Briefing to the Select Committees on Finance and Appropriations For an Equitable Sharing of National Revenue 15 July, 2014

Introduction to the Financial and Fiscal Commission 2014 Presentation Outline 1.Role and Function of the FFC 2.Parliamentary Budget Oversight Cycle and the FFC 3.Support and Interventions Provided by FFC 4.FFC work on the Local Government Fiscal Framework 5.FFC Recommendations for the 2014/15 Division of Revenue and Government’s Response 6.FFC Ongoing Work in Support of NDP 7.Conclusion 2

1. Role and Function of the Financial and Fiscal Commission

Introduction to the Financial and Fiscal Commission 2014 Role and Function of the FFC What is the FFC? – Permanent statutory body established in terms of Section 220 of Constitution – Independent and subject only to Constitution and the law – Must function in terms of an act of Parliament What is the mandate of Commission? – Makes recommendations as envisaged in Chapter 13 of the Constitution How? Enabling legislation – Section 214 (2), 218(2), 228 (2), 229(5), 230(2) 230A(2) of the Constitution – FFC Act (No 99. of 1997) IGFR Act (No. 97 of 1997) – Provincial Tax Regulation Process Act, Municipal Fiscal Powers and Functions Act, Borrowing Powers of Provincial Government Act FFC in IGFR system – Municipal Finance Management Act, Municipal Systems Act, Money Bills Amendment Procedure and Related Matters Act, Intergovernmental Fiscal Relations Act 4

Introduction to the Financial and Fiscal Commission 2014 General Principles FFC is concerned with intergovernmental fiscal relations (IGFR) – Legislative provisions or executive decisions that affect either provincial or local government from a financial and/or fiscal perspective – Includes regulations associated with legislation that may amend or extend such legislation – Commission must be consulted in terms of the FFC Act Important stakeholders for consultation in IGFR – Ministry of Finance, The Presidency, Organised Local Government, Ministry of Cooperative Governance and Traditional Affairs, Parliament, Provinces, National Planning Commission and other sector departments and municipalities 5

Introduction to the Financial and Fiscal Commission 2014 The FFC And Policy Identify weakness within the IGFR system Propose evidence-based policy proposals Interact and participate with/in forums and institutions responsible for IGFR policy Information dissemination – invitations from nine provincial legislatures Interact with various committees within parliament 6

Introduction to the Financial and Fiscal Commission 2014 Enforcement of Recommendations Recommendations of the Commission – Recommendations are made to Parliament so that the legislature can examine the financial and fiscal decisions of government against them and understand why they have been accepted or rejected – Section 4(4)(c) of the Money Bills Amendment Procedures and Related Matters Act (MBAPRMA) requires Parliament to consider the recommendations of the Commission when deliberating on Money Bills The Minister is obligated through the Constitution to explain how the FFC recommendations have been considered in arriving at the division of revenue for any particular year – The response is tabled in Annexure W1 of the DoR Bill and of the Budget Review 7

2. Parliamentary Budget Oversight Cycle and the FFC

Introduction to the Financial and Fiscal Commission 2014 FFC’s Role in the Budget Process FFC’s primary outputs/reports in terms of Section 221 of the Constitution and Money Bills Procedures and Related Matters Act (MBPRMA): – Annual Submission on the Division of Revenue (DoR) Submitted 10 months prior to tabling of the DoR by the Minister Contains recommendations/proposals for the following fiscal year and medium terms expenditure framework (MTEF) – Submission on the DoR Bill Submitted to Parliament in February and outlines the FFC’s response to DoR Bill and relevant annexures – Submission on the Fiscal Framework and Revenue Proposals Contains FFC’s response to the fiscal framework and revenue proposals contained in the budget tabled by the Minister 9

Introduction to the Financial and Fiscal Commission 2014 FFC’s Role in the Budget Process [cont.] – Submission on the Medium Term Budget Policy Statement (MTBPS) Contains the FFC’s response to the MTBPS and adjustments to the division of revenue – Submission on the Appropriation Bill Submission made to the Standing/Select Committee on Appropriations – Annual Report – Any other special reports made at own initiative or request by organs of state 10

3. Summary of FFC Support and Interventions

Introduction to the Financial and Fiscal Commission 2014 Summary of FFC Support and Interventions 12 DIRECT SUPPORT AND INTERVENTION Training of members of parliamentary committees and councillors (e.g. in Bushbuckridge) Advice to municipalities (e.g. Tshwane merger) Inputs in various for a (e.g. SALGA) INDIRECT SUPPORT AND INTERVENTION Member of review committees (LES, Infrastructure Grants, Metro’s Own Revenue) Public hearings (local government fiscal framework, housing and welfare) Inputs in benchmarking exercises Recommendations through Annual Submission on DoR

