1. Wednesday, May 28, 2008 -------------------------------------- Submission to the division of Revenue 2009/10

2. Outline of Submission  Provincial Fiscal Relations Recommendations  Local Government Fiscal Relations Recommendations  IGFR Data Issues

3. Provincial Fiscal Relations  Recommendations with respect to  Education  Health  Transport  Housing

4. Financing Basic Education Introduction  In its annual submission 2004/5, FFC made recommendations on financing of basic education addressing the provision learner support materials. The study further looks at the growing institutional fragmentation in the provision of learner transport, on request by ScoF in 2007. The study also look at implication of re-ranking of schools on financing of basic educationObjectives Learner Transport 1.To conduct status quo assessment of the provision to the nine provincial departments. 2.To conduct an assessment of the current legislative and implementation framework 2.To conduct an assessment of the current legislative and implementation framework. Re – ranking of Schools 1.To determine the distributional and financial implications of applying the national quintile re ranking as opposed to the provincial ranking system. Methodology  Survey questionnaire to education and transport departments  Analysis based on resource targeting datasets from the provinces which provided details of old and new national re ranking of schools.

5. Financing Basic Education: Learner Transport Key Findings  No specific national policy dealing with the provision of learner transport  No clear definition and division of responsibilities between the departments of education and transport at national and provincial levels  Policies and practises differ depending on the department providing the service  Lack of national service delivery norms and standards  Criteria used to determine eligible learners for the transport at most 5km with exceptions  Modes of transport differ but at most (buses and taxis) in rural areas it is bakkies and donkey charts  NDoT developing draft policy on learner transport  International practises and policies differ:  Developing countries free school transportation provided in order to promote greater access to education  Developed countries learner transport is often

6. Financing Basic Education: Learner Transport Recommendations  National norms and standards for the provision of learner transport should be established. ―This would be possible once location of the function has been clearly defined between the national departments of Education and Transport.  In the interim all provinces should implement the statutory provisions. ―To ensure that learners are afforded the opportunity of equal access to the right to education ― The Commission notes the problem of learner transport is particularly acute in rural areas.  Provincial Education Departments should be enabled to report on budgets and spending on learner transport, in line with the new economic reporting format stipulated 2008 MTEF Treasury guidelines.

7. Financing Basic Education: Re-ranking of Schools Key Findings  Schools and learners have been reassigned to NQ1 and 2.  This implies increased funding allocations.  National re ranking  Require schools in same ward are allocated same poverty score  Does not reflect poverty distribution /actual needs of the school  Does not necessarily translate into same outcome Recommendations Recommendations  Government should review the method used to inform the national quintile ranking of schools. The method should take into account the socio-economic circumstances of the learners (reflecting poverty and inequality) rather than classifying schools according to wards/ neighbourhood they are located onto.  In order to assess the pro poor impact of school funding norms, the national Department of Education should make publicly available and accessible the funding norms for no fee and fee paying schools, in line with new provisions of the Division of Revenue Bill 2008 requiring indicative allocations by school.

8. Health- Primary Health Care (PHC) Introduction  FFC has been conducting broader work on impact of infrastructure on outcomes in the social sector. In its Annual Submission for DoR 2008/9, FFC made recommendations on impact of infrastructure on education outcomes. This study represents the second output of this work, that looks at the impact health infrastructure /delivery facilities (clinics) on health outcomes and an analysis of the performance of clinics, a core component of state’s pro-poor approach to health care is also given.Objectives 1.To assess impact of access to infrastructure /delivery facilities (clinics) on health outcomesMethodology a. Literature review (with a particular focus on access to PHC in developing countries b. Probit and multinomial regression analysis 2.Assess fiscal performance of community health clinics.Methodology a Budget analysis of the nine provincial health budgets, based on 2007 Provincial b. Budgets and Expenditure Review (PBER

9. Fiscal performance of Health clinics Key Findings  In 2006, recorded underspending of over 6 per cent falls within the cautionary range of the Auditor-General.  Currently only aggregate, province-level performance info available – this limits extent to which institutional performance can be measured, particularly, one is unable to determine  performance of particular clinics,  whether growth is being driven by increased allocation to urban/rural clinics  whether excessive/marginal growth is the result of under/over- spending.  Cost-centre approach = possible solution. It allows for greater decentralization and transparency, thus having potential to improve accountability and greater managerial efficiency

