1. Submission for the Division of Revenue 2010/11
Standing Committee on Appropriations
Financial and Fiscal Commission
10 July 2009
Financial and Fiscal Commission Submission for the Division of Revenue 2010/11 1

2. About the Financial and Fiscal Commission (1)
FFC established in terms of S220 of the Constitution and the Financial and Fiscal Commission Act (2003) as amended
Commission makes recommendations on the equitable division of nationally raised revenue among and between the three spheres of government (and on any other financial and fiscal matters).
The criteria that the Commission must use in making the recommendations are listed in S 214 (2) of the Constitution.

3. The Commission
Constitutes nine members nominated by the three spheres of Government (national 5, provincial 2, and local 2)
Chair and Deputy Chairperson are full time while the rest are part time
In preparing its recommendations FFC interacts and consults with various stakeholders in the IGFR system throughout national budget process.
Regular meetings: e.g. Budget Council, Budget Forum, etc. 
FFC required to submit its Recommendations 10 months prior to the tabling of the DoR Bill and the budget in Parliament.
The Commission’s recommendations are an integral part of the budget for the next fiscal year annually.

4. 2010/11 Submission
This Submission is made in terms of Chapter 13 S 214 (2) and Section 9 of the IGFR Act 1997
Commission identified a number of challenges for the next five years among which are
Resolving the matter of powers and functions across the three spheres of government
Fiscal capacity of provinces and municipalities
Impact of transfers on the delivery outcomes of government programs
Commission’s new five year strategic plan quite heavily influenced by these challenges
The Submission addresses a number of issues ranging from review of the PES formula to infrastructure and the built environment issues.
The Commission also pays specific attention to the matter of sustaining the social assistance system

5. 1 Review of the PES Formula
Follow up work on the review that was done in 2004
Commission Secretariat coordinating a task team of the TCF on behalf of the Budget Council
Commission free to make independent recommendations from the work done
Two sets of recommendations from the work done thus far:
principle issues on the design of the IGFR system, and,
Technical issues on the formula in the short and medium term

6. Reviewing the PES formula: Principles
Clear expenditure assignments between provinces and national government
Challenges in funding concurrent functions
Align and separate instruments and objectives in the transfer system
Encourage provinces to exploit revenue raising powers in line with the Constitutional and legislative framework
Facilitates the ability of provinces to borrow (for infrastructure)

7. Review of the PES: Formula in the short term
PES formula to retain the current structure with the following adjustments
Align the components with government objectives
Remove economic activity component
It is a revenue sharing component in its current form
This option attempts to deal with expenditure needs of provinces more directly but does not resolve the structural problems affecting the PES formula

8. PES formula review: Medium term
Consideration of reforms to the broader IGFR system in order to address inadequacies of the formula
Reforms require amendments to the Constitutions in terms of the legal advice on the equitable share
Separation of education and health from the PES
Conversion of these components into separate block grants
Introduction of an Equalisation Grant

9. 2 Public Infrastructure
South Africa’s pressing macroeconomic challenge is the lack of sufficient economic growth required to reduce significantly high levels of unemployment and poverty
Major investment to expand existing infrastructure is necessary to address imbalances, backlogs and support developmental efforts
Compounding the challenge is infrastructure maintenance spending below where it should be
Modelling and simulations are run to measure the impact of a 10% increase above the budget baseline for water, health, electricity, roads, transport and communications infrastructure 9

10. Public Infrastructure: Recommendations
Increase both departmental baselines and quantum of appropriate investment in public infrastructure linked to basic services
For funds already in the system, improve the quality of targeted outcomes on infrastructure investment.
Adopt a comprehensive infrastructure maintenance strategy, specific to sectors with high impact on unemployment and poverty
Strengthen IG cooperation with regard to planning and spending, especially at local and provincial spheres of government

11. 3 Social grants in South Africa
South Africa has well-developed social assistance system (very large by middle-income country standards) with grants that are well targeted and significantly reducing poverty.
Poverty
There is a reduction in both individual and household poverty.
Labour market
Access to old-age, disability and Child Support Grant pensions:
Discourage labour-market participation by economically active dependents
tie work seekers to rural areas where opportunities are scant
Creates dependency and may pull entire households into poverty
Some grant recipient (e.g. HIV/Aids sufferers) forego treatment to get the grant?
Other effects include impact on teenage fertility
Household composition and formation

