Division of Revenue Bill 2011/12: FFC recommendations & Departments of Health, Higher Education & Basic Education comments

Meeting report

Division of Revenue Bill 2011/12: Public hearings
Financial and Fiscal Commission ((FC) briefing
Mr Bongani Khumalo, Deputy Chairperson: Financial and Fiscal Commission, stated that the submission of the Financial and Fiscal Commission (FFC), on the Division of Revenue Bill 2011/12 (DORB) was tabled in Parliament during May 2010, and served as part of the consultation processes with the National Council of Provinces (NCOP), so that the NCOP could then engage with provincial heads and broader stakeholders.

He dealt firstly with the effects of the global economic crisis and the recession on the South African economy. The recession had impacted negatively on the fiscal framework, had affected product prices and consumption, tourism, and foreign direct investment. Many sectors of the population were vulnerable. The Social Security Grant played a very important part in cushioning the children, disabled, and aged. However, the recession hit hard at those with very low income levels, and using low poverty lines was more appropriate for observation of poverty trends. The FFC thus recommended the continued expansion of the child support grant and old age pension grant. In the short term, the Commission suggested that government should continue to strive for fiscal consolidation, by restricting growth in entitlement spending to those programmes that had worked. In the medium to long term, FFC suggested that government should introduce a block grant for education, health and social development, to fund clearly defined and costed outcomes in these areas.

FFC recommended that social assistance expenditure should be protected during fiscal consolidation, in particular through targeted social spending programmes and the main cash-transfer component of poverty-focused public spending. Cash transfer and workfare programmes on a smaller scale should be piloted and evaluated before being expanded further. Non-cash complementary social development services should be strengthened through emphasising quality improvements within defined limits. It was noted that universal income grants should be avoided because they were unaffordable and a broader restructuring of the entitlement system would need to accompany them.

FFC said that National departments, when introducing and terminating conditional grants, should introduce a mandatory, systematic process for designing and planning individual conditional grants, and ensure that there was an independent evaluation of grant performance at entry, mid-term, and end of a grant. Proper accounting should be a prerequisite for most conditional grants, and government must ensure that the criteria for division of grant allocations were transparent.

Mr Khumalo noted that revenue challenges in local government resulted from local economic, social and demographic circumstances that led to structural fiscal stress, from the design of the intergovernmental fiscal system, and the poor service delivery influenced the unwillingness of consumers to pay, which in turn would impede the municipalities’ capacity to generate their own revenues. FFC recommended that, in order to address these challenges, government should discuss and adopt standard early warning systems to detect fiscal stress in municipalities. It should also legislate revenue collection, using Section 43 of the Local Government Municipal Services Act of 2000 as one of the key performance areas against which to assess overall municipal performance. Government should also use the institutional component of the Local Equitable Share to assist poor municipalities, and develop alternative methods of revenue prediction for the Revenue Raising Component.

Mr Khumalo indicated that in 2009 government tabled the Constitution Seventeenth Amendment Bill, which allowed the national government to regionalise municipal functions listed in Part B of Schedules 4 and 5 of the Constitution. The FFC opposed this approach, preferring a differentiated approach to reform that recognised cases of good performance so as to identify appropriate incentives and knowledge to regulate the industry. Currently, legislative provisions allowed for alternative service delivery arrangements that did not dilute municipal authority.

Mr Khumalo then discussed intergovernmental fiscal issues in urban public transport. He noted that in recent years there had been a significant increase in public transport capital spending. Lack of clarity over the accountability of the three spheres of government seemed to be an obstacle to investment in improved public transport. The National Land Transport Act was intending to shift the management of bus contracts, from provincial to metropolitan and city governments, and to provide for the establishment of the Municipal Land Transport Fund. However, it was argued that municipal finances would be severely affected if public transport responsibilities were to be shifted to urban municipalities without addressing the concomitant financial implications. FFC had recommended that a review must be conducted on costs associated with current urban form in selected cities, with a view to improving land use patterns efficiencies. The Department of Transport (DOT) and National Treasury (NT) should examine funding streams to the Municipal Land Transport Fund and the potential financial implications resulting from the promulgation of the National Land Transport Act on municipalities. Passenger Rail Agency of South Africa (PRASA) and cities should ensure that investment projects on rail and roads infrastructure were aligned and coordinated along A and B corridors of the National Rail Plan.