10. Fiscal performance of Community Health clinics Recommendation  Just as DOR 2008 requires that indicative allocations to schools and hospitals be gazetted with the tabling of provincial budgets, this should be extended to clinics and other PHC facilities as and when they come under provincial control

11. Infrastructure Access Impact on health outcomes Key Findings:  In poorer countries/areas where clinic network is under-developed –  Expanding access through provision of more public clinics improves likelihood of treatment  Little evidence that more clinics improves health outcomes.  Based on 1993 DHS data, distance from health facility does influence the demand for treatment  But 2006 GHS, shows little evidence that distance from public clinics is a major constraint on getting treatment, therefore  Effect of distance on demand for treatment related to expansion of clinic network post- 1994.  Investing in quality of health-care delivers higher returns in terms of health outcomes  In SA a more important factor is quality of health care, which takes into account:  Complementary infrastructure (electricity, roads sanitation),  Quality of clinical care  Maintenance,  Equipment of clinics,  Staffing and how well staff do their jobs  Management of staff and facilities

12. Infrastructure Access Impact on health outcomes Recommendations  Greater emphasis should be placed on improving the quality of service provided at clinics and funding the maintenance of existing PHC facilities. A need for construction of clinics in poorly serviced and rural and urban informal settlements still remains  The health component of the Infrastructure Grant to Provinces (IGP) should be aligned to the roll-out of infrastructure through municipal infrastructure grants

13. Transport- Road Classification Introduction  In its Annual Submission to the DOR 2006/7, FFC: ―Highlighted the fragmented manner of the delivery and funding of roads infrastructure ―Recommended that government, as a matter of urgency, should ensure the development of criteria and process for classifying all roads and assigning each class of road to the respective sphere of government/categoryObjective  To determine the progress made so far  To asses the extent to which provincial roads identified and earmarked to be incorporated into the national road (SANRAL) network have in fact been incorporated.  To assess budget and spending on road maintenanceMethodology  Analysis of ―Financial and non-financial information from 2007 Provincial Budget and Expenditure Review. ―Data on roads classification from the DoT and the Road Infrastructure Strategic Framework for South Africa. ―SANRAL Data on earmarked provincial roads; planned to be incorporated into the national road network.

14. Road Classification –Key Findings  Classification/reclassification of roads – According to DoT-  Process of classification/reclassification is underway in line with the FFC’s recommendation.  Process of developing guideline was scheduled to be finalised by March 2008.  Classification/reclassification will resume soon after finalisation of guidelines and is expected to be finished in the 2008/09  Incorporation of earmarked provincial roads into SANRAL  Over the past few years, SANRAL has taken over a number of earmarked provincial roads  By end of 2006/07 financial year, 9 247.5 kilometres had already been incorporated  For Limpopo and Northern Cape, all earmarked provincial roads have already taken over by SANRAL. This is not the case in other provinces.

15. Road Classification –Key Findings  Budget and spending on road maintenance  Persistent overspending between 2003 and 2005 financial years has been observed in a number of provinces. This may be attributed to under-budgeting or possibly inadequate planning (through the deferral of construction maintenance expenditure to latter periods).  Thus there is a need for provinces to produce adequate non-financial data on the conditions of roads in order to inform construction and maintenance budgets as part of a broader asset management strategy

16. Road Classification –Recommendations  The process of classifying roads amongst the national, provincial and municipal spheres of government should be accelerated in line with the classification framework already established.  The Premier for the provinces with earmarked provincial roads to be incorporated into the national road network should apply for such roads to be incorporated into the national road network without further delay.

