Report of the Select Committee on Appropriations on the 2010 Medium Term Budget Policy Statement, dated 16 November 2010

The Select Committee on Appropriations, having considered the 2010 Medium Term Budget Policy Statement and heard comments from identified stakeholders, reports as follows:

1. Introduction

The Minister of Finance tabled the Medium Term Budget Policy Statement (henceforth referred to as the MTBPS) on 27 October 2010, outlining the budget priorities of government for the medium term estimates. The MTBPS (spending issues portion) was referred to the Select Committee on Appropriations (the Committee) to consider and report in accordance with their respective mandates as outlined in the Money Bills Amendment Procedure and Related Matters Act No 9 of 2009 (henceforth referred to as the Act). Among its responsibilities, as per Section 6 (8) of the Act, in respect of the MTBPS, the Committee is required to consider and report on the following issues:

· The spending priorities of national for the next three years;

· The proposed division of revenue between the spheres of government and between arms of government within a sphere for the next three years; and

· The proposed substantial adjustments to conditional grants to provinces and local government, if any.

2. Medium Term Spending Priorities

Government prioritises its resources in the following areas:

• job creation initiatives and realigning support to business to enhance employment opportunities;
• enhancing the quality of education and skills development;
• improving the provision of quality health care;
• driving a more comprehensive rural development strategy; and
• intensifying the fight against crime and corruption.

The MTBPS reflects public service delivery commitments as informed by an agreed set of development and transformation goals. In making strategic choices over the medium term, will focus on these outcomes with the greatest potential impact on economic growth and development. The overall increase over the medium term period is R7.3 billion for the 2010/11 financial year and R67 billion over the following three years.

3. Budget Estimates for the 2010/11 Mid-Year

Table 1 (below) summarises budget estimates for three spheres of government.

Table 1: Adjusted Budget Allocations

Sphere of Government	Column A	Column B	Column C
	2010/11 allocation	2010/11 adjustments	Amount adjusted
	R’000	R’000	R’000
National	527 001 492	519 980 624	- 7 020 868
Provincial	260 973 745	265 139 448	4 165 703
Local	30 167 706	30 558 566	390 860
Total	818 142 943	815 678 638	- 2 464 305

Source: National Treasury (2010)

The total allocations to national departments decreased by R7.0 billion, allocation to provinces increased by R4.2 billion and allocations to local government increased by R0.4billion. In effect the general decrease will not impact on provincial and local spheres of government like on the national sphere of government where allocations were reduced. It is clear the reduced allocations are due to shortfall in expected revenue. In terms of section 6(1) of the Division of Revenue Act (henceforth referred to as DoRA), if actual revenue raised nationally in respect of the financial year falls short of the anticipated revenue set out in Schedule 1, the national government bears the shortfall and in terms of section 6(2) of the DoRA if actual revenue raised nationally in respect of the financial year exceeds the anticipated revenue set out in Schedule 1, the excess accrues to the national government, subject to subsection (3).

With respect to schedule 4 grants (i.e. allocations made to provinces to supplement the funding of programmes or functions funded from provincial budgets), the Further Education and Training Colleges Grant is the only grant that received additional allocations during the 2010 adjustment period. The Further Education and Training Colleges Grant increased by R31.297 million from R3.773 billion to R3.804 billion.

The following new allocations and amendments were noted in respect of specific purpose grants to provinces:

· Agricultural Disaster Management Grant – R50.00 million was allocated to the Western Cape Province for expenditure related to agricultural disasters such as drought. This grant is allocated as the need arises.

· Provincial Infrastructure Disaster Relief Grant – R214.398 million was allocated to KwaZulu-Natal for the rehabilitation of infrastructure destroyed by flooding. This Grant is allocated as the need arises.

· Comprehensive HIV and Aids Grant – increases by R40.00 million from R6.011 757 billion to R6.051 757 billion.

· Human Settlements Development Grant – increases by a net amount of R15 million. Gauteng Province receives an additional allocation of R115.00 million and North West Province’s allocation is adjusted downwards by R100 million.

· Devolution of Property Rates Fund Grant – increases by R769.035 million from R1.096 192 billion to R1.865 227 billion. This Grant could assist in reducing the current debt by government departments to municipalities.

