1. Submission on Division of Revenue
2005/06
Presentation to Parliament
Portfolio Committee on Transport
August

2. Background FFC Submission 2005/06
Review of the PES formula and the LES formula
Outstanding work on some of the projects carried forward this year
Health conditional grants
Financing welfare services
Financing learner support material
New work started on the following:
Assignment of powers and functions in the IGFR system
Housing funding framework
Transport funding issues

3. FFC Submission on DoR 2006/07
Consists of two sections as agreed with Government in the last two years:
Part A deals with recommendations for the division of revenue for 2006/07
Part B presents a progress report on the results of the Commission’s on-going research into the financing of learner support material
Submission also contains two Anexures
Annexure A is read together with Part A of the Submission
Annexure B presents Executive Summaries of the Submissions that were made by the FFC during the course of the last fiscal year.

4. Health Conditional Grants
Problems - grant design and implementation
SCOPA, PSCoF & Auditor General Reports
2003/04 FFC Recommended a Review
2004/05 Submission focused on preliminary observations
Health grants (12% of all grants)
NTSG and HPT&DG – 72% of health grants
Design weaknesses
Performance against Policy objectives
Allocation criteria (cost framework)

5. National Tertiary Services Grant
Original Purpose/Objective
Cross boundary flows/referrals for highly specialized services
Detached from hospitals to “…fund tertiary services.. ensure equitable access for all citizens..”
Findings with the NTSG
Inequitable distribution of tertiary facilities
Incomprehensive coverage – Not level 2 services
The required level of service in public health facilities not clearly specified

6. Recommendations - NTSG
Government should retain the grant.
Uneven distribution of tertiary facilities likely to persist in the short to medium term
It is important for the national government to support services that are of a cross-boundary nature
Government should clarify the rationale for using the NTSG to compensate provinces for cross boundary flows relating to level 3 health care services (tertiary) at the exclusion of level 2 health care services;
Develop a policy framework and clearly define the required minimum level of service and clearly distinguish between requirements for tertiary and secondary health care
Framework should indicate expected service levels, human resource requirements, financial and capital resource requirements and the funding mechanism for tertiary and secondary health care.

7. Health Professions Training and Development
Purpose/Objective:
Finance teaching and research costs
Redistributive goal - to develop capacity to train health professionals in all provinces
Findings
No comprehensive review since 1998/99
Allocations have been cut on several occasions

8. Gaps identified - HPTDG
Absence of a policy framework with quantified targets
Grant lacks specificity
There is no tight linkage between policy objectives and the use of funds to achieve certain targets
Weak interdepartmental coordination between the national departments of health and education
Provincial decisions may not always be compatible with national interest and therefore national government needs to play a significant role
Absence of a costing framework
It is necessary to set the principles upon which the allocations are based

9. Further work - HPTDG FFC will Continue engagement with stakeholders
With the aim of developing a costing framework for the grant
Investigate the challenges relating to the financing of training and development of health professionals in SA
Evaluate the allocation method or criteria for allocating the grant among provinces;
Assess the efficiency with which the grant is currently being utilized

10. Further work - HPTDG
Assess the extent to which the conditions of the grant are in line with the stated policy objectives of the grant so that the grant can only be used for the purposes for which it is designed
investigate whether there are leakages with respect to the HPT&DG not being used for the purposes for which it is designed
Assess the extent to which the conditions of the grant are in line with the stated policy objectives of the grant
Should ensure that the grant can only be used for the purposes for which it is designed
To what extent does the grant cover all the health professionals
for instance some diploma students are trained in colleges

11. Recommendations- HPTDG
Retain HPTDG as conditional grant
The framework for the HPTDG must be tightened to ensure that the grant is only used to fund accredited qualifications and training

12. Financing Social Welfare Services
Past FFC Recommendations
2004/05 Submission
PES allocations should distinguish between social grants and social welfare services;
2005/06 Submission
Social grants be converted into a national conditional grant and the delivery of welfare services be maintained at provincial level;
Objective of current report
The development of a sustainable financing mechanism for social welfare services through the intergovernmental transfer system

13. Financing Social Welfare Services
Policy environment
Government adopted a social development approach that links individual welfare to economic development;
Expressed through the Welfare White Paper of 1997, it was largely national in focus and not clear on provincial level implementation;
Resulted in lack of clarity on the nature of social welfare services together with undefined norms;
Goal setting has also been difficult as existing legislation on social welfare had to be reviewed
A financing framework for social welfare services
Must regulate inefficient provision through prioritization of needs and the proper rationing of services;
Delivery of welfare services can occur through a variety of models, viz. no-public role, public role and purchaser-provider system;

14. Financing Social Welfare Services
Challenges to provision
Lack of a clearly defined basket of services;
Uncoordinated delivery and isolated operation by different providers and strained relations due to unresolved financing policy;
Urban concentration of resources, e.g. residential facilities, places of safety and established NGOs;
Inadequate number of qualified social workers, the magnitude of the potential population they have to serve and their uneven spread across provinces
Implications of the Shift for Social Welfare Services
Social Welfare services may no longer receive peripheral attention;
They may also experience decreased funding and further marginalization;
May not warrant a separate ministry
Negative outcomes for children already in the system
High child poverty tend to results in increased involvement in the child welfare system

15. Financing Social Welfare Services
Trends in Expenditure
Poorer provinces spend a high amount on administration than on other services when compared to relatively well-off ones;
Provinces with established NGOs tend to allocate more towards subsidies;
The largest portion of allocations is spent on child and family welfare services;
There is a noticeable declining trend in expenditure on social welfare services in the past three years with a concomitant increase of social security grants’ expenditure
Future Research
Estimate the level of demand and calculate a rough national average for the delivery of social welfare service;
Engage the National Department on the development of norms and standards for social welfare;
Recommendations
Give specific consideration for allocating funds to social welfare service in the PES;
Expedite the setting of norms and standards for delivery of a minimum basket of welfare services by provinces

