briefing to the select committees on finance and appropriations

Briefing to the Select Committees on Finance and Appropriations

For an Equitable Sharing of National Revenue

15 July, 2014

Introduction to the Financial and Fiscal Commission 2014

Presentation Outline

1. Role and Function of the FFC2. Parliamentary Budget Oversight Cycle and the FFC3. Support and Interventions Provided by FFC4. FFC work on the Local Government Fiscal

Framework 5. FFC Recommendations for the 2014/15 Division of

Revenue and Government’s Response 6. FFC Ongoing Work in Support of NDP7. Conclusion

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1. Role and Function of the Financial and Fiscal Commission


Role and Function of the FFC

• What is the FFC?– Permanent statutory body established in terms of Section 220 of Constitution– Independent and subject only to Constitution and the law–Must function in terms of an act of Parliament

• What is the mandate of Commission?–Makes recommendations as envisaged in Chapter 13 of the Constitution

• How? Enabling legislation – Section 214 (2), 218(2), 228 (2), 229(5), 230(2) 230A(2) of the Constitution – FFC Act (No 99. of 1997) IGFR Act (No. 97 of 1997)– Provincial Tax Regulation Process Act, Municipal Fiscal Powers and

Functions Act, Borrowing Powers of Provincial Government Act• FFC in IGFR system

–Municipal Finance Management Act, Municipal Systems Act, Money Bills Amendment Procedure and Related Matters Act, Intergovernmental Fiscal Relations Act

4


General Principles

• FFC is concerned with intergovernmental fiscal relations (IGFR)– Legislative provisions or executive decisions that affect either

provincial or local government from a financial and/or fiscal perspective

– Includes regulations associated with legislation that may amend or extend such legislation

– Commission must be consulted in terms of the FFC Act• Important stakeholders for consultation in IGFR–Ministry of Finance, The Presidency, Organised Local

Government, Ministry of Cooperative Governance and Traditional Affairs, Parliament, Provinces, National Planning Commission and other sector departments and municipalities 5


The FFC And Policy

• Identify weakness within the IGFR system• Propose evidence-based policy proposals • Interact and participate with/in forums and institutions

responsible for IGFR policy • Information dissemination – invitations from nine

provincial legislatures • Interact with various committees within parliament

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Enforcement of Recommendations

• Recommendations of the Commission– Recommendations are made to Parliament so that the legislature

can examine the financial and fiscal decisions of government against them and understand why they have been accepted or rejected

– Section 4(4)(c) of the Money Bills Amendment Procedures and Related Matters Act (MBAPRMA) requires Parliament to consider the recommendations of the Commission when deliberating on Money Bills

• The Minister is obligated through the Constitution to explain how the FFC recommendations have been considered in arriving at the division of revenue for any particular year– The response is tabled in Annexure W1 of the DoR Bill and of the

Budget Review7

2. Parliamentary Budget Oversight Cycle and the FFC


FFC’s Role in the Budget Process

• FFC’s primary outputs/reports in terms of Section 221 of the Constitution and Money Bills Procedures and Related Matters Act (MBPRMA): – Annual Submission on the Division of Revenue (DoR)

• Submitted 10 months prior to tabling of the DoR by the Minister• Contains recommendations/proposals for the following fiscal year

and medium terms expenditure framework (MTEF)– Submission on the DoR Bill

• Submitted to Parliament in February and outlines the FFC’s response to DoR Bill and relevant annexures

– Submission on the Fiscal Framework and Revenue Proposals• Contains FFC’s response to the fiscal framework and revenue

proposals contained in the budget tabled by the Minister9


FFC’s Role in the Budget Process [cont.]

