Presiding officer and hon members, I just want to indicate that our MEC for finance would also have been here, but he is addressing a finance indaba in our province. He is fully aware of everything that is happening here and concurs. Basically, we want to indicate that there are a number of challenges that we have noted. One of them is in relation to conditional grants, but there is a particular approach that we want to adopt in this area.
We also wish to indicate that, over the years, the provincial equitable share has been revised and reviewed. It has evolved from seven components to five components currently and these are health, education and basic education, economic activity, poverty and institutional components. However, notable challenges were experienced during the rearrangement of provincial boundaries in 2006. One of the biggest concerns was that the equitable share formula was not flexible enough to deal with expenditure responsibilities that were driving provincial budgets.
At the provincial level, some of the challenges that have been identified with regard to the provincial equitable share were the following: Provinces were expected to achieve more with the equitable share because they were expected to perform more functions; the equitable share formula did not recognise the fiscal capacity of the provinces, though this is assumed through the economic output component; the equitable share was misaligned with the functions that are performed by the provinces; the formula did not capture changes to the total costs, especially fixed costs in service provision associated with migration; the current formula did not differentiate the expenditure needs across the provinces and there was a disjuncture in the way the other spheres were resourced vis--vis the expenditure requirements by these spheres of government.
In order to increase the revenue base, we are of the firm view that the economy has to grow even bigger. Over the years, in dealing with the challenges that are facing the provincial spheres of government, efforts have been made in tweaking the provincial equitable share. However, this has not provided the desired outcome. Moreover, it has just shifted resources between provinces without addressing the funding challenges at the provincial level. In terms of the Medium-Term Expenditure Framework, MTEF, the provincial share of the total budget remains at around 43,8% while the national average share is increasing from 47% to 47,3% at the end of the MTEF.
The focus area in dealing with the funding issues is around the vertical split between the spheres of government. This is a political debate but it will have to be carefully discussed to arrive at the most suitable way of sharing the resources for effective service delivery throughout the country. The role of provinces in economic development should be clarified, especially in relation to municipalities, and resources should also accompany this particular function.
Conditional grants are funds assigned to provinces from national government for the achievement of specific national objectives over and above those considered as basic. Conditional grants have been motivated by the need to ensure minimum nationwide standards for the provision of services of national concern. They are specifically used to provide for national priorities in provincial and local governments' budgets, promote national norms and standards, compensate provinces for cross-boundary flows, effect transition by supporting capacity-building and organisational reforms and address backlogs and regional disparities in social infrastructure.
Despite the good intent of conditional grants, their proliferation has posed a serious challenge on the powers of provinces. The Financial and Fiscal Commission, FFC, undertook a review of conditional grants and their findings included the following: Grants in general are allocated by national government, with little or no consultation at all with the other spheres of government. However, most importantly, grant allocations tend to be linked to key milestones that do not take provincial dynamics into account. Grants also pose a reporting burden to provinces, which is very cumbersome. Over the years there has been a phasing out of conditional grants and recently there seems to have been an attempt to introduce more conditional grants to provinces. This is likely to be interpreted as taking away some of the constitutional powers of provinces.
These are some of the issues we wanted to raise. Obviously, we have actually had a response to what we have always argued: that the economic development component of provinces should be discussed. The response has been that the powers and functions are those of municipalities. That is why we want a proper discussion across the spheres so that there is an understanding and resources can be allocated in line with that discussion.
Therefore, we are convinced that this year's division will take care of a number of issues, even if in our input we have raised the issue that the funds for human settlements should be increased due to immigration into our provinces. We are, nevertheless, fully behind this Bill and also fully in support. In our province we were unanimous in our support for all the issues we have raised. Thank you. [Applause.]