Presentation to NCOP ________________________ FFC Submission on the IGFR 2003 14 May 2003

1. Presentation to NCOP ________________________ FFC Submission on the IGFR 2003 14 May 2003

2. INTRODUCTION • Intergovernmental Fiscal Review 2003 is analyzed in terms of FFC recommendations and proposals for the 2001, 2002, 2003 and 2004 MTEF cycles.

3. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.1 National-Provincial Financing Trends National Transfers • Between 97/98 and 2001/02, the unconditional Equitable Share constituted 86% of provincial spending. • 10% was constituted of conditional grants, which are used to implement national policy objectives e.g. food relief, HIV-AIDS. • Over the 2003 MTEF, the relative importance of conditional grants increases with the age extension of the Child Support Grant.

4. 1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.1 National-Provincial Financing Trends cont. • The FFC made recommendations on a new PES formula for the 2001 MTEF. Horizontal division of revenue formulae were recommended for the primary and secondary school education, primary health care and social security basic services. • The costed norms approach was also adopted for the institutional costs of government. A tax capacity element was left inactive due to inadequate own revenue sources and a residual B-element introduced.

5. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.1 National-Provincial Financing Trends cont. Provincial Own Revenue • For the 2002 MTEF, the FFC proposed that a tax capacity element in the PES formula be considered and noted that surcharges of personal income tax, fuel and gaming levies were the most feasible provincial taxes. • For the 2003 MTEF, the Commission proposed that consideration be given to evaluation criteria for, revenue collection constraints on, tax rate setting powers of, tax room transfers and dispute resolution procedures in respect of provincial tax proposals.

6. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.1 National-Provincial Financing Trends cont. • Provincial governments continue to budget for a declining proportion of own revenue contributions to revenue (down to 3% over the 2003 MTEF). The most important and fastest growing source of own revenue is that legislated in terms of the Road Traffic Act. Many own revenue sources remain unclassified. • Provincial surpluses collected over the past 3 years are being rolled over to fund infrastructure delivery projects over the 2002 and 2003 MTEF cycles.

7. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.1 National-Provincial Financing Trends cont. Provincial Expenditure • Between 1997/98 and 2001/02, real declines were recorded for provincial spending and notably the education and housing functions. Small real growth of spending was noted for health and welfare in light of the HIV-AIDS epidemic and the introduction of the child support grants. • Real increases in spending on all provincial services are budgeted for over the 2003 MTEF cycle, but notably in social security provision with the age extension of the child support grant.

8. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.1 National-Provincial Financing Trends cont. • Over the previous 7 years, personnel spending has tended to crowd out spending on capital and other operational spending. These trends are being reversed with relatively higher increases in spending on capital and complimentary inputs (e.g. LSM, medications etc.) Division of Revenue Principles & Procedures • For the 2002 and 2003 MTEF cycles, the FFC elaborated on division of revenue principles, notably the prioritization of basic services mentioned in the Bill of Rights (CMBS), their progressive realization balanced against the constraints listed in S 214(2) of the Constitution.

9. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.1 National-Provincial Financing Trends cont. • Government responded by noting that the FFC would be part of a review of the Equitable Share formulae and other transfer mechanisms following the release of Census 2001 results in 2003. These formulae would seek to be more forward looking and policy driven. • When the FFC introduced the costed norms approach, it noted inadequate data constraints as an inducement to investment in data collection. • The need for improved data collection was proposed in the FFC’s proposals for the 2002 and 2003 MTEF cycles. In anticipation of Census planning and ongoing reforms to integrate budgetary and strategic planning, the Commission elaborates extensively on these issues in its submission for the 2004 MTEF cycle.

10. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.2 Social Development Social Security Take-up Rates • In 2000, the FFC recommended an inter-provincial allocation formula for the social security function. This included a phase-in parameter to enable gradually increased utilization by the eligible population.

11. 1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.2 Social Development cont. • The extension of the child support grant to ages 7-14 will be phased in over the medium-term. An estimated 3.2 million children will become eligible. • Since 2001, there has been rapid take-up of the disability and foster care grants. This might be attributed to the impact of HIV-AIDS. • The population aged 65+ may be growing faster than the population average. • Rising unemployment and poverty may contribute to rapid take-up. • Beneficiary take-up rates are difficult to predict and can destabilize fiscal management.

12. 1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.2 Social Development cont. Financing Social Security Take-up • Rapid rates of take-up are leading to a sharp rise in social development budgets, from 19.4% of provincial spending in 1999/00, to 21.6% in 2002 / 03 and is projected to rise to 25.8% by 2005 / 06. • The age-extension of the child support grant is to be financed through a conditional grant valued at R 1.1, R 3.3 and R 6.4 billion over the succesive years of the 2003 MTEF cycle.