– Submission on the Medium Term Budget Policy Statement (MTBPS)• Contains the FFC’s response to the MTBPS and adjustments

to the division of revenue – Submission on the Appropriation Bill• Submission made to the Standing/Select Committee on

Appropriations– Annual Report– Any other special reports made at own initiative or request

by organs of state

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3. Summary of FFC Support and

Interventions


Summary of FFC Support and Interventions

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FFC Public Hearings

• FFC has hosted three public hearings focussing on:– Local government fiscal framework (2012)– Housing finance (2013)– Child welfare services (2013)• Rationale behind use of public hearings approach:• To share, validate and expand FFC’s understanding of the

problems, preliminary findings and outcomes of the area being researched

• To provide a platform for stakeholders to engage and exchange views on the funding and service delivery challenges and possible solutions in area being researched

• To listen to the views of major stakeholders before making its recommendations to Parliament

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4. FFC Work on the Local Government Fiscal Framework

Why the Local Government Fiscal Framework is Important

• Local government (LG) sphere continuously evolving– Local government fiscal framework (LGFF) needs to be robust to

cater for changing needs of LG• To be sensitive to various needs of municipalities

– Urban/rural dimension• Balancing urban built environment needs with rural development

– Increased urbanisation– Increasing devolution of powers and functions– Poor municipal expenditure and revenue performance– Poor coordination and support between and amongst spheres

• Are municipalities appropriately funded and capacitated?– Continues to hide non-fiscal problems

• Complements government wide initiatives to review LGFF 15

CONTEXTUALISING THE LGFF

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Contextualising the LGFF

• LGFF structure is complex and multi-dimensional• Aim of the LGFF is to ensure adequate service delivery to

communities through appropriate funding of municipalities• Recipients of municipal services are non-residential (private

sector, non-governmental organisations etc.) and low-income and high-income households

• Service delivery to communities is achieved with municipal expenditure supported by various revenue streams

• Nexus between service delivery, consumers and municipal own revenues takes the form of the principle of a social contract,

• A comprehensive system of governance and regulation informs the operation of the LGF 17


Key Issues Regarding the LGFF

• The LGFF needs to be informed by a differentiated approach • The aggregate amount covering operational expenditure is

adequate, but needed to be targeted better• There is a vertical fiscal gap in relation to capital expenditure and

rehabilitation which must be addressed• Commission is concerned about the revenue situation in

municipalities• Commission reiterates its previous concerns about conditional

grants• There is a need for several transitional and implementation

arrangements in achieving an effective LGFF18


Differentiation

• The framing of the LGFF needs to account for:– Variation in municipal context (exogenous factors):

poverty; economic activity within a municipality, spatial factors such as topography and population density; powers and functions assigned; population dynamics (migration)

– Variation in municipal performance (endogenous factors): debt collection, expenditure efficiency, vacancy rates; ability to plan and execute budgets

• System needs to reward good performance and sanction poor performance

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DIFFERENTIATION FRAMEWORK FOR LOCAL

GOVERNMENT

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EXPENDITURE

REVENUE

actual costs

Understanding the Vertical Fiscal Gap

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costs incurred in providing services at a

reasonable level of

expenditure for a

properly managed service

maximum own revenue

gap

actual costs

gap

actual own revenue

Structural gap Actual gap

gap

fiscal capacityfiscal effort

inefficiency

EXPENDITURE

REVENUE

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Issues on Vertical and Horizontal Equity

• Vertical division adequate for operating expenditure– Total LES package in 2014 was R44.5 billion

• LES formula is R39.4 billion• Replacement grant and councillor support is R5.1 billion

– The quantum of resources allocated to local government for operating expenditure is sufficient but there are inequities in its distribution across municipalities

• Commission notes that new LES formula addresses horizontal concerns

• Commission estimates shortfall in vertical division on capital expenditure –This needs to be addressed– Estimated at R42 billion without grants– Total shortfall of R25 billion with infrastructure grants at R16.8

billion22


Concerns on LG Conditional Grants

• Commission is concerned about conditional grants– Inadequate planning and implementation of conditional grants – Poor monitoring and evaluation– Continued proliferation of LG conditional grant system (see next slide)– Poor targeting of grants – allocations do not reflect need

• Commission supports a rationalised LG conditional grant system that:– Does not duplicate aims and objectives of conditional grants– Is easy to monitor and implement and does not lead to an unnecessary

administrative burden being placed on both the transferring department and municipality

– Ensures there is capacity to spend grants before grants are allocated– Is based on outputs and outcomes and not just spending patterns

• Commission supports the infrastructure grants review that is being undertaken 23

Conditional Grants - Proliferation

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Ensuring an Effective LGFF

• LG performance needs to improve to ensure objectives of LGFF are achieved– Internal controls– Act on AG’s concerns

