FINANCIAL AND FISCAL COMMISSION

1. FINANCIAL AND FISCAL COMMISSION SUBMISSION FOR THE DIVISION OF REVENUE 2008/09 August 2007

2. Performance of Provincial Government • Fiscal performance and capacity were measured on the basis of the evaluative criteria in Section 214(2) a-j of Constitution e.g. national interest, developmental needs, stable and predictable revenue shares. • Quantitative aspects of analyses involve comparing budgeting/spending trends over the past three FY’s (2003 to 2005), the current FY with MTEF period (2007 to 2009).

3. Performance of Provincial Government RECOMMENDATION 1: Stable and Predictable Growth Paths To ensure stable and predictable allocations of revenue shares between different programs/categories of spend, national/provincial treasuries should aim for stable budget growth paths over a 7 yr period - from the recent past 3 yrs through to the forthcoming medium term budgeting and planning cycle RATIONALE and EXAMPLES • Often with newly estab./smaller programmes - trend of policy prioritisation, overbudgeting, underspending, followed by cut-backs in the following year’s budget. This is especially true of budgeting for infrastructure and skills training which are priorities established by AsgiSA and JipSA. Particular examples include ABET, FET, ECD, welfare, farmer support and road construction. • Result = cycle of erratic acceleration, deceleration, even declines in budgets/spending. Unpredictable funding flows delay effective planning, implementation and service delivery.

4. Performance of Provincial Government RECOMMENDATION 2: Prioritised programmes to show above average growth The policy prioritization of objectives and targets of a department, programme, or category of spending should be supported by higher than average annual budget growth RATIONALE and EXAMPLES • To ensure alignment between policy objectives/goals and budgets/spending, identified priority areas should grow by a higher than average growth rate. • In accordance with AsgiSA and JipSA, most provinces have prioritized infrastructure and skills training. Exceptions include FET, ABET, conditional grants for health professional training. RECOMMENDATION 3: Entrenchment of best practice The further institutionalization of best practice project planning & budgeting methods (which separate planning from implementation and align them to the fiscal year) should be encouraged. RATIONALE • Under-spending caused by excessive adjustments, late disbursements and end-of-year fiscal dumping is more pronounced when different spheres or departments are responsible for budgeting and delivery. • N.T. has projects in place to strengthen technical ability in provinces (IDIP).

5. Performance of Provincial Government RECOMMENDATION 4:Reporting of service delivery programmes Every departmental service delivery programme should be defined by and reported in the PBER, according to: - actual and targeted beneficiaries - personnel numbers and budgets by occupational skills level - current items & capital assets used in service delivery Provincial departments should report on these non-financial indicators on behalf of their service delivery agents. RATIONALE • To facilitate an assessment of performance i.t.o progressive realisation, efficiency and effectiveness, non-financial data is required RECOMMENDATION 5: A measure for determining socio-eco impact A methodology to measure socio-economic impact of government capital/ current spending should be standardized across govt. depts./programmes RATIONALE: • Without a measure of impact, it is impossible to determine whether what is being delivered is positively changing intended recipients’ lives

6. Framework for Assessing Function Shifts in South Africa’s IGFR System • Background • Continuous shifting of functions between government departments and between spheres of government since the promulgation of the Constitution • May have financial and fiscal implications • Un/under-funded mandates • Amended FFC Act requires the Commission to assess and make recommendations on such function shifts • Financial and fiscal implications • FFC has developed a framework for performing this requirement • Provides and outlines various criteria and factors to be taken into account when assessing function shifts

7. Framework for Assessing Function Shifts cont. • Concepts, principles and guidelines for assessing function shifts • Function shift refers to a function previously assigned by Constitution or any law made by Parliament or Provincial Legislature to any ‘organ of state’ is reassigned to a different organ of state • Organs of state are all national departments, all national provincial department, all municipalities, public entities established under schedule 2,3, and 4 of the PFMA and Constitutional institutions

8. Framework for Assessing Function Shifts cont. • Principles applying to shifting of functions • Co-operative government • The decision to assign/delegate a function should be appropriate for the whole country not only for particular sphere/government or organ of state • The delegating sphere/organ of state accept the funding requirements or support necessary to execute delegation successfully • Assigning/delegating department/sphere/organ should constantly monitor the assigned function • Consensus should be reached by both parties • contractual agreements are the most preferred

