Intergovernmental System in South Africa

1. Intergovernmental System in South Africa PMIG Meeting 7 December 2005

2. Overarching role of treasuries • Establish and enforce: • Aggregate fiscal discipline • Budgets must be respected like all laws • Fiscal aggregates stay within set limits • Allocative efficiency • Resource allocation in line with priorities • Good programmes get more and vice versa • Operational efficiency • Delivering more outputs for less resource outlays

3. Fiscal Responsibility in South Africa

4. Introduction • SA is not a federal country, but a unitary country that is highly decentralised administratively and fiscally since 1994 • Three spheres of government, with local government distinct sphere, not a creature of provinces • Focus of presentation is on initial lessons after only 11 years of democracy • Too early to draw conclusive lessons • Lessons apply to SA, and cannot be applied to another country

5. System of Governance in SA • National, 9 Provinces, and 284 Municipalities • Provinces • School education, health, social grants (Social services) • Housing, Provincial Roads, Agriculture • Poor fiscal capacity (own revenue 4%, national grants 96%) • Local government • Water, electricity, refuse removal, housing infrastructure, municipal roads • Significant fiscal capacity, but varies between municipalities (Urban metros over 95% own revenue, Rural 30%) • National government • Over half actual spending on defence, justice (courts), prisons and police • Other: higher education, admin, policy, regulatory

6. Fiscal capacity and functions • Non-interest R362,6 bn out of R417,8 bn budget for 2005/06 • Servicing debt at R53,1 bn, contingency reserve R2bn • Provinces receive R209,3bn (57,7%) • 9 provincial budgets aggregate to R215 bn • Own Revenue only 4% : Motor car license fees, gambling • Local Government receives R17,1bn (4,7%) • Only one third of spending on public goods (no revenue) • Two thirds spending user charge services (water/electricity) • Taxes: Property taxes, regional levies (to be phased out) • Own revenue around R90bn • National Govt budget is R109bn (37,6%) • Revenue-sharing system (Constitution) • Size of grant depends on functions & fiscal capacity

7. Division of revenue

8. Constitution of SA • Section 214 requires annual Division of Revenue Act • One national law applies to all provinces and municipalities • No need for each province or municipality to have separate legislation on fiscal responsibility • PFMA applies to all national and provincial govts, and MFMA applies to all municipalities • How do we get consistency in fiscal responsibility objectives between states and between national govt? • Uniformity and precedence of national economic policy, taxes etc

9. Tax Assignment • National govt has 4 biggest taxes • Personal Inc Tax, Corporate Tax, VAT, fuel levy • Provinces can legally impose a surcharge on PIT and fuel levy, but do not as prefer revenue-sharing arrangement • Provinces have motor car license fees • Municipalities have property taxes and surcharge on electricity/water • National legislation can regulate exercise of taxation powers of sub-national govts, given need for tax harmonisation and national economic policy objectives

10. Borrowing Powers • Provinces and municipalities can only borrow for capital beyond a financial year • Provinces and municipalities can borrow for bridging purposes within a financial year • Provincial borrowing regulated by legislation • Provinces have non-revenue generating activities, and minor tax powers • Should they really borrow? • We are open to giving more tax and borrowing powers in future, but need to ensure expenditure efficiency first

11. Intervention powers • Specified and narrow intervention powers where a province or municipality fails to exercise its powers or responsibilities • National govt can intervene in a province in terms of section 100 of Constitution • Province can intervene over municipality ito section 139 of Constitution

12. Key Fiscal legislation in SA • Constitution • Chapter 13 of Constitution • National Acts of Parliament • Intergovernmental Fiscal Relations Act • Provincial Tax Regulation Process Act • Borrowing Powers of Provincial Govt Act • Public Finance Management Act (PFMA) • Municipal Finance Management Act (MFMA) • Annual Budget Acts of Parliament • Annual Division of Revenue – explanatory memorandum & extensive tables • National and provincial appropriation Act • Tax legislation (Taxation and Revenue Laws Amendment Acts)

13. Fiscal Responsibility in SA

14. How do we understand fiscal responsibility in SA? • Rules and legislation are necessary but not sufficient • Can easily get around (ex-ante or ex-post?) • Budget a plan at start of fin year, and actual may be significantly different • Co-operation and buy-in are more important • Budget preparatory process must be DEEPLY consultative process • Between national and sub-national governments • Between departments in each government • Budget is a POLICY process, driven by policy priorities and spending pressures