Schedule 6 Grant

The following amendments were noted in respect of specific purpose grants to municipalities:

· Water Services Operating Subsidy Grant – increases by R8.399 million from R661.704 million to R670.103 million. This Grant subsidises water schemes owned and/or operated by the Department of Water Affairs or by other agencies on behalf of the Department and transfer these schemes to Local Government.

· Municipal Drought Relief Grant – increases by R92.000 million from R228.357 million to R320.357 million. The Grant provides capital finance for basic water supply in municipal infrastructure for affected households, micro enterprises and social institutions.

Schedule 7 Grant

The following amendments were noted in respect of allocations-in-kind to municipalities for designated special programmes:

· The Integrated National Electrification Programme (Eskom) Grant was adjusted downwards by R31.970 million from R1.751 780 billion to R1.719 810 billion during the 2010 adjustment period. This Grant provides capital subsidies to Eskom to address the electrification backlog of permanently occupied dwellings, the installation of bulk infrastructure and rehabilitation of electrification infrastructure.

· Water Services Operating Subsidy Grant – increases by R13.678 million from R145.978 million to R159.656 million. The net additional allocations to the Water Services Operating Subsidy Grant amount to R22.077 million (includes R8.399 million as per schedule 6 and R13.678 million as per schedule 7) in the 2010/11 financial year.

4. Hearings on the 2010 MTBPS

Hearings on the 2010 MTBPS took place on 02 and 03 November 2010.

The Standing and Select Committees on Appropriations jointly invited the following stakeholders: the National Department of Cooperative Governance and Traditional Affairs, the South African Local Government Association, the Financial and Fiscal Commission, the Human Sciences Research Council and Peoples Budget Coalition. Furthermore, the University of Free State and the Industrial Development Corporation were invited to comment on the MTBPS but could not honour the invitation due to certain reasons.

4.1 Financial and Fiscal Commission

The Financial and Fiscal Commission (henceforth referred to as the FFC) highlighted the potential risks to the moderate economic growth projections for the South African economy, which include: interruptions in the global recovery, exchange rate volatility, human resource needs and the proposed fiscal austerity/consolidation framework over the medium-term.

The FFC submitted that for the South African economy to grow faster, a more inclusive economic growth strategy that is multi-faceted in its approach is required. The FFC advised that the strategy should focus on poverty alleviation, the labour absorption capacity of the economy, the productivity of public expenditure (i.e. quality improvements in access to social services), accelerated implementation of approved infrastructure projects; increased spending on maintenance and rehabilitation and the rooting out of corruption in all sectors of the economy. The FFC requested that more detail be provided in relation to the economic policy direction of government which frames the fiscal environment in which the intergovernmental fiscal relations system must operate for effective Commission engagement.

The FFC raised concerns with respect to the downward revisions of agriculture and health spending over the medium term, particularly in light of the fact that these sectors contribute positively to economic growth and form part of the 12 identified national priority outcomes

The FFC noted that national government’s share of the Division of Revenue declines over the 2010/11 Medium Term Expenditure Framework, whereas the provincial and local government shares increases over the same period. The FFC commented that the current formula for determining the local equitable share (LES) is unconstitutional in respect of the Revenue-raising component (RRC). Furthermore, the FFC cautioned against potential negative effects on middle income municipalities resulting from the government’s approach to focus on targeted funding for poorer municipalities to the detriment of middle income municipalities.

The FFC submitted that the biggest expenditure challenge in the provincial government is the rising personnel spending compared to other spending items that lead to growth and development. With respect to the local government sphere, the FFC said that the biggest expenditure challenges are the poor performance against conditional grants (particularly infrastructure) highlighted by rollovers amounting to R1.8 billion in the 2010/11 financial year.

With respect to proposed substantial adjustments to conditional grant allocations to provinces and local government the FFC noted the following:

· Education Conditional Grants: Dinaledi schools – Mathematics and Science proficiency are identified as key outcomes, but low pass rates do not augur well for the future;

· Health Conditional Grants: Comprehensive HIV and Aids Programme – There is a mismatch between the burden of disease and the population;

· National Tertiary Services Grant: The health expenditure is dominated by tertiary level hospitals, therefore the next tier of hospitals are negatively affected, therefore the same effort should be directed towards primary health care facilities;

· Eradication of Backlogs in Education an Health Infrastructure Grants – The government should reconsider its decision to discontinue grants in these areas;

· Agricultural Grants: Namely, Comprehensive Agriculture Support Programme (CASP), Ilima letsema and Mafisa – The FFC agrees that it makes economic sense to merge these conditional grants into one comprehensive agriculture finance programme as their impact individually is limited; and

· Expanded Public Works Programme (EPWP) Incentive Grant for Infrastructure – The FFC noted low level of spending from this grant. The FFC is of the view that more effective reporting of EPWP projects will allow municipalities to access this incentive grant.