National Department of Health (NDOH) briefing
Ms Malebona Matsoso, Director-General, National Department of Health, presented the views of the Department of Health (NDOH or the Department) on the FFC recommendations.

She outlined that there were five conditional grants, which had formed part of the health system since its inception in 1998. Health conditional grants accounted for about 95% of the total NDOH budget. The Comprehensive HIV and AIDS Conditional Grant enabled the health sector to develop an effective response to HIV & AIDS, supported prevention programmes and subsidised funding for Antiretroviral (ARV) treatment. The Forensic Pathology Grant assisted in the transfer of medico-legal mortuaries from SAPS to the health sector, and provided a comprehensive forensic pathology service for the criminal justice system. The Hospital Revitalisation Grant aimed to transform and modernise infrastructure, health technology, equipment and monitoring and evaluation in hospitals. It supported management development initiatives, including personnel, procurement delegations and financial management capacity. The National Tertiary Services Grant aimed to provide strategic funding to enable provinces to plan, modernise and transform services in tertiary hospitals. Western Cape and Gauteng received the largest proportion of the grants because these provinces provided the highest proportion of tertiary services. She noted that the Health Professions Training and Development Grant was still under review, for possible integration with the Department of Higher Education.

Ms Matsoso outlined that the Department agreed with the FFC’s recommendations under Chapter 3, which were related to the transparency in the allocations of the grants. The Department also agreed that in some cases targeted allocations to address the challenges, rather than the equitable share formula allocation, should be applied. The Chapter 4 recommendations of the FFC related more to Municipal Revenue matters. However, NDOH would like some of these recommendations to be applied to hospitals, with regard to patient fees revenue collection and management. It was proposed that a uniform revenue retention strategy should be developed for the health sector, as an incentive for collection of patient fees.

The NDOH acknowledged the work of the FFC, and the equitable share formula for allocations to provinces. NDOH highlighted that a proper working relationship with National Treasury was being developed to determine a possible specific formula for the public health sector, in order to address health demographics and work load per province or hospital.

Department of Higher Education and Training (DHET) briefing
Mr Theuns Tredoux, Chief Financial Officer, Department of Higher Education and Training (DHET) told the Committee that his Department was not directly mentioned in the FFC report. However, DHET could play a key role, in terms of Social Assistance reforms, through the provisioning of education to out-of-school youth. Research indicated that more than 2,7 million youth between the ages of 15 to 25 were either not employed nor attending an education or training facility. It was suggested that consideration should be given that the equitable share portion being paid to provincial education departments in respect of children from 6 to 18 years of age should rather be based on actual and planned enrolments. A portion for Out-of-School Youth should then be allocated to the DHET, to be accommodated in the planned Community Education and Training Centres.

Mr Tredoux outlined that the Further Education and Training (FET) Colleges Sector Conditional Grant was a Schedule 4 Grant that would fund the subsidies to FET Colleges, compensation of employees at college level, estimated improvements of conditions of service and support functions at provincial level.  The allocation for the current year financial year amounted to R3.77 billion. The 2011 Medium Term Economic Framework baseline allocations were set out (see attached presentation for details). 

The Conditional Grant Framework in the Division of Revenue Act (DORA) and the Protocol had been signed with all provinces, so as to guide relationships in support of the conditional grant. Close working relationships with provincial officials would be improved and maintained, and official reporting lines would be set through provinces. Key outputs of the grant would focus on the continuation of the implementation of Management Information Systems for the delivery of a transversal service, expanding ICT for teaching and learning towards connectivity norms, and refurbishment, maintenance and repairs of infrastructure and equipment to support the delivery of approved programmes.

Department of Basic Education (DBE) briefing
Mr Bobby Soobrayan, Director General, Department of Basic Education, explained that this Department (DBE) was responsible for three grants. These were the National School Nutrition Programme (NSNP), HIV and AIDS Life Skills, and Technical Schools Recapitalisation conditional grants. The Dinaledi Schools Conditional Grant would come into effect in 2011/12.

