BRIEFING ON SUBMISSION FOR THE DIVISION OF REVENUE 2012/13

1. BRIEFING ON SUBMISSION FOR THE DIVISION OF REVENUE 2012/13 For an Equitable Sharing of National Revenue. Joint Select Committees on Finance and Appropriations 10 August 2011

2. Background Briefing on Submission for the DoR 2012/13 • This Submission is made in terms of: • Section 214(1) of the Constitution (1996) • Section 9 of the Intergovernmental Fiscal Relations Act (1998) • Section 4(4c) of the Money Bills Amendment Procedure and Related Matters Act (Act 9 of 2009) • Submission divided into three parts: • Part 1: Macroeconomic and Fiscal Outlook (Chapters 1,2) • Part 2: Vibrant Urban Economy (Chapters 3,4 and 5) • Part 3: Improving Development Outcomes of the IGFR system (Chapter 6, Annexure 1 and 2) 2

3. PART 1. MACROECONOMIC AND FISCAL OUTLOOK Briefing on Submission for the DoR 2012/13

4. Chapter 1 - Background Briefing on Submission for the DoR 2012/13 • International economies dealing with complex issues when adjusting fiscal policy in an uncertain environment • Issues related to budget process rules in context of rising fiscal deficits especially prominent • South Africa has been moving towards fiscal consolidation for a while • Even though the latest budget places a high priority on job creation, MT forecasts still indicate a reduction in the deficit • Government is also proposing implementation of fiscal guidelines aimed at strengthening fiscal frameworks in line with NGP objectives 4

5. Chapter 1 - Recommendations Briefing on Submission for the DoR 2012/13 • Over the medium term, Government should continue with a gradual programme of fiscal consolidation that entails reducing moderately but consistently the budget deficit • Such efforts to preserve fiscal sustainability must be sustained in future, even with addition of longer-term programmes such as NGP and proposals for NHI • The Commission supports Government proposals to implement fiscal rules • Proper implementation of fiscal rules (guidelines) can contribute to and complement existing fiscal policies • The Commission will continue its work with specific focus on the design and institutional issues around the implementation of fiscal guidelines in South Africa 5

6. Chapter 2 - Background Briefing on Submission for the DoR 2012/13 • Despite positive economic picture, a lot still needs to be done • Unemployment and relatively low economic growth • Inequality and Poverty • MDGs • Government faces difficult trade-offs in addressing these • Macro and fiscal issues • Roles of different spheres • Conceptual unifying frameworks used • Account for different spheres in economic growth process • Linkages between productive sectors, demand and macroeconomic constraints • Forward-looking behaviour • Impact of infrastructure on economic growth 6

7. Chapter 2 - Findings Briefing on Submission for the DoR 2012/13 • With respect to prospects for achieving accelerated economic growth • Focused infrastructure spending (TFP and employment) results in improved GDP growth • Reduces the debt-to-GDP ratio especially in medium term • With respect to MDGs • Importance of MDG 6 (AIDS) and MDG 2 (universal education) – AIDS has massive impact on maternal mortality and child mortality • Costs of attaining all outstanding MDGs prohibitively high – too much to do in 4 years • With respect to current IGFTs • Reduce disparities in terms of well-being amongst provinces • Have small overall GDP effect but high provincial disparities 7

8. Chapter 2 - Recommendations Briefing on Submission for the DoR 2012/13 • National, provincial and local government should further reprioritise expenditures in respect of Equitable Share and Conditional Grants for 2012/13 to move towards attaining the MDGs • Government should prioritise MDG 2 (universal education) and MDG 6 (HIV indicators) in the interim as their attainment will have positive impacts on other MDGs (positive spillovers) • Time-frame for attaining all outstanding MDGs simultaneously should be extended beyond 2015 to make the task feasible 8

9. Chapter 2 - Recommendations Briefing on Submission for the DoR 2012/13 • Government should continue strengthening the equity focus of the current system of intergovernmental transfers, in particular in health and education sectors • The existing transfer system is not the most effective instrument to support government’s growth objectives, and this aspect should continue to be strengthened so that it plays a supportive role in this respect • Government should actively and specifically continue pursuing implementation of significant capital investment in public infrastructure that has a positive impact on total factor productivity and employment in the context of the NGP 9