When the Committee asked the FFC to elaborate what it meant by the unconstitutionality of the revenue raising component of the local equitable share (LES) formula, the FFC explained that the unconstitutionality of the LES formula refers to the existing practice whereby deductions or additions to municipalities’ equitable share are based on actual revenue collection figures, which disregards the municipality’s capacity to collect revenue and the degree of effort made by the municipality to collect all revenues owed. The FFC advised that this is in contravention of the Constitution and therefore recommends that the LES formula should contain a revenue-raising capacity variable.

4.2 Department of Cooperative Governance

The Department of Cooperative Governance (henceforth referred to as DCoG) provided the Appropriations Committees with an overview of key focus areas and budget priorities over the 2011 Medium Term Expenditure Framework (MTEF) that will contribute to the national priority outcome 9: A responsible, accountable, effective and efficient local government system. Key strategies and programmes proposed by DCoG for the 2011 MTEF include:

· A differentiated approach to supporting local government (i.e. covering aspects of finance, services and labour);

· Propose a single window of coordination, support to municipal finance and administration capability; and

· Propose a refined ward committee model to deepen democracy, improved support to human settlements outcomes, implementation of the community work programme and accelerated access to basic services.

DCoG indicated that it has requested additional allocations to the baseline allocations of municipal transfers, which include the Municipal Infrastructure Grant (MIG), Bulk Infrastructure Fund (BIF) and the Local Government Equitable Share (LGES). DCoG submitted that:

· An additional allocations of R16.9 billion over the 2010/11 MTEF to the MIG baseline is requested on the basis of meeting sector targets to eradicate infrastructure backlogs;

· An additional allocations of R26.3 billion over the 2010/11 MTEF to the BIF is requested on the basis of unlocking the delivery of reticulation services by funding bulk infrastructure and procuring well located land towards addressing backlogs in order to ensure universal access to basic services. DCoG explained that the BIF will be specifically used to upgrade, refurbish and rehabilitate bulk infrastructure such as Water and Waste Water Treatment Works; and

· An additional allocations of R4.2 billion over the 2010/11 MTEF to the LGES is requested on the basis of complementing the institutional component of the LGES by funding critical skills in municipalities, prioritising water and sanitation over the MTEF in order to build long-term municipal institutional capacity through the proposed reconfigured Municipal Systems Improvement Systems Grant (MSIG) into the Local Government Institutional and Systems Support Grant (LGISSG).

DCoG further submitted that additional funding has also been requested for the following departmental programmes: Special Purpose Vehicle, Disaster Management, and the Implementation of the Masters Systems Plan for the National Disaster Management Plan, Municipal Infrastructure Audit, Local Government Turnaround Strategy and the Township Renewal Programme.

When the Committee raised the following points of clarity in respect of the proposed Special Purpose Vehicle:

· Elaborate on the rationale for a Special Purpose Vehicle (SPV)?

· What form will the SPV take?

· It appears that the SPV will encroach on the mandate of local municipalities, in that case who will be held accountable for infrastructure and service delivery?

· The success of the SPV largely depends on cooperation and alignment between the three spheres of government, how does DCoG intend overcoming this challenge?

· How DCoG envisages achieving the targets and outcomes in light of the current capacity?

· How will DCoG monitor the activities of the SPV?