He then explained the purpose of each of the grants. The National School Nutrition Programme aimed to provide nutritious meals to all quintile 1 to 3 primary schools and quintiles 1 and 2 secondary schools, to enhance learning. The programme would be extended to quintile 3 secondary schools in 2011/12. The challenges included the fact that the DBE did  not have sufficient capacity to monitor the implementation of the programme. However, a bid had been submitted to increase capacity.

The HIV and AIDS Life Skills Grant was designed to provide education and training for educators, learners and other school support staff to develop, implement and manage life skills education. Its main objective was to integrate HIV and AIDS, and relevant life skills programmes into the school curriculum.

The Technical Secondary Schools Recapitalisation Grant aimed to recapitalise up to 200 technical schools, to improve their capacity to contribute to skills development training. This would be done by improving their conditions and modernizing and equipping them properly, and by increasing the number of technically qualified learners. However, coordination between Provincial Departments of Education and Public Works was poor, some schools plans were not available, and there were prolonged procurement processes. The DBE was providing on-site support to the provincial departments of education, to try to minimise delays related to the procurement processes, and visits would be undertaken from 23 August to 30 September 2010. Guidelines to assist in the implementation of the project would be developed, such as specifications for tender documents. A development of a transversal tender for all procurement items had been proposed.

Mr Soobrayan noted that funding for the 500 Dinaledi Schools would be used to provide resource materials to promote teaching and learning of mathematics and physical science. This would also include the provision of textbooks, mobile science laboratories and kits, ICT hardware and software for selected schools.

Mr Soobrayan said that, despite the challenges, there had been significant progress in implementation of the National School Nutrition Programme, as well as the HIV and AIDS Life Skills conditional grants. The DBE would continue to support provinces to ensure that the Technical Secondary Schools Recapitalisation programme achieved the desired results.

The DBE supported the FFC recommendations to continue to expand child support and old age grants, and the need to maintain high access to health and education. In regard to the FFC recommendation that growth in entitlement spending should be restricted to programmes that had demonstrably worked, DBE said that it was important to balance how fiscal policy was applied to achieve effective spending with the rights of citizens in provinces that had a low capacity to deliver. There were challenges in sustaining high levels of access to education and health services. The key challenge to education financing was the mitigation of income inequality. Although repairs and maintenance were treated as high priority by the Department, the DBE had a huge backlog that was severely compromising service delivery and limiting the efficient use of very expensive inputs.

Mr Soobrayan finally noted that his Department did not have substantive input on some of the FFC recommendations, including those on the regionalisation of municipalities, intergovernmental fiscal issues around urban public transport, reform of the local government equitable share formula, local government revenue improvement strategies, and social assistance.

Discussion on FFC briefing
Mr M Makhubela (COPE, Limpopo) wanted to know how the government was going to sustain child grants, given the exponential growth of the population. He asked the FFC to explain what it meant by “block grants” for health, education and social sectors.

Mr Khumalo replied that the child grant issue was linked to the means test. The system was fairly credible and mostly was not abused. There was no pressure on the fiscus because the uptake was growing up. He said that the block grant was not much different from the conditional grant. Both conditional and block grants had conditions attached to them, but the block grant had looser constraints, in that it would require a determination of what was needed for education but would not prescribe how the money must be spent. The conditional grants had certain protocols and systems in place that must be adhered to, but the FFC could not interfere, whether or not that was observed. The same applied to health and social sectors.

Mr T Harris (DA, Western Cape) asked the FFC about the status of the review of the local government equitable share formula. The Committee had been told that this would be ready by 2011. He asked the view of the FFC on modeling, noting that this had been running for a while. 2008/09 was a critical period, as the recession was very severe, and the Committee needed an assurance whether the model was still on track.

Mr Khumalo stated that the review of the local government equitable share formula started in 2007, and there was also an examination of the transfer system, and discussion with provincial treasuries. Government alternatives were presented. He noted that the numbers in respect of the modeling were available, and there was an indication that the government took an optimistic view of the recession. The Committee would be sent an updated version of this when the FFC addressed the Committee on the Medium Term Budget Policy Statement in October.