12. Social Grants: Recommendations
The government should increase the rollout of social grants to cushion the vulnerable people from the effects of the economic downturn.
Manage the risks and opportunities associated with the scaling up of social grants
Social assistance should be managed in such a way as to eventually reduce dependency on social grants
Government should use infrastructure expansion to provide opportunity for workfare programmes as well as activities identified in the Expanded Public Works Programme. The government should consider the EPWP to pilot workfare immediately

13. 4 Public hospitals funding
Access rights to health care are stated in the constitution and enabled frameworks
Bottlenecks hamper the realisation of these rights in practice
Pieces of legislative frameworks and policy documents exist that govern the provision of health care services
However, they lack proper integration and coordination
Broad policies in support of health care exist but they are not effectively implemented
There is no specific national hospitals policy or act guiding the operations of these public institutions

14. Public hospitals funding
Location of functions and responsibilities between provincial health departments and public hospitals are not clear and this inhibits the decision making process
Evidence suggests that reforms aimed at granting hospitals more independence may lead to greater efficiency gains and better performance
Lack of standardised formats to determine the structure of hospital budgets
Inconsistencies in the current provincial health budget structure and classification makes it difficult to compare allocations by type of hospital on personnel, goods and services and capital)

15. Public hospitals: Recommendations
The Commission recommends that there be legislative provisions and norms and standards to ensure a well-functioning public hospital system
It is recommended that Government standardise and institutionalise budget formats and processes for public hospital systems.

16. 5 Rental housing
Internationally, a general consensus is that a well functioning housing system should have a balance between ownership and rental opportunities
In South Africa access to housing is one of the Constitutional basic rights
The government’s key objectives is to eradicate informal settlements and rental housing is a central component of this objective
Since 1994, government has provided about 2.6 million subsidised houses. However, housing backlog persists at about 2.1 million units

17. Demand for rental housing
The demand for rental housing by people earning below R2,500 per month has been increasing. However, the formal sector has not kept up with this demand

18. Factors hampering rental housing delivery
Social housing projects that fall outside designated restructuring zones
Lack of coordinated approach by sectors in the provision of housing
Cumbersome requirements to qualify for a social housing capital restructuring grant
Slow disbursement of funds to social housing institutions
Income bands used that have not kept pace with inflation

19. Rental housing: Recommendations
Eligibility criteria for accessing the Social Housing Capital Restructuring Grant to allow projects falling outside the Designated Restructuring Zones to access funding
Number of Designated Restructuring Zones to respond to excess demand for rental housing
Requirement for the minimum unit size for redevelopments of existing buildings

20. Rental Housing: Recommendations
The process of disbursing funds for rental housing within the housing sector should be made shorter to minimise time lags following the submission of approved project plans
The Social Housing Regulatory Authority should improve inter-sectoral coordination between various government departments responsible for integrated human settlement
The qualifying income bands should be reviewed to ensure that individuals are not unfairly excluded from benefiting from the subsidy

21. 6 Road Infrastructure
A well-developed and modernised transport network is necessary for the efficient functioning of any economy
In South Africa
There is under-investment in both the construction and maintenance of roads especially at sub-national levels
The number of roads categorised as “poor” and “very poor” has doubled between 1998 and 2008
about 60% of national and provincial roads are in “poor” and “very poor” condition
This is against the international benchmark that only up to 10% of the total road network should be in ‘poor’ or ‘very poor’ condition

22. Road infrastructure: recommendations
The Commission recommends an increased and stable provision of funds for construction, maintenance and rehabilitation backlogs of roads in the long term.
Financing instruments proposed to ensure the increased and stable funding include:
Formulating pricing and cost recovery policy for roads that generate sufficient revenues for maintenance and operation of the road infrastructure on a sustainable basis
Earmarking a portion of road-related user charges and taxes
Including a road infrastructure component within the provincial and local government equitable share formulae
Expanding the role of development institutions and capital market in funding road infrastructure investment especially at sub-national spheres

