is still in its infancy.