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FFC SUBMISSION:

MEDIUM TERM EXPENDITURE FRAMEWORK 2004-2007________________________

Presentation to Portfolio & Select Committees on Finance

27 May 2003

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Introduction• Appropriate to review intergovernmental fiscal

relations system since 1994– FFC review builds on previous submissions and

responds to stakeholder comments– Emphasis is on underlying principles of the system

and primacy of the Constitution

• Submission also addresses issues relating to Division of Revenue 2004/05

• Consistent theme: provision of constitutionally mandated basic services

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Part A: FFC Review of the Intergovernmental Fiscal Relations System

• Proposals applicable to:– Expenditure assignment– Performance measurement– Poverty targeting– Norms and standards– Collection of data– Co-operative governance

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Part A:Key issues• The pace at which constitutionally mandated

basic services are being progressively realised

• Ensuring equity and efficiency through the appropriate assignment of functions intergovernmental fiscal arrangements

• Sustainability of the intergovernmental system: future role and capacity of provinces and district and local municipalities

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Part A:Key issues cont’d• Maintaining the balance between progressive

realisation and Section 214(2)(a-j)• Ensuring provinces are able to respond to

preferences for public services and have incentives for efficiency

• Establishing and maintaining the vertical balance in the equitable division of revenue

• The appropriate methodology for determining the equitable division of revenue horizontally among provinces and municipalities

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Part A:Key issues cont’d

• Ensuring effective participation of each sphere in intergovernmental fiscal arrangements

• Developing required capacity in all spheres of government

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Part A Proposals:Expenditure Assignment

• The social security grant & social insurance system should be aligned with provision of free basic services

• National Social Security Agency should be jointly accountable to national and provincial government

• Assignment of water and housing provision should be clarified

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Part A Proposals:Performance Measurement

• National policy objectives should be expressed as delivery & funding programmes

• Indicators of inputs, outputs, and outcomes should be used to evaluate programmes

• Government should clarify progressive realisation of constitutionally mandated basic services (CMBS)

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Example of CMBS Performance Indicators• CMBS functions e.g. housing, health, food,

water, social security, education• Delivery & funding programmes e.g. ECD,

child support, reproductive health care Cross functional & functional policy outcomes

e.g. poverty, numeracy, mortality rates Delivery outputs e.g. take-up rates & quality

ratios (beneficiary : unit of personnel, capital) Financial inputs e.g. real growth rate of

spending

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Part A Proposals:Poverty targeting

• Costs of poverty targeting should be weighed against costs of universal coverage of free basic service provision

• Impact of education and health user fees should be considered

• Impact of tariffs for basic municipal services should be considered

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Part A Proposals:Norms and standards

• Norms and standards should take account of resource constraints and the need for policy flexibility

• Norms and standards should be based on current averages or minimum international standards

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Part A Proposals:Fiscal capacity

• Potential revenue base of provinces and municipalities should be measured

• Socio-demographic and economic data should be disaggregated to the lowest level possible

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Part A Proposals:Co-operative governance

• Role of Budget Forum and Budget Council should be reviewed to co-ordinate integrated development planning and budgeting

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Part A Proposals:Collection of data• Provincial and municipal treasuries should

publicise budgets, financial statements, and development plans

• All official and recognised data sources should be identified and audited

• Data collection and release cycles should be co-ordinated with planning cycles

• Time lag between collection and release of national statistics should be reduced

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Part A Proposals:Collection of data cont’d• National departments should verify and publish

data on beneficiaries receiving constitutionally mandated basic services

• Data should identify population eligible for receipt of social services and household infrastructure

• StatsSA should collate measures of the extent, cause, and alleviation of poverty

• The value, level, and rate of depreciation of public sector capital stock should be measured

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Part A Proposals:Funding instruments• Design of conditional grants should be negotiated

between transferring and recipient authorities• Role of conditional grants should be

circumscribed to avoid distortions in equitable share distribution

• Capital grants should be designed to eradicate infrastructure backlogs and link with progressive realisation of CMBS

• Capital grant funds should be equitably allocated using FFC capital grants model

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Part B: FFC Submission for the Division of Revenue 2004/05

• Proposals applicable to:– National government

– Provincial government

– Local government

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Financing HIV/AIDS

• Impact of the condition is uncertain• Different data sources on infection rates

– ANC (annual), HSRC (2002), ASSA (2000)– Cost implications are not clear

• Serious long-term implications for social security grants system– Disability grants beneficiaries at advanced

AIDS stages– Foster care grants for orphans between

being orphaned and adoption

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Financing HIV/AIDS cont’d

• Enhanced response programme– Increased funding to NDoH for procurement

• Condoms, media campaigns working well

– Increased funding through HIV/AIDS conditional grants: DSD, Health,Education

• Criteria differ from one grant to another and provinces apply different weights to the grants

• Conditions are cumbersome and too stringent

– Increased funding through the equitable share• Allocation is not tied to any specific programmes

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Proposals:Financing HIV/AIDS

• Current national programmes should be retained and strengthened

• Existing conditional grants should be evaluated in terms of their efficiency – Clear and coordinated policy framework

needed at the national level

• Changes in social spending resulting from increases in the equitable share should be evaluated

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Health conditional grants

• National Tertiary Services (recurrent)• Health professional training and development