DCoG responded that the proposed SPV came about after an in depth analysis of the challenges affecting municipal infrastructure and service delivery, which were informed by the State of the Nation Report, the Local Government Turnaround Strategy and the need to deliver on outcome 9. DCoG reported that it cannot divulge the form that the SPV will take (there are a number of options) as it still needs to table the proposal to the Executive. DCoG views the SPV as an implementing agent and local municipalities would therefore freely enters into service level agreements with the SPV, with the local municipality being ultimately accountable for infrastructure and service delivery. DCoG has identified a lack of cooperation and coordination between the three spheres of government as a risk and will attempt to mitigate the risk by proposing that the SPV be a single window for coordination among the three spheres of government. DCoG acknowledges the need to bring in additional technical capacity in order for the SPV to achieve its goals and will draw on capacity within the private sector and government entities. The activities and outcomes of the SPV will be monitored by a joint monitoring and evaluation panel comprised of all relevant stakeholders.

4.3 South African Local Government Association

The South African Local Government Association (henceforth referred to as SALGA) indicated that the economic recovery was a welcome sign for local government. However, SALGA also cautioned that the economic recovery bears pressure on demand for quality municipal services and subsequently the ability of municipal services to support the expansion of productivity within local industries and the sustainability of key economic sectors operating within municipal boundaries.

SALGA further recommended a comprehensive review of the local government fiscal framework to address amongst others, the limited vertical share. There should be a systematic review of baselines to ensure:

· Revenue allocations to local government as a whole are congruent with its full range of developmental and service delivery responsibilities; and

· The vertical share of local government meets the increasing demand for municipal services.

Furthermore, SALGA recommended that this should be combined with efforts to build the capacity of weaker municipalities to spend efficiently and effectively.

Concern was raised regarding whether the proposed minor adjustments to the local government equitable share (LGES) formula to allocate more funding towards poorer municipalities are substantive enough to address institutional challenges, such as: the need to appoint skilled personnel to manage finances, human resources, service delivery functions and core administration functions. In addition, the availability of credible data on key variables relating to the socio-economic demographic and spatial profiles of municipalities needs to be addressed not only to update the data underpinning the LGES formula but also to enable a more fundamental review of the structure of the formula itself.

With regard to conditional grants, SALGA made the following submissions:

· The management of grants should be reviewed;

· The approach on conditional grants should not be a one size fits all, it should be based on municipal needs and its capacity to deliver;

· Analyse past performance to improve the operational effectiveness of the grants;

· A conditional grant for rural municipalities for job creation and economic development should be introduced;

· Disaster management funding should reach municipalities earlier;

· Electricity Demand Side Management funding must be effectively targeted; and

· Increase funding for the water services operating subsidy grant to assist municipalities struggling with refurbishment and maintenance.

Since infrastructure funding remains a challenge, it was argued that there should be an explicit link between municipal infrastructure grant (MIG) allocations and LES allocations, especially in smaller municipalities. Funding should be set aside through MIG for the funding of refurbishment and upgrade of existing infrastructure in smaller and poorer municipalities.

SALGA welcomed the envisaged devolvement of the housing and public transport functions to cities and the increase in the Devolution of Property Rates Grant.

The Committees on Appropriations raised concern regarding the perceived lack of support provided by SALGA with respect to capacitating municipalities. SALGA responded that in support of municipalities they are partnering with universities who are service providers to strengthen the capacity of financial management. For example the University of Witwatersrand is offering a course in financial management. Furthermore, SALGA reported that it is reviewing the possibility of electing a permanent member to the National Council of Provinces (NCOP) to provide support to the Committees concerning local government matters.

The Committees on Appropriations sought clarity on the impact of the new demarcations and SALGA reported that there are 382 new wards in the country which will have a huge financial burden on the government, particularly in Johannesburg where there are more than 60 new wards. This also implies the increase in the number of councillors which, in turn, increases the amount allocated in respect of the institutional component of equitable share that funds the payments of councillors.

4.4 Human Sciences Research Council

The Human Science Research Council (henceforth referred to as HSRC) applauds the Appropriations Committees and the Ministry of Finance for enabling public engagement with the national budget priority setting and decision making processes. Furthermore, applauds efforts to chart a new inclusive growth path that serves as an agenda for collective action.

The HSRC identified the following strengths in respect of the MTBPS:

· Employment is clearly stated as the government’s top priority. However the MTBPS should be complemented by more detail on how the government will implement a new development path that will create 5 million jobs within 10 years;

· It takes into account the scale of challenges faced in areas of poverty, education and health;

· It recognises cities as engines of growth, thus requiring more investment in infrastructure to address bottlenecks and backlogs;

· It recognises that expanding informal settlements need investment;

· It provides for faster growth in municipal spending compared to growth in provincial and national expenditure;

· It recognises that investment in transport can improve living standards for workers, cut transport costs and increase productivity; and

· It gives due attention to rural development, youth employment, the Industrial Policy Action Plan and the Community Works Programme.