13. 1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.2 Social Development cont. National Social Security Agency • In its submission for the 2003 MTEF period, the FFC proposed that, over the medium- to long-term, the social security function be transferred to the national sphere and transfer payments administered by a National Social Security Agency. • The creation of a national public entity has received in-principle approval from Cabinet. • There are wide inter-provincial variations in payment costs and approval periods.

14. 1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.2 Social Development cont. • The national entity is expected to reduce fragmentation, more effectively deal with the distorting allocation effects of inter-provincial migration, allow for the exploitation of scale economies and enable flexibility in procurement. • For the 2004 MTEF, the FFC reiterates its proposal for funding social security from the national sphere to avoid the crowding out of other service delivery mandates . • Further, the Commission recommends that the NSSA be jointly accountable to national and provincial governments and be capable of adminstering province-specific grants, should they arise.

15. 1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.2 Social Development cont. Social Assistance • Social security transfers constituted 87.2% of provincial social development budgets. In the poorer provinces of Limpopo, Eastern Cape and Kwazulu Natal, the proportion is approximately 95%. • In its 2000 submission, the FFC recommended an explicit allocation for other welfare (or social assistance) services and that this be allocated between provinces based on the distribution of poverty.

16. 1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.2 Social Development cont. • New legislation on children in conflict with the law will have budgetary implications. • Other welfare services includes secure care centres, shelters for abused women and children and homes for the disabled. • A Food Relief grant amounting to R 388 million per year is planned for the 2003 MTEF.

17. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.3 Education Width and Depth Issues in Service Delivery • In 2000, the FFC recommended a costed norms approach to the allocation of funds for public ordinary, independent and special school spending programs. • Learner enrolment in public ordinary and independent schools has declined from 12.3 mil in 1996 to 11.97 mil in 2002 i.e. at an average annual rate of 4.7%. • Whilst there has been a real decline in provincial spending on education, this has been slower than the decline in learner enrolment. This enabled an increase in spending per learner.

18. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.3 Education cont. • Learner-Educator ratios have improved from 35 in 2000 to a national average of 32 in 2002. In 2002, there are 38 learners per classroom. • The Commission has frequently cautioned against the crowding out pressures on complimentary inputs such as learner support materials.

19. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.3 Education cont. Other Constitutionally Mandated Basic Education Services • In its submission for the 2003 MTEF, the FFC noted that Early Childhood Development was not accounted for in the PES formula. Whilst its inclusion in an unconditional grant may inhibit budgetary growth due to other spending pressures, the conditional grant funding should be retained until a new PES formula is adopted. • The recommendation to include ECD in the PES formula is reiterated for the 2004 MTEF in anticipation of a review of the PES formula.

20. 1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.3 Education cont. • The FFC’s submission for the 2004 MTEF proposes that ABET be funded through a conditional grant mechanism until such time as national norms and standards are established. These would enable consideration in the PES formula review. • The Commission comments on the constraints involved in implementing the Integrated Nutrition Program through the health function whilst its targeted beneficiaries are learners.

21. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.3 Education cont. Inter-Provincial Equity Issues • The inheritance of provinces with the highest poverty rates (Eastern Cape, Kwazulu Natal, Limpopo) spending the lowest per learner and vice versa (in respect of Gauteng, Western & Northern Cape) remains but the variation in per learner spending, learner-educator and learner-clasroom ratios has been significantly reduced. • In its submission for 2004 MTEF, the Commission recommends that the age-weighting of learners be phased out of the PES formula. Poorer provinces tend to have higher concentrations of out-of-age learners and youth unemployment.

22. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.4 Health Developing the CMBS Health Care Norm • In its recommendations for the 2001 MTEF cycle, the Commission defined CMBS health services in terms of a primary health care package. National norms and standards had not been established. • In its submission for the 2003 MTEF, the FFC identified further issues requiring investigation over and above the definition of norms and standards set out in the Department of Health’s PHC package.

23. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.4 Health cont. • In its current submission, the Commission proposes that, given problems of inflexible conditionality and delivery capacity, a more efficient conditional grant mechanism for HIV-AIDS be considered. • The government’s Enhanced Response to HIV/AIDS Strategy effected increased spending through the PES funding mechanism over and above the targeted conditional grants. The Commission proposes that the outcomes of spending from the PES on HIV-AIDS be evaluated. Further it notes that an expansion to the equitable share formula should be based on HIV prevalence rates.

24. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.4 Health cont. • The Commission proposes that the eligible population for CMBS health services be based on a moving average of the medical scheme population and that the current weighting of public to medical scheme populations in the PES formula be reviewed. Institutional Capacity Building • There does not appear to be a clear and transparent link between the intended service and the funding allocation of the Health Professions Training and Development Grant.

25. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.5 Provincial Infrastructure The Provincial Infrastructure Grant • In response to concern expressed at Parliamentary Hearings in 1999 about inadequate spending by provincial governments on social infrastructure backlogs, the FFC recommended that national government provide a conditional grant to support the reduction of these backlogs. • In 2001, the Commission commented that the mechanism for allocating funds consistently and objectively was not apparent and proposed the adoption of an analytical model it had developed. • In line with concerns expressed by government and other stakeholders, the FFC is expanding its Capital Grants Model to incorporate Roads and Housing (in addition to Education, Health and Welfare) and to develop its supporting database.

26. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.5 Provincial Infrastructure cont. Recurrent Implications of Road Infrastructure • In most provinces, there is little evidence that proportionate and real declines in spending on roads are to be reversed over the 2003 MTEF. • Only 16.2% of Provincial roads are surfaced. Neglecting the maintenance of gravelled or graded access roads (on which the poor are disproportionately dependent) increases the frequency of rehabilitation backlogs. Many such roads are in a state of historic disrepair. • Many provincial departments do not distinguish between new-build, upgrading, rehabilitation and maintenance spending.

27. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.5 Provincial Infrastructure cont. Functional Assignment Issues pertaining to Roads &Transport • Road & Transport are concurrent functions of all 3 spheres of government. This places additional demands on co-operative governance. • Some provincial roads are likely to be reclassified as part of a strategic road network for which national government is responsible. This could alleviate the pressure felt by provinces from social services spending. • The public transport subsidy allocations between bus, train and taxi passengers does not reflect current usage patterns.

28. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.5 Provincial Infrastructure cont. Functional Assignment Issues pertaining to Housing • In its current submission for the 2004 MTEF cycle, the FFC proposes that the assignment of responsibilities between the 3 spheres of government for provision of CMBS water and housing services be clarified. • It noted further that the delivery of housing and household infrastructure should be closely aligned to enable Integrated Development Planning. • The Human Settlements conditional grant program endeavours to address the issue of housing projects without supporting community infrastructure such as roads, schools, clinics and retail facilities.

29. -1- NATIONAL-PROVINCIAL CONCURRENT FUNCTIONS1.5 Provincial Infrastructure cont. Housing Delivery Issues • Between 1997 / 98 and 2001 / 02, housing delivery rates averaged 200 000 per annum. The rate of subsidy approval and hence housing delivery has declined by approximately 40% since 2001. • The national housing backlog is currently estimated at just over 2 million. Housing, household water, sanitation, electricity and waste removal service backlogs overlap but do not correspond. • Arrears payments on municipal services are more common amongst poor communities. Many municipalities are risk averse to new low-cost housing developments.

30. -2- NATIONAL-MUNICIPAL CONCURRENT FUNCTIONS2.1 National-Municipal Financing Trends Trends in metropolitan and non-metropolitan areas • Most property rates and regional levy income is collected in the metros and large urban areas owing to their economic base. • It is the role of the intergovernmental fiscal system to ensure that redistribution of resources occurs. Per capita allocations for infrastructure and capacity-building grants and equitable share allocations are therefore smaller for metros than for districts and most local municipalities. • There is a need to maintain this redistributive thrust by ensuring that the equitable share formula reflects revenue-raising capacity.

31. -2- NATIONAL-MUNICIPAL CONCURRENT FUNCTIONS2.1 National-Municipal Financing Trends cont. Regional levies • Regional levies are in the process of reform. It is important to ensure that the following two principles inform the levy reform process: • Revenue accruing through regional levies should be retained in the local government sphere; • The revenue instrument should be subject to local control so as to promote accountability to local residents.

32. -2- NATIONAL-MUNICIPAL CONCURRENT FUNCTIONS2.1 National-Municipal Financing Trends cont. Municipal borrowing • Many municipalities could potentially obtain loan finance but are not doing so. The FFC has indicated that this should be addressed by: • Developing a differentiated approach to the borrowing market; • Developing deliberate policy measures to built the creditworthiness of municipalities.

33. -2- NATIONAL-MUNICIPAL CONCURRENT FUNCTIONS2.1 National-Municipal Financing Trends cont. Electricity • The electrification programme will be more costly in future owing to the rural location of those who are not yet electrified. • Two issues of importance during the restructuring of electricity distribution: • Should there by a municipal levy on electricity (to replace surpluses) or should there be a national grant? • Levy is preferable, as accountability for service delivery is enhanced where revenue is collected and disbursed locally. • Should subsidies for free electricity be channelled through the equitable share or conditional grants? • Conditional grants, once REDs are operational.

34. -2- NATIONAL-MUNICIPAL CONCURRENT FUNCTIONS2.1 National-Municipal Financing Trends cont. Water • It is important to assess funding required for free supply of water and electricity to households.