FFC Public Hearings FFC has hosted three public hearings focussing on: – Local government fiscal framework (2012) – Housing finance (2013) – Child welfare services (2013) Rationale behind use of public hearings approach: To share, validate and expand FFC’s understanding of the problems, preliminary findings and outcomes of the area being researched To provide a platform for stakeholders to engage and exchange views on the funding and service delivery challenges and possible solutions in area being researched To listen to the views of major stakeholders before making its recommendations to Parliament 13

4. FFC Work on the Local Government Fiscal Framework

Why the Local Government Fiscal Framework is Important Local government (LG) sphere continuously evolving – Local government fiscal framework (LGFF) needs to be robust to cater for changing needs of LG To be sensitive to various needs of municipalities – Urban/rural dimension Balancing urban built environment needs with rural development – Increased urbanisation – Increasing devolution of powers and functions – Poor municipal expenditure and revenue performance – Poor coordination and support between and amongst spheres Are municipalities appropriately funded and capacitated? – Continues to hide non-fiscal problems Complements government wide initiatives to review LGFF 15

C ONTEXTUALISING THE LGFF 16

Introduction to the Financial and Fiscal Commission 2014 Contextualising the LGFF LGFF structure is complex and multi-dimensional Aim of the LGFF is to ensure adequate service delivery to communities through appropriate funding of municipalities Recipients of municipal services are non-residential (private sector, non-governmental organisations etc.) and low-income and high- income households Service delivery to communities is achieved with municipal expenditure supported by various revenue streams Nexus between service delivery, consumers and municipal own revenues takes the form of the principle of a social contract, A comprehensive system of governance and regulation informs the operation of the LGF 17

Introduction to the Financial and Fiscal Commission 2014 Key Issues Regarding the LGFF The LGFF needs to be informed by a differentiated approach The aggregate amount covering operational expenditure is adequate, but needed to be targeted better There is a vertical fiscal gap in relation to capital expenditure and rehabilitation which must be addressed Commission is concerned about the revenue situation in municipalities Commission reiterates its previous concerns about conditional grants There is a need for several transitional and implementation arrangements in achieving an effective LGFF 18

Introduction to the Financial and Fiscal Commission 2014 Differentiation The framing of the LGFF needs to account for: – Variation in municipal context (exogenous factors): poverty; economic activity within a municipality, spatial factors such as topography and population density; powers and functions assigned; population dynamics (migration) – Variation in municipal performance (endogenous factors): debt collection, expenditure efficiency, vacancy rates; ability to plan and execute budgets System needs to reward good performance and sanction poor performance 19

D IFFERENTIATION F RAMEWORK FOR L OCAL G OVERNMENT 20

Introduction to the Financial and Fiscal Commission 2014 EXPENDITURE REVENUE actual costs Understanding the Vertical Fiscal Gap 20 costs incurred in providing services at a reasonable level of expenditure for a properly managed service maximum own revenue gap actual costs gap actual own revenue Structural gapActual gap gap fiscal capacity fiscal effort inefficiency EXPENDITURE REVENUE 21

Introduction to the Financial and Fiscal Commission 2014 Issues on Vertical and Horizontal Equity Vertical division adequate for operating expenditure – Total LES package in 2014 was R44.5 billion LES formula is R39.4 billion Replacement grant and councillor support is R5.1 billion – The quantum of resources allocated to local government for operating expenditure is sufficient but there are inequities in its distribution across municipalities Commission notes that new LES formula addresses horizontal concerns Commission estimates shortfall in vertical division on capital expenditure –This needs to be addressed – Estimated at R42 billion without grants – Total shortfall of R25 billion with infrastructure grants at R16.8 billion 22

Introduction to the Financial and Fiscal Commission 2014 Concerns on LG Conditional Grants Commission is concerned about conditional grants – Inadequate planning and implementation of conditional grants – Poor monitoring and evaluation – Continued proliferation of LG conditional grant system (see next slide) – Poor targeting of grants – allocations do not reflect need Commission supports a rationalised LG conditional grant system that: – Does not duplicate aims and objectives of conditional grants – Is easy to monitor and implement and does not lead to an unnecessary administrative burden being placed on both the transferring department and municipality – Ensures there is capacity to spend grants before grants are allocated – Is based on outputs and outcomes and not just spending patterns Commission supports the infrastructure grants review that is being undertaken 23

Conditional Grants - Proliferation 24

Introduction to the Financial and Fiscal Commission 2014 Ensuring an Effective LGFF LG performance needs to improve to ensure objectives of LGFF are achieved – Internal controls – Act on AG’s concerns Greater support for LG from other spheres – As per Section 154 of the Constitution – Improved monitoring and evaluation – Improved capacity support – Direct and structured intervention Appropriate implementation of Sections 139 and 216(2) of the Constitution Ensure Municipal Finance Management Act and Municipal Systems Act provisions for competent municipal officials are enforced 25