Mr N Van Rooyen (ANC) asked the FFC to explain what it meant by “poor service delivery influences willingness to pay”. He further wanted to know the role of provincial financial committees in budget allocation.

Mr Khumalo thanked Mr van Rooyen for highlighting an error: the presentation should have read “poor service delivery negatively influences willingness to pay”. He noted that the role of provincial finance committees in allocations was complicated. The FFC had spoken to the NCOP about the lack of communication with the provincial committees.

Mr B Mashile (ANC, Mpumalanga) enquired if municipalities would be able to pay for their own operational costs, noting that some of them were located in densely populated areas, while others were in scattered areas. He enquired which was the more difficult to manage. He also asked what improvements could be made in regard to the security of grants, as it seemed that provinces were doing as they pleased with grants. Lastly, he asked the Commission to expand on the issue of public transport.

Mr Khumalo explained that when dealing with scattered municipalities, a figure must be reached on the basis of some study, whereas in an urban municipality there was various social interaction. In the past, both had received the same share. FFC, however, took a different approach that a metropolis and scattered municipality should not be treated in the same way.

Mr Khumalo said that the FFC was still dealing with pieces of legislation in regard to public transport.

Discussion on NDOH issues
Mr Mashile commented that he was uneasy with the Department wanting to have the power to withhold grants, as that would undermine intergovernmental relations and hinder the three spheres of government working together. He instead proposed strict monitoring in regard to transfers, rather than withholding grants.

Ms Matsoso explained that suggestion to withhold grants should be qualified, in the sense that currently the NDOH was working with National Treasury on conditional grants, specifically for the Hospital Revitalisation Programme. All ongoing projects had been reviewed and some had been stopped, with status reports being provided for all. These projects had involved a total investment of R9.1 billion, with a budget breakdown for each province. R2.3 billion of this investment, according to the Department’s analysis, would not be spent at the end of the financial year. Some of the problems emanated from the Department of Public Works, and from poor quality planning and management. The Department had asked that the funds should rather be withheld, and that National Treasury should re-allocate them in the next financial year, rather than the funds being reflected as “unspent” in this financial year. The Department would like to see whether its model for hospital revitalisation could not be used also for the other grants.

She noted that there had been an increase in human resource spending throughout the country. Many administrators and managers had been appointed in hospitals over the past years, which showed an increase of spending of 30%, although for healthcare workers, nurses and doctors the increase was sitting at 2%. She noted that in recent years training of nurses had followed an academic approach, in contrast to the traditional “bedside” training, and this had hampered service delivery. The Department recorded few nursing students because stipends were no longer issued, and bedside care effectively fell away, with staff nurses attending to that. The training of both nurses and doctors needed to be reviewed.  Although administrative staff were increasing, thousands of registrars had not been appointed, so there were less “foot-soldiers” to actually render healthcare. The Department needed to review the model significantly, in order to, for example, decrease maternal and child deaths. Although in the past student nurses would study midwifery for one year, it was currently being taught in only six weeks. The Department needed a different approach to providing these grants, especially if the country was serious about meeting the Millennium Development Goals.

Mr Harris asked the Department for its views on the introduction of block grants, and if it agreed with the adherence to certain conditions in conditional grants.

Ms Matsoso replied that there was value in both block and conditional grants. Provinces had to state their priorities, as some problems might be province-specific.

Mr Makhubela requested that the NDOH should formulate a proper plan and discuss it with the Minister.

Mr F Mahlalela (ANC, Member of Mpumalanga Finance Committee) asked if the Department was aware that provinces sometimes experienced cash-flow problems and what its plans were in this regard.

Ms Matsoso replied that the Minister and MECs were aware of such problems. Intervention measures were in place for such crises.

Mr B Khumalo commented on the issue of stopping grants, stating that the use of conditional grants had to be in line with what the Department intended to do, and it had to take responsibility for that grant. A mere stopping of the grant would not address the underspending, and it was preferable to manage the process so that service delivery would not be impeded, and the grant would not need to be stopped.