35. -3- DATA ISSUES3.1 Overview of FFC Proposals on Data • In introducing the costed norms methodology in 2000, the FFC recognized the current lack of data and national norms and standards with which to sustain its formula but noted the incentives created to improve data collection, a theme which it reiterated for the 2002 and 2003 MTEF cycles. • The Commission’s current submission elaborates extensively on issues pertaining to data collection to enable performance measurement and improve the link between budgetary and strategic planning.

36. -3- DATA ISSUES3.1 Overview of FFC Proposals on Data cont. Performance Measurement • The Commission proposes that policy outcome, delivery output and financial input indicators of progressive realization be used to define the linked funding, spending and delivery programs of government departments, institutions and enterprises. These might include: • Policy outcome measures e.g. poverty rates, HDI, % of households receiving transfer payments and/or free basic services, • Delivery output measures e.g. growth rates of beneficiaries against eligible population, changes in the real value of transfer payments and free basic service packages, • Financial input indicators e.g. real growth rates and proportions of spending.

37. -3- DATA ISSUES3.1 Overview of FFC Proposals on Data cont. • Norms and standards may be based on moving averages or minimum international standards for new CMBS programs. Data Collection & Presentation • The Commission proposes that data collection and release cycles be co-ordinated with budgetary & strategic planning (and possibly electoral) cycles. The consultation and planning phases of the Census should be reconsidered in this light.

38. -3- DATA ISSUES3.1 Overview of FFC Proposals on Data cont. • Gaps in data collection were noted in respect of: • Numbers of eligibles and beneficiaries for all CMBS services, • Various measures of poverty, • Consistent definitions of the value, level and rate of depreciation of public capital stock, • The potential revenue base of municipal and provincial governments, • The level of spatial disaggregation of socio-demographic and GDP figures.

39. -3- DATA ISSUES3.2 Data Development in respect of the IGFR 2003 • There has been a very significant improvement in the recording of sub-national government and departmental data on financial inputs, delivery outputs and policy outcomes, notably for the municipal sphere. • The Commission notes additional coverage and suggests further coverage in future releases of the IGFR report.

40. -3- DATA ISSUES3.2 Data Development in respect of the IGFR 2003 Social Development • Additional coverage noted with respect to time series of social security beneficiaries and grant values, administration costs and disbursement methods. • Further coverage suggested in respect of the eligible population for social security grants and social assistance.

41. -3- DATA ISSUES3.2 Data Development in respect of the IGFR 2003cont. Education • Additional coverage noted: breakdown of education spending records and budgets according to CMBS programs, spending on complimentary inputs eg. LSM, ongoing measures of service quality e.g. learner-educator ratios and the inclusion of mathematics and physical science matric results as policy outcome measures. • Further coverage suggested: a breakdown of eligibles, learners, educators and classrooms by CMBS program, as well as policy outcomes e.g. litearcy and numeracy rates.

42. -3- DATA ISSUES3.2 Data Development in respect of the IGFR 2003cont. Health • Additional coverage noted: the new program structure of the Health budget, access and coverage ratios to PHC and antenatal services, utilization rates e.g. bed occupancy and policy outcome measures e.g. disease prevalence. • Further coverage suggested: Number of patients treated in clinics and hospitals by disease, service quality ratios e.g. patients per health professional and spending by disease.

43. -3- DATA ISSUES3.2 Data Development in respect of the IGFR 2003cont. Provincial Infrastructure and Economic Services • Additional coverage noted: Agriculture chapter outlining land redistribution measures and the redirection of enterprise support services to subsistence and emerging farmers; road length and usage data, public transport program structure, housing subsidy breakdown and time series on delivery. • Further coverage suggested: beneficiaries and eligible populations for these infrstructure and enterprise support services.

44. -3- DATA ISSUES3.2 Data Development in respect of the IGFR 2003cont. Municipal Finances • Additional coverage noted: Municipal spending and funding breakdowns, revenue collection effort, function assignments. • Further coverage suggested: Jurisdictional breakdown to local municipality, spending & funding breakdowns for each basic municipal service, household infrastructure backlogs.

45. -3- DATA ISSUES3.2 Data Development in respect of the IGFR 2003cont. Water • Additional coverage noted: Spending & revenue breakdown for municipal & regional utilities, water yields & consumption, personnel resources, tariff structure. • Further coverage suggested: Bulk infrastructure and maintenance backlogs, number of household & enterprise consumers.

46. -3- DATA ISSUES3.2 Data Development in respect of the IGFR 2003cont. Electricity • Additional coverage noted: consumption per economic sector, tarriff structure, connections-cutoffs & arrears rates. • Further coverage suggested: consumption by economic sector per municipality, bulk infrastructure and maintenance backlogs.