Treasury presentation: financing of social grants Portfolio Committee: Social Development 18 September 2003

Overview The context: social security funding The social grant budget in the context of the consolidated national budget Provincial grant budgets The Social Assistance Bill, provincial funding and the financing of grants; oversight after centralisation Transition funding

The Context: Social Security Funding

An Estimate of Social Security Spending 2000/2001

Composition of Social Security Expenditure 2000/2001

Issues: Public and Private Social Assistance – pure public, from general revenues –Old age pension, disability grant, child support Social Insurance – from earmarked taxes –UIF, COIDA, RAF Tax expenditures (subsidies) –Retirement benefits, medical aid contributions Mandated contributions Pure private – variety of savings vehicles –Private pensions, long-term insurance South Africa: Large role of “private provision” - absence of second mandatory tier

The Social Grants Budget in the Context of the Consolidated National Budget

National Revenue “The Budget” Borrowing Total Spending Debt Servicing Reserve NATIONAL PROVINCES LOCAL GOVT Horizontal split between Provinces Horizontal split

Funding Social Assistance: The Budget Framework and Vertical Split

Funding Social Assistance: The Provincial Picture

Provincial Grant Budgets

Overview on Social Grants Delivery Extension of the safety net (income support): –1998 2,4 million beneficiaries, now approaching 7 million –Child Support grant: From beneficiaries in 1999, to just over 3 million 0- 6 year olds in September 2003 In addition &8-year olds on by Sept 2003 Very significant expansion of safety net to continue Significant increases in social grant values to counter inflation in recent years

Expenditure and Budget Trends –Provincial expenditure grew from R19,4b in 1999/00 to R31,2b in 2002/03 –An annual average growth 17,3 per cent –Significant real growth between 2001/02 to 2002/03 from R23,8 billion to R31,2 billion –2002/03 expenditure is inflated by R2b special allocation for social grant arrears –Accelerated growth over the period from R31,2 in 2002/03 to R51,2 billion in 2005/06 –an annual average growth rate of 17,9 per cent

Social Grants as Percentage of Provincial Social Development Budgets

Current Financing of Social Grants Social grants are financed from provincial revenues: equitable share, conditional grant and own revenues Since 1999 financed from equitable share; CSG extension through conditional grant from 2003 ES formula consists of economic, education, health, welfare, basic and institutional components Formula provides broad indications of relative need and not earmarked allocations or budgets Welfare component determined by grant target population weighed by poverty (numbers in bottom quintile)

Current Financing Policy on Social Grants Provinces in collaboration with national Government determines the projected beneficiaries and resulting spending on grants Since 1999 financed from equitable share; CSG extension through conditional grant from 2003

Summary of formula (1) Equitable share component WeightsData usedSource Education41% Total enrolment numbersNational Department of Education: Enrolment figures School-age cohort (6-17 years) Stats SA: Census Health19% Population with and without medical aid support Stats SA: October Household Stats SA: Census Welfare18% Target population of each grant type Stats SA: Census PovertyStats SA: Income and expenditure survey Economic activity 7% Gross geographic productStats SA: GGP Remuneration DataStats SA: Remuneration data Backlog3% Schools Survey of Needs 1998 Sectoral reports on backlogs in infrastructure Basic7% CensusStats SA: Census Institutional5% Independent of data

Summary of formula (2)

The Social Assistance Bill, provincial funding and the financing and oversight of grants

Key aspects of the Bill The “administrator”: delegation of “implementation and execution” of the Act “Terms” of the delegation Financing from moneys appropriated by Parliament Inspectorate

Institutional Arrangements Social grants policy, service delivery and financing the responsibility of the Minister of Social Development and DoSD Responsibility for social grants delivery – application to approval to eventual payment to beneficiaries to be delegated to Agency/entity Minister: Executive authority (S 63 of PFMA) CEO: Accounting authority (S of PFMA also Part 9 of Treasury Regulations - TR) and accountable to executive authority [S6(2) of Assistance Bill) DoSD: –Responsibilities around budget [S53 of PFMA and 6(1) of TR] –Responsibilities around monitoring of transfers [S38(1)(j) of PFMA and 8(4) of TR] –Responsibilities around reporting/in-year monitoring (revenue & expenditure; PFMA compliance – par 26.1 of TR) –Advises Minister and monitors on his behalf (Social Assistance Bill)

The transition and grant funding

Transitional Arrangements Function shift/legislative change requires: –Changes to the intergovernmental system –Changes to the equitable share formula – broader impact on provincial funding –Changes to the current social grants system of delivery –Migration of personnel – complex transitional issues Significant expansion of role of the national DoSD Policy changes also requires –In depth assessment of the social grants function relative to other social development functions in provinces –Thorough analysis of the social grants service delivery pressures, credible beneficiary and expenditure projections, and associated costs for social grants delivery

Transitional Arrangements (2) Furthermore require: –Inventory of assets and liabilities associated with social grants delivery by district, regional and provincial offices –Register of all staff directly involve and associated with social grants –Audit of contractual obligations –A mandate to do separation of social grants function from other social development functions – personnel, assets, contractors, liabilities, etc. –Consideration of how transitional financing of social grants, service delivery contracts and agents, and associated administration and support costs would be covered

Funding issues Social development –Given the nature of social security grants expenditure should this be determined through the ES formula? –Approaches that are under consideration: Retaining current approach, at least in immediate term Determine total & division among provinces separately from formula, but transfer as part of ES allocation Use conditional grant mechanism

The problem: policy, financing, delivery alignment Policy & Rules Finance Service Delivery NationalNational ProvProv

The eventual solution: centralisation Policy & Rules Service Delivery NationalNational ProvProv Finance

The transition? Alternative 1 Policy & Rules Service Delivery NationalNational ProvProv Finance

The transition? Alternative 2 Policy & Rules Service Delivery NationalNational ProvProv Finance

Principles for Transition Maintain and improve service delivery Provide certainty Joint confrontation of key decisions (policy, budgets) Requirements: –Appropriate budgets –Administrative and service delivery integrity –Information –Mechanism for addressing unforseen or unavoidable pressures

Process requirements Agreement on expenditure projections and required budgets for MTEF (beneficary payments, administrative cost, outsourced costs) on the basis of key cost drivers –Assesment of baseline allocations, available resources and required adjustments (provincial and national) Key information –Pressures (disability, child support grants) –Process and compliance audits Mechanism to deal with overshooting of expenditure projections (information, formats, timing) Preparation for phased centralisation of service delivery & financing (agency agreements and phased takeover, timelines) Decision on funding mechanism