• Greater support for LG from other spheres– As per Section 154 of the Constitution– Improved monitoring and evaluation – Improved capacity support – Direct and structured intervention

• Appropriate implementation of Sections 139 and 216(2) of the Constitution

• Ensure Municipal Finance Management Act and Municipal Systems Act provisions for competent municipal officials are enforced

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5. RECOMMENDATIONS FROM THE FFC’S SUBMISSION FOR THE DOR

2014/15 AND RESPONSE BY GOVERNMENT

FISCAL LEVERS FOR NATIONAL DEVELOPMENT

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PRESENTATION OUTLINERecommendation Government Response

Budget Consolidation in SAGovernment must continue efforts to moderate the growth in expenditure components such as the public-sector wage bill , as decreases in government expenditure increase the probability of a successful fiscal consolidation in SA

Moderating the public-sector wage bill requires management of employee remuneration policies (wage increases, allowances and so on) and staff numbers. The former is governed by the DPSA. Government recognises that there is dualism in this area and has raised the issue in the FFC’s presence both in Parliament and in other executive forums (the Technical Committee on Finance and the Budget Council)

Funding of SA FET SectorThe funding model for the FET sector following the function shift should ensure that baseline funding does not perpetuate past underfunding of the function in certain provinces and that additional allocations are used to achieve a more equitable funding regime and ongoing infrastructure development and maintenance are provided for

In 2012, Department of Higher Education and Training developed a comprehensive turnaround strategy for all 50 FET colleges. The strategy, which is being implemented aims to systematically address the colleges’ key challenges to achieve sustainable improvements in the quality of teaching and learning. The coordination and implementation of the strategy is important and will drive annual operational plans, budgets and priorities. A portion of the cost per course will cover ongoing maintenance and infrastructure development.

PRESENTATION OUTLINE

Briefing on the 2014 Appropriation Bill

Recommendation Government ResponseManaging the Provincial Wage Bill to Contain Fiscal Stress and Build a Capable StateOver the medium to long term a transition is required, towards a more appropriate balance between the wage and non-wage components of provincial budgets for social spending (starting with education and health). This should be in the form of national sector departments setting a norm or ratio of frontline versus administrative staff to total expenditure per sector

Government supports the recommendations

Effective Devolution of Transport Functions to MunicipalitiesWith respect to the devolution of the transport function the FFC recommends that baseline funding for transport is thoroughly understood by recipient municipalities

Improving Fiscal Performance of Provinces and MunicipalitiesProvincial treasuries and municipalities to put in place an agreed-upon measurement and assessment framework for fiscal performance against which provinces and municipalities are evaluated

Government agrees that frameworks for fiscal performance are critical - expenditure reviews are being conducted as well as the public expenditure and financial accountability assessments in provinces

Challenges, Constraints and Best Practices in Maintenance and RehabilitationNational Treasury, in collaboration with relevant stakeholders such should develop local government-specific infrastructure asset management legislation similar to the Government Immovable Asset Management Act.

6. 2014/19 FFC Research Agenda in Support of NDP

The theme: IGFR in support of national development

Dynamics of economy & social issues

(equity)(1)

Balance betweenaccumulation &breakthrough: Managing past

recommendations (2)

Capable state issues:

Efficiencyeffectiveness

collective goods (3)

• Elimination of poverty and reduction of inequality to 0.6

• Need for “Institutional transformation”

• Toward a new model?


Value Add of the FFC

• FFC can provide advice, analysis and training to assist the work of the Committee– Specialised IGFR training to committee members and/or

parliamentary researchers – Provision of recommendations that are founded on evidence

based research– Technical support with respect to parliamentary fiscal oversight

activities

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7. Conclusion


Concluding Remarks

• Institution building is a long term process

• FFC is keen to engage and support Parliamentary Committees in their fiscal oversight role

• FFC’s intergovernmental fiscal relations conference will be hosted in Cape Town from 11-13 August 2014

– Theme: An African Perspective on Decentralisation

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FFC’s Website: www.ffc.co.za

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briefing to the select committees on finance and appropriations

Documents

act of parliament

igfr act

fiscal commissionintroduction

fiscal decisions of

constitution ffc

functions act

municipal fiscal powers

mandate of commission