16. Framework for Powers and Functions
Key Issues:
No clear delineation of responsibility for some functions that are shared by spheres of government.
where functions are responsibility of one, but carried out by another sphere, uncertainty arises on whether its assignment, delegation or agency agreement.
difficult for municipalities to plan and budget for the function in medium and long term.
Municipalities with significant fiscal capacity spending more on functions not strictly categorised as local government functions in terms of Schedule 4B and 5B of the Constitution. 
Consequences for the intergovernmental fiscal system: 
provision of such services could compromise the delivery of local govt’s CMBS;

17. Framework for Powers and Functions
Key Issues cont’d…
increased expenditure does not appear to increase the vertical division of revenue, even where additional expenditure responsibilities are assigned through legislation; and
an increasing asymmetry between the range and quality of services delivered by metros and larger municipalities on the one hand and smaller and fiscally weak municipalities on the other.
the absence of a uniform framework, makes it difficult to compare the fiscal gap among municipalities in SA and to design intergovernmental transfers accordingly.
Lack of comprehensive definitions and norms and standards for many functions.
difficult for national or provincial government to assign or delegate a function, as specific responsibilities and related expenditure needs are unknown.

18. Recommendations:
The draft DPLG Framework on the Assignment of Powers and Functions to Local Government and the instruments that give effect to the framework should be finalised as a matter of urgency. 
An Intergovernmental Assignment Framework that applies to all three spheres of government should be developed. This framework should:
Identify the location of powers and functions according to generally accepted intergovernmental fiscal principles as outlined in sections 41(1), 126, and 156 of the Constitution;
Ensure that agreement on funding arrangements is reached before a function is assigned;
Develop criteria for assessing whether a sphere of government has sufficient capacity to fulfil a function; and
Rationalise the current institutional arrangements for assigning or delegating functions.

19. Recommendations Cont’d:
Monitoring capacity should be established in the national sphere of government to ensure that assignment and delegation processes are consistent with the Intergovernmental Assignment Framework. 
For any function that may be assigned or delegated, Government should:
Develop a clear definition of that function;
Develop norms and standards for that function, so as to understand service level responsibilities and the concomitant funding implications.

20. Funding Framework for Housing Delivery
Key Issues:
Numerous blockages in the housing delivery process, largely related to delays in finance and planning approvals. 
Policy shift towards improving building quality of houses is not fully funded. 
Where additional costs arise in the housing process, as with new housing standards, these are generally borne by local government 
Long-term financial liabilities arise for provinces or municipalities who carry rental housing stock, as rental arrears and operational expen are not covered by rental income. 
Increase in number of low income households that are unable to maintain the monthly service charges, increases the debt burden on municipalities.
Alternatively the additional recurrent costs associated with increased responsibility to provide free municipal services, increases the financial stress on low capacity municipalities.

21. Recommendations:
In cases where municipalities have the capacity to become accredited to administer housing programmes, Government should ensure that funding for the administration of housing subsidies is made available.
Accreditation process should reduce delays in rolling out housing delivery. 
Government should consider the funding implications of any further policy changes, for example when higher building standards are specified nationally. 
Funding gaps should be avoided particularly in municipalities with weaker fiscal capacity.

22. Recommendations Cont’d:
A sustainable financial framework for the on-going demands of rental housing schemes should be developed.
Consideration should be given to linking new housing subsidies with the MIG and the equitable share formula so as to ensure that the municipalities can deliver basic services to poor households. In doing so, the following should be taken into account:
The need to provide municipalities with appropriate incentives to extend municipal infrastructure and spend funds efficiently and effectively;
The need to achieve equity in addressing the expenditure needs of local government;
The need to take account of the differing capacities of municipalities; and
The need to ensure that LES allocations keep pace with the installation of new housing infrastructure. 

23. Recommendations Cont’d:
Government should address housing delivery bottlenecks to reduce under spending in provinces, resulting from:
Delays in local and provincial government planning approvals (EIA, transport plans, social compact agreement);
The lack of project management capacity in some provinces and municipalities; and
Delays in proclaiming land, where this falls within traditional communal areas.

24. Transport Funding Issues
Key Issues:
Considerable under-investment in SA’s transport infrastructure over the past two decades, although this is being addressed through the emphasis on infrastructure investment in the MTEF 2005; 
Considerable debate internationally and within SA regarding the desirability of “pricing” road usage through fuel levies and user charges; 
Re-classification of some provincial roads as national roads has implications for the provincial equitable sharing mechanism; 
Insufficient funding of municipal road maintenance in SA, in spite of the fact that up to 52 percent of the road network legally falls under the jurisdiction of municipalities.

25. Recommendations:
Government should ensure that the following is implemented as a matter of urgency: 
Developing criteria and processes for classifying all roads and assigning each class of roads to the respective sphere of government or category of local government; and
assessing the length and condition of all roads, and the estimated expenditure need for rehabilitation and maintenance arising from this. 
Government should develop a coherent funding framework for roads in South Africa, and this framework should consider the role of the provincial equitable share and existing provincial and municipal infrastructure grants.

26. Recommendations Cont’d:
Government should consider the devolution of bus and taxi subsidies to municipalities, where the capacity exists to manage these services. 
Government should implement mechanisms to improve the efficiency of inter-modal transport planning
Government should address certain issues that need to be resolved for setting up transport authorities, including funding arrangements and how the authorities’ governing bodies are constituted.