10. PART 2. VIBRANT URBAN ECONOMY Briefing on Submission for the DoR 2012/13

11. Chapter 3 - Background Briefing on Submission for the DoR 2012/13 • Research focussed on analysing revenue, expenditure trends and performance of municipalities • LG revenue: focus on municipal consumer debt • LG expenditure: focus on factors influencing expenditure and efficiency • Findings indicate: • Between 2004 and 2009, real average municipal consumer debt declined for most categories of municipalities (except secondary cities and districts with major powers) • Despite making in-roads with respect to this challenge, there remains room for improvement in a number of areas • Management of debtors, accounting for indigents, affordability of basic services, billing and collection activities 11

12. Chapter 3 - Background Briefing on Submission for the DoR 2012/13 • Municipalities spend poorly on repairs and maintenance • Poor costing of services • Distinction between social and economic infrastructure • Municipalities need to improve technical efficiency in utilising existing resources • Skewed resource distribution, service delivery arrangements in terms of the provision of basic and FBS and skills levels in municipalities impact on efficiency 12

13. Chapter 3 - Recommendations Briefing on Submission for the DoR 2012/13 • National and provincial treasuries’ efforts to improve the credibility of municipal budgets through annual benchmarking exercises should continue to be supported • The results of evaluations to be reported to Parliament and provincial legislatures, and placed in the public domain to assist in incentivising effective financial management among municipalities • National government should specifically enforce provisions set out in S74(2) of Municipal Systems Act, such that the basis of municipal tariffs accurately reflects the cost of providing the specific service, as well as conforms to National Treasury expenditure guidelines for repairing and maintaining municipal infrastructure • This will improve planning and funding of repairs and maintenance 13

14. Chapter 3 - Recommendations Briefing on Submission for the DoR 2012/13 • National and provincial government should require and assist municipalities to identify the primary cause of poor performance in billing and revenue collection functions and use the information to design appropriate remedial strategies • Subsequently, municipalities should establish municipal service districts to facilitate improved performance • As an interim measure, government should establish and publish guidelines for municipalities on management of municipal consumer debt in terms of, but not exclusive to, interest charges, debt impairment and writing off of bad debts 14

15. Chapter 3 - Recommendations Briefing on Submission for the DoR 2012/13 National and provincial government should develop and support peer learning and support programmes that assist poorly performing municipalities to leverage experience and best practices of well-performing municipalities, particularly in relation to spending performance, efficiency in using resources, proper debt management and achievement of desired developmental outcomes Data available at local government level should be reviewed to ensure appropriate surveys or alternatives are available to account accurately for changes in demographics and other factors at municipal level 15

16. Chapter 4 – Background Briefing on Submission for the DoR 2012/13 • Vibrant urban economy is key for sustainable development and economic growth • Optimum land use has potential to unleash growth potential of the economy • In South African cities, land is used inefficiently as characterised by low density levels • This challenge needs to be addressed, as it has direct impact on sustainability of resources such as land and is costly to overall economy • Objective of research is to establish fiscal and economic costs of inefficient land use patterns in country’s major cities 16

17. Chapter 4 - Findings Briefing on Submission for the DoR 2012/13 • Various pieces of legislation acknowledge importance of densification to promote efficiency, but there are no incentives • Current funding for built environment is uncoordinated and does not support delivery of integrated and sustainable human settlements with all basic infrastructure • The CECM has shown that a sprawling city is more costly than a compact city • Costs savings in a compact relative to sprawling city amount to 7% after 10 years • If this is extrapolated to 6 metros, saving amounts to approximately 1.4% of GDP by year 10 • 22% less carbon emission resulting from more efficient public transport and less travelling 17

18. Chapter 4 - Recommendations Briefing on Submission for the DoR 2012/13 • Government should actively and specifically pursue development of a more spatially compact urban form for cities, by developing and adopting appropriate policies and financing instruments • Specific fiscal instruments include • wider use of development charges in financing infrastructure associated with the land development process • public transport subsidies that specifically target high density low-income areas • fiscal incentives for urban land development projects located within the existing urban form • Government should review the Commission’s analytical work on fiscal and economic costs of the current urban form of cities and guide the Commission as to further development of these analytical methods 18