15. Transformation in first 5 years of democracy 1994-1999 • SA in a fiscal mess in 1994, with deficit close to 10% and inflation around 20% • First priority of new Mandela government was to get macroeconomic policy right • Achieved with stunning success but low growth • Second priority was to make the budget process more transparent and consultative • Key budget reform was introduction of 3 year budgeting, debt management reforms • Had to transform and modernise a bean-counting treasury with antiquated practices into a SMART treasury with policy assessment capacity

16. Budget Reforms since 1994 • Three-year budgeting system • National and provinces (1998/99 Budget), Municipalities • Budget decentralisation and CERTAINTY • Own budgets by provinces and Local Govt, grant certainty • Division of Revenue Act and schedule of all national allocations per province, per municipality for each of three coming years • Public Finance Mgt Act and Mun Fin Mgt Act • modernising financial management in public sector • Minister responsible for outcomes and policy, administrative head of dept responsible for implementation and outputs • No bail-out/guarantees for provinces/LG • Up-front allocation certainty, no ad-hoc in-year allocations • Development of provincial/local fiscal framework

17. Low inflation and interest rates

18. Debt service costs as per cent of GDP

19. Debt to GDP

20. Medium term outlook

21. Three year budgeting • In 1998 shifted from one-year incremental budgets to three-year rolling budgets • Publish 3 year budgets, but appropriate only for one year only • Use outer 2 years as baseline for next budget, and allocate only additional funds from contingency reserve and new revenue • We ignored nay-sayers who said not possible • Lays basis for better planning, more consultative budget processes and better intergovernmental fiscal relations

22. Intergovernmental Budgeting • SA has grant certainty • Three year allocations per province, per municipality, for EVERY grant • Equitable share allocation main allocation to provinces (64%) • Clear formula to divide funds • Provincial formula linked to key social sectors • Local govt formula linked to poor households • Conditional grants • Social grants (27%, previously from eq share) • Infrastructure, tertiary hospital services • Different formula for each conditional grant • Annexure E in Division of Revenue Bill

23. Budget is a policy process • Budgeting is at heart of policy-making, and needs to be consultative • Budgets require prioritising of policies, which is essentially a POLITICAL process • Minister of Finance requested Cabinet to form- • a Ministers Committee on the Budget (sub-com of Cab) • Budget Council and Budget Forum, for provinces and municipalities • Compulsory consultations for Division of Revenue process and exercise of sub-national fiscal powers • No outside or independent agency can determine budget or allocations

24. Budgeting harder under decentralised system • Need to co-ordinating policy, planning, budgeting processes • National depts responsible for policy, prov/LG for implementation • Setting up of sectoral Ministerial forums (MinMECs) between Ministers of national and provincial governments for education, health, welfare, housing • Challenge of co-ordinating sectoral and budget forums, as each sector wants to maximise its funds • Reducing sectoral collusion and allegations of unfunded mandates • How do we link Budgets to PERFORMANCE?

25. Performance and Accountability challenges • We are still striving to get more performance accountability • Budget reforms to facilitate greater performance in public sector as a whole • Has 3 year budgeting reached lower down to the level of project or facility? • How do we get better customer accountability? • How can we get better political accountability through legislatures • Does pol failure increase risk of service delivery failure?

26. Budget preparation process: pre-year • Independent FFC makes (advisory) proposals • Consultations with provinces and LG • Budget Council of national/provincial Ministers of Finance • Budget Forum incorporates local govt • National Cabinet makes final allocations to 3 spheres of govt in October • Equitable share formula used to divide funds between provinces and local govt (also conditional grant formulae) • Pre-budget in Nov, followed by Budget in Feb • Division of Revenue Bill tabled, to be passed by Parliament • Contains memo explaining formulae • Contains or ensures up-front payment schedule for transfers • Provinces table own three year budgets in Feb/March • National govt publishes Intergovernmental Fiscal Review in April