17. Housing Introduction  In its Annual Submission to the DOR 2006/7, FFC recommended that:  In order to address housing delivery bottlenecks and stem underspending, municipalities with capacity, be accredited to administer housing programmes.Objective  To examine progress with the accreditation process  To investigate institutional bottlenecks hampering the speed and efficiency of housing delivery  To investigate institutional bottlenecks hampering the speed and efficiency of housing delivery.Methodology  Analysis of ―Financial and non-financial information from 2007 Provincial Budget and Expenditure Review. ―Data relating to accreditation obtained from the NDoH

18. Housing –Key Findings  The process of transferring funds is bureaucratic and inefficient  Within public housing, the Integrated Housing and Human Settlement Development (IHHSD) grant is the dominant source of funding – comprises over 80% of total provincial housing budgets  The bulk of the IHHSD grant flows to the Housing Development Implementation programme within provincial housing budgets.  Analysis of spending performance of the IHHSD grant and the Housing Development Implementation programme illustrates high underspending which is within the cautionary range of Auditor-General.  This implies that municipalities (the level of government that is responsible for delivery) are not receiving funding timeously or they receive large amounts close to end of financial year (also known as fiscal dumping).

19. ……Housing –Key Findings  Despite historical underspending, projections over the outer years of the 06 MTEF show strong growth (12% per annum in real terms) for both IHHSD grant and Housing Development Implementation programme - will departments be able to use funds effectively OR will under-spending persist?  Lack of capacity = key reason for poor spending performance – consideration should be given to institutional capacity to spend rapidly growing budgets otherwise underspending may persist  Housing MinMec approved a list of 18 municipalities for accreditation – 11 are at step eight of accreditation process and 8 are at step seven. Implication – thus far NO municipality has been accredited  Slow pace of accreditation has negatively affected some municipalities which in anticipation of receiving accreditation, have already started preparing to take over the function by establishing units and staffing.

20. Housing -Recommendations The FFC reiterates its previous recommendation that the accreditation of municipalities with adequate capacity should be accelerated in line with the framework provision of the Integrated Housing and Human Settlement Development (IHHSD) grant contained in the Division of Revenue Act for 2008 and the Housing Act of 1997

21. Local Government Fiscal Relations  Recommendations with respect to  Strategy forLocal Government Revenue  Strategy for Local Government Revenue  Restructuring of the Electricity Industry  Public Transport in relation to world cup 2010

22. Strategy for Local Government Revenue Introduction  In the Annual Submission to the DOR 2007/08, FFC undertook to: ―Conduct broader assessment of the local government fiscal framework ―Explore other potentially viable revenue sources for local government Objective  Identify a basket of potential revenue sources for local government level that comply with ―Constitutional provisions- s229 ―Municipal Fiscal Powers and Functions Act ―Meet criteria of a good local government tax Methodology ―Literature review of internationally accepted options for local government sources ―Municipal Survey

23. Criteria for Local Government Revenue  New revenue sources must ―Meet criteria for good taxes: Fairness, Efficiency, Economy and Adequacy ―Offer potential to strengthen local independence ―Be suitable for local collection. ―Be in line with the national macro economic limits ―Be in line with the national macro economic limits.  Emphasis must be on importance of “own revenue” for local government to enhance ―Fiscal Autonomy/Independence ―Accountability

24. Recommendations: Local Government Revenue  Reforms to fiscal framework of local government should not compromise the fiscal autonomy of municipalities  The replacement for RSC levy which formed a significant source of municipal revenue source should be a tax that: ―Enhances the fiscal autonomy and discretion of local governments; ―Strengthens the accountability of local government regarding the administration and use of proposed tax base; ―Yields an adequate and buoyant revenue stream for municipalities in the face of cyclical instability; and ―Does not disturb macroeconomic balance

25. Restructuring of the Electricity Industry Introduction  In the Annual submission for DOR 2002/03, FFC Recommended that  Municipalities to be compensated for all losses related to the transfer of electricity distribution to REDs.  Electricity restructuring process has occurred at a slow pace due to incompleteness of the necessary legislation as well as misalignment of existing legislation such as  RED Establishment Bill; Asset Transfer Framework; National Cross Subsidy FrameworkObjective  Investigate extent to which the process of electricity distribution industry (EDI) restructuring has/not progressed since its conceptualisation in the late 1990s  Make further inputs into the process  Assess and make recommendations on the Constitutional and Legislative issues impacting on the restructuring process  Impact of these issues on the intergovernmental fiscal system particularly on Local Government fiscal framework

26. EDI- Key Findings Constitutional Issues  Constitution assigns function to reticulate electricity to municipalities  Constitutional implications of removing electricity as a function of Local Government? Legislative Issues  Delay in finalising legislation has led to uncertainty among stakeholders in the electricity distribution industry  Maintenance backlogs estimated at R5 bn accumulated over the past 10 years  Municipalities’ reluctance to be part of the REDS