19. Chapter 4 - Recommendations Briefing on Submission for the DoR 2012/13 • Government should conduct a broad-based review of the efficacy of current housing finance arrangements in meeting housing needs within the context of creating sustainable and more compact human settlements 19

20. Chapter 5 – Background Briefing on Submission for the DoR 2012/13 • Need Vibrant urban economies to spur local economic development • Climate change could undermine this • Cost of climate change to local economies not well understood • Chapter evaluates costs associated with climate change and focus on LG sector • Using econometric model, findings show that climate change is a real threat to water and energy security in Local Government sector • Climate change induces increases in water and electricity infrastructure expenditures • Municipalities forgo provision of essential services as they stretch budgets to cater for climate change consequences 20

21. Chapter 5 – Recommendations Briefing on Submission for the DoR 2012/13 Government should ensure that municipalities develop their own climate change mitigation and adaptation strategies and plans for climate change as part of the Integrated Development Planning process. Government should provide support in this respect to municipalities over the next three years, distinguishing between different types of municipalities by both location and capacity in terms of the mandatory requirements placed on them 21

22. Chapter 5 – Recommendations Briefing on Submission for the DoR 2012/13 • Government should consider providing municipalities with a performance-based conditional grant which rewards or incentivises actions that are environmentally efficient and responsive to adaptation and mitigation challenges of climate change • Design of proposed grant should pay attention to municipal-specific factors, such as the area, topography, coastal/or otherwise, and vulnerability to climate change • Specific focus areas for this grant should include: •  Efficient water management practices, including minimisation of water losses, effective asset management or rehabilitation programmes, and demand management •  Efficient energy management practices, including minimisation of electricity losses (unaccounted for electricity), elimination of illegal connections and energy savings by households and industry •  Implementation of green procurement principles 22

23. PART 3. IMPROVING DEVELOPMENTAL OUTCOMES OF IGFR SYSTEM Briefing on Submission for the DoR 2012/13

24. Chapter 6 – Background Briefing on Submission for the DoR 2012/13 • Investigates causes of poor outcomes in education and health • Identifies factors that inhibit quality delivery, performance and development outcomes of public expenditure • Assesses governance, fiscal and institutional weaknesses giving rise to challenges of services from equity, efficiency and quality perspectives • Explores introduction of governance, institutional and fiscal innovations in delivery of aforementioned government outcomes 24

25. Chapter 6 – Findings Briefing on Submission for the DoR 2012/13 • Outcomes of public expenditure emerging as major concern for policy-makers • Fiscal leakages and waste, cost-overruns as a result of OSD and poor service delivery result in inefficiencies • Public expenditure for basic education and health has been rapidly increasing since 1994 • Rates of investments in these sectors do not yield adequate returns for ‘making life better for all’ • Poor educational and health outcomes are similarly skewed against poor 25

26. Chapter 6 – Recommendations Briefing on Submission for the DoR 2012/13 • Government should finalise implementation of OSD and formalise the performance evaluation system • In dealing with the expansion and implementation for OSD, government should: • Be mindful of rising public sector wage bill relative to other priorities • Rethink funding of personnel costs which are centrally determined but funded by provinces through PES • Full costing of OSD implementation must be undertaken and national government must take responsibility for funding, preferably though a specific purpose conditional grant • Formalise performance evaluation with aim of boosting performance by emphasising high competence of education and health personnel 26

27. Chapter 6 – Recommendations Briefing on Submission for the DoR 2012/13 • Increasesin education spending should be directed towards investments that will have biggest impact on quality - this includes learner and teacher support materials. Government should improve quality and prioritise epistemological access to education by: • Developing capacity to evaluate academic performance of learners throughout their academic careers • Ensuring that required amount of time is spent on teaching by relieving teachers of administrative duties through hiring of administrative assistants • Supporting training/development of teachers and making explicit amounts spent for this purpose through the DoRA • Improving schools accountability for learner performance 27