27. Key Budget documents • Budget Review and Division of Revenue (DoR) Bill all part of National Budget • contains memo explaining formula • contains/ensure upfront payment schedule for transfers • Intergovernmental Fiscal Review • 1x month after national and provincial budgets tabled • discusses 9 provincial budget trends for 7 years • in year (2002/03), three years to follow, three years past • covers LG information for current financial year • Quarterly and monthly budget info on provinces • 30 days after end of each quarter • Strategic plans of departments tabled with budgets • Annual reports of departments in Sept • NT website www.treasury.gov.za

28. Initial Lessons from SA

29. First Lesson from SA • Budget reform goes with fiscal decentralisation • It is even more important for fiscally decentralised • Co-ordinating policy and sector interests across tiers of government is really difficult but necessary • Ignore the nay-sayers and implement 3 year budgets • Budgets should not require line-item political and legislative approval • Reserve line-item budgets (to the extent they are even necessary) for internal management purposes only

30. Budget Reforms and Fiscal Decentralisation • Budget reforms are even more important for fiscally decentralised countries • Are budgets sustainable? • Is consolidated tax to GDP stable or declining? • Is consolidated borrowing or deficit sustainable (ie consolidated debt to GDP stable or declining) • Are provincial budgets comparable with each other? • Standard chart of accounts, uniform budget formats etc • How quickly can we produce consolidated budget information? • How much are we spending on school education? • Need to aggregate school budgets from 9 provinces

31. Second Lesson: Intergovernmental Grants • Money is fungible, so unconditional grants work better than conditional grants, focusing on broad priorities related to entire budget • Resist sectors who prefer conditional grants • Cond grants for social grants and infrastructure • Horizontal equitable share formula is redistributive between provinces • How do we achieve equalisation? • Needs versus performance? • Data problems– is it possible to get comparable usage and cost data for all provinces or municipalities?

32. Third Lesson: Transparency, Information and Accountability • It is a continual struggle to get all levels of government to publish information • Start with budget implementation information, through monthly reports • Opens up possibilities for greater accountability by Parliament, public etc • Information delayed is accountability denied! • Culture of publishing ALL relevant info on website on same day • How quickly do we collect and publish information?

33. Regular reporting • Financial management improves dramatically if we start • Publishing of monthly in-year reports on budget implementation • Requiring financial statements from all departments and entities to submit for audit within 60 days of end of fin year, and audited and tabled in Parliament within 6 months • Many benefits follow from above, including in-year accountability, better management and a further feedback mechanisms to improve budget allocation process

34. Fourth Lesson: Build Treasury capacity • Fourth lesson is to reform all treasuries to play a leadership role in budget process • Budgeting is too important to leave to accountants! It is positively dangerous • National Treasury must develop its policy assessment capacity to inform budget allocation process • National Treasury also needs to create an enabling framework for better governance, management and accountability

35. National Treasury capacity • In a decentralised country, National Treasury in SA has dedicated unit for intergovernmental fiscal relations • Dedicated unit to work with provinces and municipalities • Assessing credibility of provincial budgets (informal and perhaps to publish such assessment) • Printing Intergovt Fiscal Review (IGFR) and consolidated budgets • Ensure each (nat, prov or mun) treasury prepares quarterly reports for its Cabinet or Exco • Ensure that national Treasury do a consolidated quarterly report for all provinces?

36. Key challenge is to ensure Budget Credibility • National Treasury assesses provincial budgets as an advisory service to provide an independent perspective, and point out budget risk • Is tabled budget credible? • Are projections realistic? • Is the deficit fully funded? Focus on a balanced budget rather than a deficit target? • Continual challenge is to ensure implementation is according to planned budget

37. Fifth lesson:One collection agency • Success of one national collecting revenue agency (SARS) for the major taxes • You cannot spend or divide revenue that you fail to collect! • We divide revenue ANTICIPATED to be collected before the start of the financial year

38. Last lesson: Check relevance of Conventional Assumptions • To what extent does conventional theory of fiscal decentralisation really work in a developing country? • Does greater tax capacity lead to better accountability? • Do developing countries have effective accountability and auditing mechanisms? • How can we get better financial or service accountability when we have a shortage of auditors, doctors etc?

39. Theory and practice • SA has clear expenditure and tax assignment, and GRANT CERTAINTY • Why are provinces fiscally more responsible than municipalities? • Provinces have weak tax powers, municipalities have strong tax powers • What further taxes do we devolve? • Why should be move away from one tax collector? • Why should we prioritise tax rate autonomy over other taxation reforms? • What need for borrowing if govts struggling to spend on capital?