27. EDI- Recommendations  Government should address potential loss of a crucial revenue source for local government resulting from the establishment of REDs  The restructuring process to factor in current reforms to the fiscal framework of local government  There is a need to finalize legislation in respect of: ―The transfer of assets ―The national pricing framework ―The establishment of the REDs

28. Electricity Prices & South African Economy Key Issues  South Africa currently experiencing significant electricity supply problems. There is an urgent need for government to tackle the ongoing electricity crisis as this is central for growth, household wellbeing and employment.  Electricity pricing and capital injection are the central tools at authorities’ disposal  What will be the likely consequences?  Implications for the division of revenue, in particular for Local Government  Free basic electricity  Roll out of (electricity) indigent policies  Disruption to budget consultation and approval due to MFMA prescriptions around tariff or rate setting

29. Modeling Work on the Key Issues  Two simulation models  Input Output Model coupled with Income and Expenditure Survey  CGE Model  These simulation models are intended to provide policy makers with guidance on the key issues;  It is difficult to describe the models fully using theory alone; the details are in the GAMS and Excel simulation model – one needs to use it to get a ‘feel’ for how it works.

30. Sector Contribution to GDP

31. Shares of electricity in total household expenditure  Electricity expenditures represent on average 3.5% of total expenditures  Lowest quintile households have low electricity intensity  High quintile households allocate the highest shares towards electricity

32. Two Policy Simulations  Electricity Pricing:  What If Electricity Tariffs Increased By 20% Or By 100%  Electricity Infrastructure:  What if electricity capital expenditure were to increase by 5%?

33. Electricity pricing: Mesoeconomic effects  A 100% (20%) leads to a 1.1%(0.2%) increase in purchaser cost  Highest incidence:  Non-ferrous metals, Gold, Treated Metals, Water and Trade  Sectors experiencing increases below the average:  Most Basic foodstuffs, Textiles and Footwear and Agriculture and agricultural oriented

34. Household Impact: Welfare  A 100% (20%) tariff increase reduces welfare by 2.6% (0.7%)  Welfare falls the least for poorest 2 quintiles  Urban households experience greater declines of welfare

35. Capital spending: Macroeconomic Results

36. Recommendations  Government should work with the National Energy Regulator of South Africa to put in place a financing framework that deals effectively with electricity pricing. Such a framework should capture the scarcity of the resource in a pricing environment that reflects costs, efficiency, stability and, eventually, externalities.  Given that reforms in electricity pricing structure will, in essence, necessitate an increase in electricity prices, such higher electricity prices will adversely impact on poor households with access to electricity as well as raise the cost to government of extending basic access to electricity for poor households. As such, government will need to increase annual funding for the rollout of services under the free basic electricity programme.

37. Recommendations  For greater efficiency of resource allocation, technological innovation and increased investment in renewable energy sources, government will need to increase funding resources set aside for such purposes and incentives with a view to establishing and implementing a framework that:  Encourages new forms of electricity generation technologies to enter the market;  Expands opportunities to consumers to access such forms of energy;  Allows non-utility developers equal market opportunity to compete with established providers; and  Incorporates financial incentives to expand production and distribution capacity, and effect savings through improving end- user efficiency.

38. Public Transport- 2010 FIFA World Cup Introduction  Follow-up on FFC’s 2008/9 submission on assessment of macro impacts of government’s financing of 2010 World Cup, where  Govt. responded to positively to this FFC recommendationsObjective  Assess the impact of government’s transport infrastructure spending for 2010 World Cup ―Examine opportunity costs of government’s 2010 transport spending, in order to evaluate overall transport infrastructure strategy  Evaluate contribution to the economy of Public transport infrastructure funding ―Funding focuses on 2010 FIFA World Cup expenditures  Work out the macroeconomic, sectoral and household effects;  Derive implications for public transport infrastructure funding

39. Transport- 2010 FIFA World Cup Methodology  Unit expansion in infrastructure spend is run through a transport focused SAM ―Novel feature of SAM  Elaborate disaggregation of public transport sector into its subcategories used for analysis  Allows for elaborate analysis of how increased infrastructure spend affects sub- sectors and units of the South African economy  Allows for an evaluation of the impact of public transport infrastructure spend on economic growth, poverty reduction and equity