28. Chapter 6 – Recommendations Briefing on Submission for the DoR 2012/13 • Coordination, financing and provisioning of scholar transport should be improved • The Commission is aware that agreement has been reached between the Departments of Basic Education and Transport that the scholar transport function be transferred from the Department of Basic Education to the Department of Transport. In so doing, it is recommended that: • All resources associated with delivering a service associated with scholar transport are transferred to Department of Transport, including current assets and budget and all future resources • A thorough assessment of financial and fiscal implications of this shift is conducted before the shift happens 28

29. Chapter 6 – Recommendations Briefing on Submission for the DoR 2012/13 • Government must, through input and outputnorms and standards, take reasonable measures to give effect to inclusive education of intellectually disabled children • These norms should indicate human, physical, administrative and regulatory resources provided by Government dedicated to achieving targets for inclusive education • Government should extend its ongoing efforts to reform health fiscal frameworks by taking into account the burden of disease giving rise to budget pressures, to cover: • Review of funding for HIV/AIDS, opportunistic and other infectious diseases through a regular review of usage costs for chronic disease services in HIV/AIDS, TB, maternal and child health to inform resource allocations in public sector health care system 29

30. Chapter 6 – Recommendations Briefing on Submission for the DoR 2012/13 • Institutionalisation of a budget process that forces provincial health budgetsto be based on estimations of needs of health care service users and holds provincial governments accountable for underfunding of hospitals and clinics •  Re-examination of distribution of resources between different levels of care without weakening the role played by tertiary hospitals, but also strengthening role played by primary health care in health system • Certain functions, such as procurement, human resources and financial management, should be devolved to hospital management to boost efficiencies and better performance 30

31. Appendix 1 – Rural Development Briefing on Submission for the DoR 2012/13 • Governance and institutional arrangements for rural development across the three spheres of government needs to be clarified urgently • This is important for planning, budgeting and implementation of rural development programmes • The Commission recommends that a functional mapping of all rural development activities be undertaken, with specific responsibilities assigned to each sphere of government • The fiscal framework (both the equitable share and conditional grant allocations) for rural and agricultural development must be reviewed • In particular, Government should merge current conditional grants into a comprehensive agriculture and rural development finance programme, preferably administered by one department in order to improve focus, targeting and impact, and reduce transaction costs in administration of conditional grants 31

32. Appendix 2 – Unfunded Mandates Briefing on Submission for the DoR 2012/13 Government should take steps to ensure that all mandates have a legal basis Functions performed by each sphere of government must have a secure legal footing Performing functions falling outside their mandate impinges upon the lawfulness of their budgets (although their expenditure is not necessarily illegal)  Government should develop a time-bound programme to regularise the functional assignment of libraries and museums 32

33. Appendix 2 – Unfunded Mandates Briefing on Submission for the DoR 2012/13 • Government should undertake a review of extent of compliance with legal procedures for assignment and delegation of functions, as set out in IGFR Act, FFC Act, DoR Act and the Local Government Municipal Systems Act. It is recommended that compliance with the following legal requirements are assessed: • Financial and fiscal implications of a function shift on the sphere of government/organ of state. • The organ of state initiating a general assignment must provide these implications to FFC for its recommendations to Minister of Finance in line with Section 3 of FFC Act 2003 as Amended. FFC tabled a compliance check list for this specific purpose in 2007 • All resources associated with delivering a service associated with a function to be shifted are transferred. • This should include current assets, budgets and all future resources. There must be evidence of a decision taken by the Executing Authority of the assigning or delegating department/organ of state that this is acknowledged and pledged 33

34. Concluding Remarks Briefing on Submission for the DoR 2012/13 • The Commission’s Submission for the 2012 division of revenue emphasises: • Support for continued fiscal consolidation • Support in principle for the adoption of fiscal rules/guidelines • Prioritising MDG’s improving quality spending to impact on job creation, growth, poverty and cushioning the vulnerable • Addressing municipal challenges including issues of urban form and climate change through the adoption of sustainable long-term strategies 34

35. Thank You. Financial and Fiscal Commission Montrose Place (2nd Floor), Bekker Street, Waterfall Park, Vorna Valley, Midrand, Private Bag X69, Halfway House 1685 www.ffc.co.za Tel: +27 11 207 2300 Fax: +27 86 589 1038