The HSRC noted the insufficiency of progress with respect to broad education, health and economic indicators. The HSRC recommends that investment in these broad areas targeted for priority needs to be further specified.

With respect to Education, the challenge is how and where to intervene, in order to break the cycle of the education and development trap. Substantial investments in early learning through reception year and foundation phase of schools are critical to breaking the stagnation of low performance scores.

The Aids epidemic is stabilising, however intensive efforts are still required. The 3^rd national HIV prevalence, incidence and communication survey (2008) revealed a number of positive trends. A decline in the HIV prevalence in the teenage population (15-19 years) has been observed, as well as a decline in mother-to-child infections. However, HIV infection risks remain high in the country, with women aged between 25 and 29 years continuing to record very high levels of HIV infection.

In respect to economic growth, the HSRC noted the importance of a knowledge economy, which would contribute to economic growth. South Africa’s scores are low in respect of the Knowledge Economy Index and the number of full time equivalent researchers per 1 000 people compared to its counterparts. Furthermore there has been slow uptake of the Research and Development (R&D) tax incentive by the private sector. The extent to which the requisite institutional reforms and actions to support the incentive regime have been implemented by government should also be considered. Hence, the HSRC calls for the government to continue to prioritise R&D and monitor and evaluate programmes that must deliver on R & D outcomes.

The HSRC furthermore placed emphasis on the need for research information to inform medium term expenditure decisions, with concerns raised regarding whether national data collection needs in the areas of health and education are receiving sufficiently allocations from national funding. The HSRC proposes a new national health survey (i.e. South African National Health and Nutrition Examination Survey [SANHANES]) that will provide real-time annual monitoring of the health status of the nation and fill the current gap in national health surveys. Furthermore, proposes accessibility modelling (that will identify access norms and standards, demand for services, service infrastructure supply etc.) and strategic use of GIS capabilities for spatial optimisation of services, resulting in improved service delivery.

The HSRC commends the acknowledgement in the MTBPS of procurement and tender fraud which is currently under investigation and the efforts of the Inter-Ministerial Committee on Anti-Corruption in its efforts to address inefficiencies in, and improving the effectiveness of public management. The HSRC also proposes a closer examination of the nature and scope of service delivery protests to avoid future conflicts with communities and facilitate implementation, given the imminent increases in tariffs and user charges.

The Appropriations Committees raised the following points of clarity in respect of the HSRC submission:

· What are the HSRC’s recommendations for improving educational outcomes in light of the poor outcomes observed thus far?

· The Committees also wanted to know whether the government HIV/Aids awareness programme has been effective in light of the prevalence of HIV infections continuing to remain high among women aged 25-29 years.

· Concern was raised that the status of Tuberculosis (TB) was not mentioned in the HSRC presentation, as the prevalence of TB is quite high as well.

· What conditionalities could be attached to social welfare grants?

· What is the optimal percentage share of Gross Domestic Product (GDP) that need to be invested in R&D activities?

· What comparative studies has the HSRC undertaken in relation to the economic growth potential of cities?

The HSRC responded that government has been proactive by intervening in critical areas such as curriculum and teacher/educator training to bring about positive outcomes. The HSRC indicated that it would provide empirical evidence of factors affecting educational outcomes.

The HSRC explained that the prevalence indicator could be misleading as it does not reflect the positive trends, such as the fact that HIV/Aids patients are living longer as a result of anti-retroviral treatment and more people are becoming aware of their HIV/Aids status. Prevalence is measured according to the number of new HIV incidents reported and the mortality rate of HIV infected people or Aids patients. The HSRC indicated that in the Western Cape, TB forms part the Burden of Disease Programme, whereby HIV/Aids and TB are diagnosed and treated together. This has resulted in cost savings and improved diagnosis and treatment of HIV/Aids and TB. The HSRC were also of the opinion that the Western Cape model could possibly be implemented across the country.