40. Findings- Transport 2010 FIFA World Cup  Road Transport ―has highest linkages of all the transport sectors when it comes to domestic production and supply  Rail Transport ―Second largest individual transport sector  Transport Support Services ―Quite high value added and household income multipliers.  Transport Via Pipeline ―Highest multiplier of all transport subsectors with respect to value added, especially capital income  Air Transport and Water Transport have low multipliers  Transport infrastructure spend tends to be regressive ―Middle income households benefit the most from transport demand injection ―Richest households gain more than poorest households

41. Transport- 2010 FIFA World Cup –Recommendation 1  Be cautious about expecting too much from 2010 public transport infrastructure spending impacts.  On their own, they are unlikely to make significant impacts on equity and efficiency constraints  Performance targets set as conditions to grant financing this transport should reflect modest benefits  Caution needs to be exercised regarding huge infrastructure expenditures for public transport Why?  Transport Infrastructure does not promote high economic development relative to other uses of public funds  Thus such expenditures could crowd out other investments with higher private and social returns.

42. Transport- 2010 FIFA World Cup –Recommendation  Link the spending on public transport Infrastructure for 2010 to broader host city development plans. This will require that  A more resourced public transport infrastructure and system grant continue after 2010 World Cup  That projects selected for funding under this arrangement be selected on the basis of full appraisal of environmental and social costs/benefits.  Funding mechanisms to cover maintenance costs of constructed 2010 facilities should be developed (Rephrase according to submission)

43. IGFR Data Issues  Recommendations with respect to  Provincial Government Data  Local Government Data

44. Provincial Data Issues – Education Education –No fee schools  Key Findings  Although data on the number of schools by household income quintile are available through government gazettes, etc, budget allocations are still not reflected across the nine provinces.  The 2008 DOR requires that this information be gazetted per school with the tabling of the budget.  Currently, however, no distinction is made between fee paying or no-fee schools  Recommendation  In order to assess the pro-poor impact of school funding norms, the department of education should make publicly available and accessible the funding norms of no- fee paying schools, in line with new provisions of the Division of Revenue 2008 requiring indicative allocations by school.

45. Provincial Data Issues – Education Education - Learner Transport  Key Finding  While budget guidelines state that budgets and expenditure information on learner transport should be recorded under the goods and services component, this information is only available in the provincial budget and expenditure databases of two provinces, namely Mpumalanga and the Western Cape  Recommendation  Provincial Education Departments should be enabled to report on budgets and spending on learner transport, in line with the new economic reporting format.

46. Provincial Data Issues – Health Key Findings  Section 2(c)(iv) of the National Health Act of 2003 makes reference to, “… protecting, respecting, promoting and fulfilling …” the rights of, “… vulnerable groups such as women, children, older persons and persons with disabilities ”.  The Conditional HIV/AIDS Grant section of Division of Revenue Act (DoRA) 2008 mentions that outcome data regarding availability, affordability and accessibility of health facilities for TB and HIV/AIDS should be collected.  The indicators referred to in bullets 1and 2, have been identified internationally and nationally as necessary for evaluating service delivery in health and quality of health care and should be collected.

47. Provincial Data Issues – Health Recommendations The FFC therefore recommends that Health data for vulnerable groups such as the proportion of women with access to antenatal care, the availability, affordability and accessibility of health facilities for TB, HIV/AIDS, children, older persons and persons with disabilities should be collected and improved using the South African Statistical Quality Assurance Framework (SASQAF).