Discussion on DHET issues
Mr Makhubela wanted to know if money had been transferred or allocated for the proposed universities in Mpumalanga and Northern Cape, and asked what the DHET intended to do to address the collapsing infrastructure of Giyani.

Mr Mashile asked what the Department was doing generally about collapsing infrastructure in former Bantustans.

Mr Tredoux explained that there was no money allocated to the DHET for these, but that a request had been made to National Treasury was made for the proposed universities in Mpumalanga and Northern Cape. Two separate review teams were established to look at the infrastructure development issues, but the outcomes were not yet known so as to determine whether the proposals would reach fruition. The bid was not to create more FET Colleges, but to increase enrolments in the current institutions. He added that an audit was being done on conditions in the former Bantustan institutions.

Mr Mashile asked for the view of the Department on conditional grants for health institutions, pointing out that the NDOH wanted to train nurses in hospitals, rather than in universities. He also asked that the DHET comment on the FFC’s recommendations for maintenance of infrastructure, to make sure money intended for such activities reached the intended institutions.

Mr Tredoux replied that discussions between the Director-Generals of the Departments of Health and Education were at an advanced stage, and there were also discussions on agriculture and nursing colleges. However, more responsibility lay in the provinces. He noted that the DHET had some influence over the funding to provinces. Conditional grants for  existing FET Colleges went to maintenance.

Mr Harris enquired if the Department agreed with the recommendations from the FFC and how DHET would make things happen. He also asked for an explanation on the role of provinces in Community Education Centres.

Mr Tredoux said that the Department did agree with the FFC recommendations, and that there was always a room for improvement. For block grants, it was agreed that provincial education departments should receive 50% of the equitable share. The Department had established the Indlela Institute for the training of artisans. At present, it was waiting for the review on this institute. The Department was still investigating Community Education Centres, and data had been received from external researchers. It seemed that these might be one way of addressing unemployed youth.

Discussion on DBE Presentation
Mr Mashile enquired how funding cuts had affected school nutrition programmes and other areas of operations. He also wanted to know the view of the Department regarding public transport for learners, especially those in rural areas.

Mr Soobrayan elaborated there had been an increase in school feeding so as to protect the vulnerable. He conceded that there had been some cuts, but these resulted from poor planning and management by provinces, and that school nutrition programmes would not come to an end, since they had helped to solve many problems and diseases associated with poverty. The Department wanted schools to be empowered so that they in turn could empower communities. He agreed that the matter of public transport for learners was part of the strategic planning of the DBE, and a programme was in place to look at the issue. Engagements had started with the Department of Transport and National Treasury. Transporting learners to sporting events was another intervention of the Department. Costs were escalating in trying to solve all these problems, and procurement issues applied.

Mr Harris requested the Department to expand on income inequality saying that he did not see that it was a problem. He enquired whether the DBE had carried out any review of cost effectiveness of its spending.

Mr Soobrayan explained that income inequality was explained in developmental literature, and the concept was that economic development would only be addressed if income equality was also addressed. Fiscal policy in South Africa had to take income inequality into account. Reviews were done on how funding norms were implemented, and solutions were being engineered to solve the problems.

Mr Mahlalela asked how many schools would remain as Dinaledi Schools, and if there were any plans for expanding this programme.

Mr Soobrayan replied that Dinaledi showed successes and the DBE would like to expand it. There was no intention to drop any school from the programme.

Mr Makhubela wanted to know how many mobile laboratories the Department had, called for further clarity on the grants, and asked what solutions would address the challenges being faced.

Mr Soobrayan said that the DBE had just published infrastructure norms, through which it intended to address the programme. The directives would be submitted to the Committee. DBE was seeking a balance between prescription and choice in the grants. Provinces must make their decisions based on reality. Huge initiatives for monitoring allocations in provinces were undertaken. He explained that in answer to some of the challenges, the DBE was publishing tenders in newspapers. He suggested that detailed programmes and plans should be submitted to the Committee for further input and recommendations.

The meeting was adjourned.