40. Other factors also impact: Public Service • Subnational governments tend to have personnel intensive functions like teachers, nurses, and personnel expenditure a high proportion of their budget (e.g. in education 80%) • Bargaining system for public service – centralised or decentralised? • Mobility and uniformity in conditions of service between states? • Are public servants under one pension fund? Is it a benefit fund? How do you share burden of funding shortages?

41. Local Government • We are still implementing our reforms with municipalities, so not as developed as with provinces • Have undergone three major transitions (including change in boundaries) since 1993 • Provincial govt should do unto municipalities what they want central govt to do unto them! • Every govt has a propensity to be gate-keeper over funds they control • Need three year grant certainty, predictability etc for local govt as well, and also for projects that you control

42. Conclusion • Has decentralisation worked in SA? • Don’t know, too early to tell • Reform process still not completed • Short-term assessment vs medium to long-term • Has decentralisation led to better delivery? • Would delivery have been better if centralised? • No, if national depts with delivery responsibilities are taken into account • Not clear if provinces or local govt would do better! • Mixed story of early successes and failures • No easy solutions to complex problems

43. Budget Reform

44. 1997 1998 1999 2000 2001 2002 2003 2004 2005 • Accounting Reform • Procurement Reform Budget Reforms in SA Publication of Quarterly Performance Information Improving operational & allocative efficiency MFMA Measurable objectives SCOA SPP tabled Publication of Section 32 & CG information AR tabled Estimates of National Expenditure & Provincial Budget Statements 1 & 2 Public Finance Management Act National Expenditure Survey & IGFR Medium Term Expenditure Framework Intergovernmental System

45. Strategic Plan Year 1 Annual Review Medium Term Budget Individual Performance Plans Annual Reports Monthly/QPR Reports ACCOUNTABILITY CYCLE 5 years Updated annually Includes budget information Covers critical areas for department Environmental changes Expenditure outcomes and new budget allocations Strategic direction changes Detailed focus on first year of strategic plan Includes output and service delivery information Expenditure trends 3 year forward estimates Strategic direction explained Previous year outcome incorporated when deciding resource allocation Staff have performance contracts & individual development plans Linked to departmental key objectives and outputs Indicate individual contribution towards achieving departmental objectives Performance against budget and strategic plan Meeting reporting requirements - Treasury & PS Regulations Progress against budget & implementing strategic plan Highlights departmental performance (financial & non-financial) against targets

46. Budget Process

47. Chapter 13 of Constitution • Chapter 13 sets fiscal framework • SA government system a revenue sharing one • Fiscal powers of provinces and municipalities (taxation and borrowing) s228-230 • s214 on division of revenue between three spheres of govt (national, provincial, local) • Sections 215 and 216 on budget transparency and fin management • Establishment and mandates of National Treasury, FFC, SA Reserve Bank

48. Legislative context • Public Finance Management Act (PFMA) • Covers national and provincial depts and entities • Municipal Finance Management Act (MFMA) • Intergovernmental Fiscal Relations Act • Gives effect to consultative processes on division of revenue • Establishes Budget Council and Budget Forum • Other chapter 13 legislation on provincial/LG taxes, borrowing, FFC, SARB • Numerous pieces of financial sector legislation (banks, fin institutions etc)

49. Budget Process • Budget process at the heart of government • Guided by policies, priorities & making trade-offs • Not a bean-counting process • Co-ordination between planning, budgeting, policy development and implementation • Budget Preparation • Collectively agreed in Cabinet / EXCO • Involves consultation with provinces and LG through Budget Council, Budget Forum and Extended Cabinet (Premiers and SALGA) • Budget approval after tabling • Role of finance portfolion and standing committees, Joint Budget Committee • Role of all portfolio committees

50. MTEF budget process Medium term policy review Macroeconomic framework, fiscal policy & DoR Preparation of MTSF Cabinet lekgotla Cabinet lekgotla MTBPS Jan April July Oct 2003 Departmental and agency planning & budgeting Preparing budget submissions MTEC – review & recommendations to Cabinet Preparation of Budget Documents May Aug Nov Feb 2004