48. Provincial Data Issues – Public Works & Transport Key Findings  Community Based / Expanded Public Works programme  Currently the DoRA (2008) specifies the following outcome measures for the Infrastructure Grant to Provinces:  Number of job opportunities created and the average length of employment for labour intensive projects  Number of persons participating in the training programs under the expanded public works programme  Km of access roads constructed and maintained as part of the EPWP  Levels of Job creation, which is assumed to play an important role in reducing the levels of unemployment among vulnerable groups such as women, youth and disabled persons as targeted by the EPWP

49. Provincial Data Issues – Public Works & Transport Recommendations  The FFC therefore recommends that reporting for vulnerable groups such as women, youth and people with disabilities should be included in the reporting of the outcomes measures for all conditional infrastructure grants to provinces and municipalities

50. Provincial Data Issues – Housing Data issues as they relate to housing focus on  Compliance with DORA reporting requirements for the Integrated Housing and Human Settlement Development (IHHSD) grant  Impact of the structure of the provincial departments within which the provincial housing function which is located on reporting of budget, output and outcomes Key Findings  Not all departments are complying with the DORA requirements.  Data gaps in the current reporting system that need to be attended to: ―Houses under construction/completed: Currently reported as a combined indicator - difficult to assess impact and efficiency of housing interventions ―Properties transferred to occupiers: This is necessary to assess changes in asset poverty, a key concern of the Breaking New Ground (BNG) Policy ―Average construction time: Establishing norms for construction time of houses will aid assessment of efficiency and help to identify problem projects. ―Women-headed households ―Number of employment opportunities created, is required in terms of DoR, but not reported on by all provinces

51. Provincial Data Issues – Housing ……..Key Findings Cont’  Not all provide budget, output and outcomes data at subprogramme level  This makes it impossible to analyse housing programme implementation and performance

52. Provincial Data Issues – Housing Recommendations  All provincial departments receiving the IHHSD grant should comply with the measurable outputs-related to reporting requirements detailed in the housing conditional grant framework and published in the DoR Act annually. To enable measurement of housing delivery, the following should be reported on:  Number of houses completed separate from those under construction  Proportion and number of these houses completed that are occupied  Proportion and number of these properties that have been transferred to their occupiers  Value of these houses and norms regarding average construction time  All provincial departments assigned the housing function should provide financial and non-financial output and impact data to a sub-programme level, so that data can be analysed for every component of the housing subsidy programme (e.g. Project-based, People’s Housing Process, Social housing, Rural housing).

53. Local Government Data Issues Introduction  Local Government data is incomparable, unreliable and often inaccurate  There is a general lack of coordination for data collection from Local Government  Municipalities suffer from survey fatigue  National organs of state (225 questionnaires a year) excluding provincial requests  60% of questionnaires do not get completed.Objectives  Identify processes to  Improve data collection and coordination at LG level  Improve resultant data quality and reliability Methodology  Review of supporting relevant literature  Analysis of financial and non financial questionnaires sent to municipalities

54. Local Government Data - Elimination of Duplication Key findings  Initial analysis indicates that out of ………..  35% of Non Financial Questions are duplicated.  66% of Financial questions are duplicated  Need to reduce survey fatigue by eliminating Data Request Duplication  A process required to determine if highlighted questionnaires are duplicated.  If duplication exists, stakeholder must identify methods to share data collection instrumentsRecommendation  National and provincial government departments, agencies and other organs of state should eliminate duplicate data requests submitted to municipalities

55. Local Government Data – Common Definitions Key findings  Stakeholders need to reach agreements on the terms and definitions in use  Must consider the purpose of collection  Definitions need to be understood  Different departments aggregate similar line items differently  Eg: Rates and General Services have different components in Treasury and Stats SA collections  Some legislative definitions are open to interpretation  Eg: Definition of Municipal Health Services (no definition until 2004)Recommendation  Uniform definitions should be established between national and provincial organs of state and municipalities with careful consideration given to the purpose of collecting and producing statistics. The interpretation should reflect the purpose and mandate of the department collecting the data and be concurrent with the legislation which guides those organs of state

56. Local Government Data – Local Government Data – Establish a National Coordinating Body Key findings  A Coordinating Body would provide the FORMAL means for completing the tasks necessary for Reform. Such tasks would be:  Assist stakeholder to reach agreements for rationalising data collection  National organs of state must be ensured that their data requirements will be addressed  All questionnaires must be evaluated, an environment for this to occur is requiredRecommendation  The FFC recommends that a national coordinating body be established to coordinate and rationalize the data collection activities of local governments. The national coordinating body should recommend and implement data collection standards according to the South African Statistical Quality Assessment Framework principles.

57. STRATEGY TO ENHANCE LOCAL GOVERNMENT REVENUE Thank you