(recurrent)• Hospital revitalisation (once-off project

specific) • Pretoria academic hospital (once-off grant)• HIV/AIDS (recurrent)• Integrated nutrition programme (recurrent)• Hospital management and quality

improvement (once-off project specific grant)

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Provincial government

• Review of the provincial equitable share formula with respect to the social sector – Education

• ECD, ABET, LSM, “Out of Age” enrolment, performance indicators

– Social Development• Grant types, take-up rates, beneficiaries, provincial

needs, problems with current formula

– Health• Base population growth rates, medical aid population,

age and gender, fixed shares, crowding-out

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PES: Education Component

• Current formula as applied by Treasury– Weighting for inappropriate age learners

• Allocates equal amounts per-capita• Biased against provinces with a large number

of inappropriate age learners (poorer provinces)

– ECD currently provided via a conditional grant but to be folded into the ES formula

• FFC proposals for DoR 2003/04• Not enough information on the number of

learners currently in formal system, especially in rural areas

– Policy requires phasing in over 10 years

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PES: Education Component cont’d

• Adult Basic Education and Training (ABET)– Currently about 200,000 adults receive

ABET in ALCs– Difficulty in designing a formula-based

grant due to definitional problems– No norms and standards– Data on demand sketchy

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PES: Education Component cont’d

• Learner Support Materials– Study needed to identify the nature of the

problem – Report to the Minister of Education

• FFC made its submission separately

• Performance indicators– Necessary to support government efforts in

developing service delivery indicators– Also necessary for generating data for

taking costed norms approach forward

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Proposals: Education Component

• The formula for the education component should end the double weighting of “school age learners”

• The FFC reiterates the proposal that the formula should be adjusted to incorporate Grade R – The allocation should be based on a poverty-weighted

count of children aged five and six in each province

• Government should establish a conditional grant programme for financing education programmes for increasing/improving adult literacy and numeracy

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PES: Health Care Component

• Base population– Not sensitive to population growth rates between census

periods

• Age and gender utilisation rates– Differential service utilisation rates not accounted for

• Medical scheme population– Data that is currently utilised not appropriate

• Fixed share components– Not related to policy guidelines and minimum norms and

standards but more to past aggregate expenditure trends

• Crowding out– Increasing take-up rates in different social security grants

result in crowding out of other social sector programmes and health is the most vulnerable

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Proposals: Health Component

• Provincial population growth rates should be incorporated into health care component of the PES formula

• Age and gender variation in the population be taken into account in determining the relative need for health services– An acceptable index should be constructed

making use of international and domestic data

• The data used for the medical scheme population should be based on the best available annual estimate and the weighting should be reviewed

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PES: Social Development Component

• Nature of Social Development component– Transfers– Means-testing– Progressive realisation and take-up rates

• Problems with formula as currently applied:– Allocations to categories– Allocation to sub-categories– Number of grant categories– Take-up rates– Means testing– Incentives

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Proposals: Social Development Component• Populations of grant recipients in the formula

should be revised to reflect take-up rates more closely

• Overall allocation to social development should be revised to reflect provincial aggregate spending on social development programmes

• Allocation to social development should distinguish between social security grants and welfare services and allocate an amount for each

• Current top-down methodology should be reviewed to ensure that the relative needs of provinces are reflected more closely

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Overall PES formula

• Formula has indicative weights that reflect historical proportions of expenditure need– Eg health’s indicative allocation is 19%, yet

actual expenditure was 18% in 2002/03 and 17.9% in 2004/05

• Social security is highly demand driven, but the indicative weight is not related to this demand– Results in a crowding out of other social

services as provinces are under pressure to pay grants for fear of litigation

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Proposals: Overall PES Formula

• Shares in the formula should be determined according to explicit policy guidelines on minimum norms and standards

• FFC reiterates the proposal that social security grants should be budgeted for and funded from the national level– This would minimise the crowding out of

other social service delivery mandates through the pressures from social security grant payments

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Local government

• On-going research into the basic services and fiscal capacity components of the equitable share formula

• Funding of institutional capacity

• Funding of urban and rural development nodes

• Development of a differentiated approach to municipalities

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Local government:Funding of institutional capacity

• Poor service delivery owing to lack of lack of administrative capacity– Different kinds of capacity needed:

management, technical, and administrative skills

• Current institutional funding:– I grant of equitable share– Capacity-building grants

• Need to identify core capacity and ensure funds are well-targeted

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Local government:Urban and rural development nodes

• 13 rural and 8 urban nodes• From 2002/03, some nodal funding

channelled through the equitable share allocation. FFC concerns:– Equitable share should be distributed according to

criteria that apply to all munis• Criteria should be objective and beyond direct political

control

– Implies different standards of “basic service provision”

– National priorities best funded through national grants

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Local government:Differentiated approach to munis

• Previous FFC recommendation: apply to municipal borrowing

• Over-arching classification inappropriate

• Classification could be appropriate for:– Municipal borrowing– Revenue sources– Municipal service partnerships

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Local government proposals

• Institutional funding (equitable share and conditional grants) should be assessed to ensure it reflects capacity needs of munis

• Funding of the development nodes should not come from the local government equitable share allocation

• Government should consider developing a differentiated approach to such areas as municipal borrowing, revenue sources, and service partnerships