The HSRC proposed the following conditionalities related to certain social welfare grants:

- School enrolment could be a conditionality attached to the child-support grant;

- Teenage mothers should either continue with their schooling or enrol in an Further Education and Training (FET) institution in order to gain access to the child-support grant; and

- Conditionality in respect of the proposed youth employment grant could be that the individual should show proof of actively seeking work in order to qualify for the grant.

The HSRC reported that R& D as a percentage share of GDP has declined, despite government committing to 1% of GDP, Currently the R& D as a percentage share of GDP is 0.93 %. The HSRC recommends an optimal percentage share of 1.5% of GDP.

The HSRC reported that it forms part of a research group that is reviewing and assessing the socio-economic status of cities. Findings are that the economic performance of cities have benefited the country as a whole and have been the drivers of employment creation. On the other hand, it has placed greater demand on cities infrastructure and service delivery, resulting in greater pressure on the cities finances. Hence, the HSRC cautions the government and recommends a more balanced approach in investment and the distribution of investment between rural and urban areas.

4.5 Peoples Budget Coalition

The Peoples Budget Coalition raised the following concerns with respect to the MTBPS:

· It is of the view the MTBPS is proposing a contractionary budget;

· The MTBPS should have taken a more development perspective, particularly focusing on the Millennium Development Goals;

· it is also of the view that the MTBPS does not place enough emphasis on the creation of employment;

· Employment should be at the primary focus of South Africa’s economic policy;

· The economic growth projection of 3.9 per cent is not sufficient to create jobs.

· A concern was raised that the cost burden of the global economic recovery will be placed on the south. Calls for fiscal consolidation by the G20 are a means to introduce fiscal austerity measures in which public sector expenditure on social services are to be cut. Thus a call for South African fiscal policy to be independent of the G20 prescriptions;

· Another concern was raised with regard to the currency appreciation and its implications for the export trade sector and the local producers that supply to the export market. It was rgued that it could have implications for labour operating within this sector. Hence, the People’s Budget Coalition called for a coherent exchange rate management policy package that is linked to industrial development policy and implemented at a macro-economic level.

The People’s Budget Coalition also questioned the Committee as to the progress of the establishment of the Parliamentary Budget Office as required by the Money Bills Amendment Procedure and Related Matters Act.

5. Committee Observations:

Having considered the 2010 MTBPS and engaged extensively with the identified stakeholders, the Select Committee on Appropriations noted the following key observations or concerns:

5.1 Government is cautioned against the potential negative effects resulting from the government’s approach to focus on targeted funding for poorer municipalities to the detriment of middle income municipalities.

5.2 It was highlighted that current practice that is used to determine the local equitable share (LES) is unconstitutional in respect of the Revenue-Raising Component (RRC).

5.3 The availability of credible data on key variables relating to the socio-economic demographic and spatial profiles of municipalities needs to be addressed not only to update the data underpinning the LGES formula but also to enable a more fundamental review of the structure of the formula itself.

5.4 Concern was raised regarding whether the proposed minor adjustments to the

local government equitable share (LGES) formula to allocate more funding towards poorer municipalities are substantive enough to address institutional challenges, such as the need to appoint skilled personnel to manage finances, human resources, service delivery functions, and core administration function.

5.5 Government efforts to chart a new inclusive growth path that serves as an agenda for collective action is applauded. However, government is required to provide more details on the proposed new growth path/ economic policy direction of the country.

5.6 It was further highlighted that government, at the provincial level, seems to be spending more funds on the compensation of employees rather than on programmes.

5.7 Government is not doing well with respect to health spending and therefore the downward revision is justifiable.

6. Committee Recommendations

The Select Committee on Appropriations, having considered the 2010 Medium Term Budget Policy Statement and received comments and recommendations from the identified stakeholders, recommends to the House that the 2010 Medium Term Budget Policy Statement be supported.

The Select Committee on Appropriations further recommends the following:

• That the overall expenditure of government at the end of the second quarter of each financial year needs to be at 50 percent. This will most likely lead to improved quality of spending and reduce the level of unauthorised spending and fiscal dumping at the end of the financial year.

• That the Department of Co-operative Governance should consult government and other relevant stakeholders with respect to the proposed Special Vehicle Unit to avoid duplication of government programmes.

• That the Department of Health should investigate reasons for under-spending of grants and discourage the tendency of returning funds to National Treasury. This works against the plans to transform our Health institutions.

Report to be considered.