5. RECOMMENDATIONS FROM THE FFC’S SUBMISSION FOR THE D O R 2014/15 AND RESPONSE BY GOVERNMENT

F ISCAL L EVERS FOR N ATIONAL D EVELOPMENT 27 Budget Consolidation in SA Economic and Social Value of Social Grants Funding of SA FET Sector Financing Research in Higher Education Evolution of Conditional Grants National levers for inclusive growth in a post crisis fiscal response Assessing and Improving Fiscal Performance of Provinces Managing the Provincial Wage Bill to Contain Fiscal Stress and Build a Capable State Effective Devolution of Transport Functions to Municipalities Effective Intergovernmental Planning and Budgeting Provincial fiscal levers: State capability and performance Measuring Fiscal Stress in SA Local Government Improving Performance of Municipalities through Performance Based Grants Challenges, Constraints and Best Practices in Maintenance and Rehabilitation A Collaborative Effort to Enhance Revenue Generation in Rural Municipalities Collaborative governance for effective and sustainable municipalities

P RESENTATION O UTLINE RecommendationGovernment Response Budget Consolidation in SA Government must continue efforts to moderate the growth in expenditure components such as the public-sector wage bill, as decreases in government expenditure increase the probability of a successful fiscal consolidation in SA Moderating the public-sector wage bill requires management of employee remuneration policies (wage increases, allowances and so on) and staff numbers. The former is governed by the DPSA. Government recognises that there is dualism in this area and has raised the issue in the FFC’s presence both in Parliament and in other executive forums (the Technical Committee on Finance and the Budget Council) Funding of SA FET Sector The funding model for the FET sector following the function shift should ensure that baseline funding does not perpetuate past underfunding of the function in certain provinces and that additional allocations are used to achieve a more equitable funding regime and ongoing infrastructure development and maintenance are provided for In 2012, Department of Higher Education and Training developed a comprehensive turnaround strategy for all 50 FET colleges. The strategy, which is being implemented aims to systematically address the colleges’ key challenges to achieve sustainable improvements in the quality of teaching and learning. The coordination and implementation of the strategy is important and will drive annual operational plans, budgets and priorities. A portion of the cost per course will cover ongoing maintenance and infrastructure development.

P RESENTATION O UTLINE Briefing on the 2014 Appropriation Bill RecommendationGovernment Response Managing the Provincial Wage Bill to Contain Fiscal Stress and Build a Capable State Over the medium to long term a transition is required, towards a more appropriate balance between the wage and non-wage components of provincial budgets for social spending (starting with education and health). This should be in the form of national sector departments setting a norm or ratio of frontline versus administrative staff to total expenditure per sector Government supports the recommendations Effective Devolution of Transport Functions to Municipalities With respect to the devolution of the transport function the FFC recommends that baseline funding for transport is thoroughly understood by recipient municipalities Improving Fiscal Performance of Provinces and Municipalities Provincial treasuries and municipalities to put in place an agreed-upon measurement and assessment framework for fiscal performance against which provinces and municipalities are evaluated Government agrees that frameworks for fiscal performance are critical - expenditure reviews are being conducted as well as the public expenditure and financial accountability assessments in provinces Challenges, Constraints and Best Practices in Maintenance and Rehabilitation National Treasury, in collaboration with relevant stakeholders such should develop local government-specific infrastructure asset management legislation similar to the Government Immovable Asset Management Act.

/19 FFC Research Agenda in Support of NDP

The theme: IGFR in support of national development Dynamics of economy & social issues (equity) (1) Balance between accumulation & breakthrough: Managing past recommendations (2) Capable state issues: Efficiency effectiveness collective goods (3) Elimination of poverty and reduction of inequality to 0.6 Need for “Institutional transformation” Toward a new model?

Introduction to the Financial and Fiscal Commission 2014 Value Add of the FFC FFC can provide advice, analysis and training to assist the work of the Committee – Specialised IGFR training to committee members and/or parliamentary researchers – Provision of recommendations that are founded on evidence based research – Technical support with respect to parliamentary fiscal oversight activities 34

7. Conclusion

Introduction to the Financial and Fiscal Commission 2014 Concluding Remarks Institution building is a long term process FFC is keen to engage and support Parliamentary Committees in their fiscal oversight role FFC’s intergovernmental fiscal relations conference will be hosted in Cape Town from August 2014 – Theme: An African Perspective on Decentralisation 36

Introduction to the Financial and Fiscal Commission 2014 FFC’s Website: 37