23. Road infrastructure: Recommendations
There should be greater coordination of road management functions across the three spheres of government
In this regard, revise and modify the inter-road authority coordinating model proposed by the national Department of Transport
Address lack of technical skills in the road management sector of sub-national governments

24. 7 Water and Sanitation
In South Africa the reliability and quality of water supply by municipalities has been receiving attention in recent years. In the quest to achieve universal access:
There is an emerging gap between policies and implementation with regards to water supply
There is lack of qualified staff and insufficient investments in water capital and maintenance
Most beneficiaries are unable to pay for services beyond the stipulated amount of free basic water services
There is no coherent framework of oversight for how water service authorities manage trade-offs in the design and determination of their water tariffs

25. Water and sanitation: Policy targets and achievements
All the people to have access to safe drinking water by 2008
The Community Survey estimates that in 2007, 88.6% of households had access to piped water
The percentage in (EC, KZN and LP), is below the national average.

26. Water and sanitation: Policy targets and achievements
All the people to have access to basic sanitation by 2010
The Community Survey estimates that in 2007 a little more than 60% of households had access to a flush toilet
FS has the highest number of HH still using the bucket system, 56.3% of HH in LP use a pit latrine and 25.2% of HH in EC have no toilet at all

27. Water and sanitation: Recommendations
Review of Basic Water and Sanitation Strategy
The Commission recommends a review of the current free basic water and sanitation subsidy policy. Such a review need to ensure that;
Shortcomings implicit in the current subsidy system do not outweigh benefits
Principles and practices guiding both tariff and subsidy structures and price levels are made clear and routinely monitored

28. Water and sanitation: Recommendations
The Commission recommends that there be an expansion of access to sanitation services
The sanitation strategy should also target behavioural change in respect of sanitation practices by households, and not only the provision of infrastructure
Government must explore appropriate sanitation technologies that meet the needs of community

29. Water and sanitation: Recommendations
The Commission recommends that there be a separation of policy from regulatory functions in the water services sector
The Commission further recommends an establishment of a National Water Regulator which will report to Parliament
Issue licences, regulate tariffs, and monitor Water Integrated Resource Plans for infrastructure investments.
Regulate compliance to industry norms and standards
Develop regulatory frameworks for Public Private Partnerships and alternative service delivery models in the water sector
Monitor supply and demand trends in the water supply industry

30. Local government has shown progress with delivery of services
8 Institutional and fiscal capacity support mechanisms for local government
Local government has shown progress with delivery of services
However, it has been inundated with many challenges
Certain municipalities are unable to perform their functions due to capacity constraints
Lack of capacity has led to the intervention from national government through capacity building programs and grant funding

31. Capacity for local government
There are too many capacity building programs. These are:
Not aligned to objectives and problems
Uncoordinated, repetitive and reactive
Not sequenced, monitored nor evaluated
May lead to the creation of negative incentives

32. LG capacity: Recommendations
The Commission recommends that local government should be central to setting the agenda for capacity building programs. Prior to capacity programs being developed and implemented:
A comprehensive assessment and design process should be undertaken
Capacity development programs should be aligned to each stage of the developmental transition of municipalities
Capacity development programs should be comprehensive and not only focus on training of personnel and deployment of experts within municipalities

33. LG capacity: Recommendations
Government must establish an intergovernmental wide framework for understanding what constitutes a lack of capacity within the context of local government
There should be a clear separation of responsibilities, as well as coherent interface, between service authority and the service providers
It is also recommended that replication of poorly defined roles and responsibilities between national, provincial and district municipalities in the policy framework be eliminated

34. LG Capacity: Recommendations
Each capacity building program must have a clear outline of measurable objectives, targets and timelines
A variety of grant instruments should be used for addressing different capacity challenges within different functional areas
Appropriations for Siyenza Manje should be subjected to the provisions of the Division of Revenue Act just as is done for other capacity grants

35. STRATEGY TO ENHANCE LOCAL GOVERNMENT REVENUE
Thank you