9. Framework for Assessing Function Shifts cont. • Enhancing subsidiarity • Function assigned to a municipality must be the one that would be most effectively administered locally and the municipality has the capacity to administer the function • Transfer of the authority role • Authority role must be transferred in full • As much as possible, functions must not be split between two spheres of government, between a district and a local municipality or between a government department and a public entity • Where this is unavoidable, clear lines of responsibility should be drawn • Efficient, effective and sustainable delivery of services • Equitable, efficient, affordable, economical among other principles should be considered when evaluating a shift of a function

10. Framework for Assessing Function Shifts cont. • Definition of terms • Authority for execution of functions • Primary assignment which is determined by the Constitutional mandate • Delegation: • The temporary transfer of power/function by a province/national legislature to another organ of state in accordance with Chapter 238 (a) or (b) of the Constitution • Assignment • General assignment is the one that is either transferred by national sphere to all provinces or all provinces to municipalities • Asymmetric general assignment results when only certain provinces/municipalities receive an assignment • Specific assignment is the transfer of statutory power in provincial/national legislature to a specific municipality according to Sec 99 & 126 or 154 of the Constitution

11. Framework for Assessing Function Shifts cont. • Checklist and manual • The checklist and manual are important documents that will assist the FFC when making recommendations on the shifting of function from one sphere to another • The first part of the checklist and manual deals with the policy and legal issues • The second part deals with the process of shifting the function

12. Framework for Assessing Function Shifts cont. • The FFC noted that: • A proper preparation for a shift may persuade a proponent that a shift is not viable or the best solution • Such a proposal could have positive results as it could save both time and resources

13. Framework for Assessing Function Shifts cont. • The Commission conducted a research on the principles and guideline and agreed to: • Adopt the check list and manuals as tools to be used for assessing proposed function shifts • Accept that the framework will be updated continuously • Distribute the document to all organs of State in order for them to use it in their proposals for a function shift.

14. The Transfer of Water Services Progress to date. • Progress can be summarised as follows (to 31 August 2007) : • 53 agreements signed (91%); • 1888 staff transferred (27%) • 4864 staff seconded (71%); • 1695 schemes with a total asset value of approximating R5,932 million transferred (83%), and • Refurbishment total expenditure R433million (61%).

15. Allocation of Resources • Allocations for 2007/08 reflected in: • Schedule 6 – Specific Purpose Recurrent Grant allocation, R550,000 million (where transfer agreements have been concluded) • Schedule 7 – Allocation in kind to Municipalities for designated programmes, R490,025 million (where transfer agreements are still under negotiation and staff still on the payroll of the DWAF ).

16. Proposed FFC CMBS Model • Model aim to solve 3 policy issues identified in FFC 2002 submission: • how to balance the need to provide constitutionally mandated basic services (CMBS) with macroeconomic constraints that limit the available resources. • how to objectively determine the equitable sharing of available revenue among the three spheres of governments. • what resources need to be allocated to capital spending in a way that is consistent with the answers to the first two questions. • An over-arching economic model that addresses all of these issues in a coherent fashion was constructed.

17. Box 1a • FFC CMBS Model: Cost Function Approach • Estimate level of output • Estimate cost function for each service • Estimate ‘spending deficiency’ • Allocate grants for capital and recurrent spending for each service • Determination of PEA and LEA Box 5 Macroeconomic implications (FFC Social Accounting Matrix) Box 4 Simulation Model • Box 3 • Database • Disability data • Service output/expenditures • Output, input & input prices • Revenue/pool data Box 2 Poverty/Inequality Disability Factors impacting on the cost of CMBS provision FFC CMBS Modelling Project Flow Chart

18. Cost B A D C 0 Output per Period The Model Dynamics • Transition of recurrent spending on a service in a given region

19. The Model cont. • Main value to policy analysts, dependant on how the model is used: • provide estimates of what level of service provision could be achieved under differing assumptions, made by the policy maker, about the size of the allocations available. • provide estimates of size of allocations required to achieve particular target levels of service provision, specified by policy maker, over a specified period.