Submission for the 2016/17 Division of Revenue: For an equitable sharing of national revenue
The Financial and Fiscal Commission (the Commission) tabled at Parliament its Annual Submission for the Division of Revenue on 29 May 2015
This Submission is part of the Commission’s constitutionally defined processes, to advise Parliament and state organs on how the money collected by national government should be allocated fairly and equitably among the three spheres of government, to enable them to carry out their constitutional and other legal mandates. Intergovernmental fiscal transfers are a dominant feature in South Africa, as the bulk of government revenue is raised at national level and then allocated to subnational government (municipalities and provinces) through the equitable share and other grants.
The Submission is made in terms of Section 214(1) of the Constitution of the Republic of South Africa (1996), Section 9 of the Intergovernmental Fiscal Relations Act (1998) and Section 4(4c) of the Money Bills Amendment Procedure and Related Matters Act (2009).
Background
The government’s National Development Plan (NDP) sets ambitious goals for social reforms to eliminate poverty and reduce inequality by 2030. To provide the necessary revenue to meet these goals, the economy needs to grow faster, by 5.4% per annum according to the NDP. Growth is affected by the long-standing structural weaknesses in the economy, as a result of long-term planning and financing challenges, and the lack of a strategic vision. The NDP and the Infrastructure Development Act, which sets the framework for the Presidential Infrastructure Coordinating Commission (PICC), provide a clear vision and policy basis from which to work.
In line with the NDP, government seeks to kick-start economic growth through investing in public infrastructure, which is an important strategic responsibility shared across different spheres and sectors of government. The infrastructure plan was first announced in the 2012 President’s State of the Nation address. When Budget 2014 was tabled, government allocated R847-billion to targeted public infrastructure investment, specifically the transport and electricity sectors.
Since then, lower-than-anticipated economic growth and the need to contain expenditure have resulted in infrastructure allocations being revised downwards by R34.2-billion. Over the next three years (2015/16–2017/18), total infrastructure investment is now projected at R813.1-billion, of which two-thirds (77%) will go to the transport, energy, and water and sanitation sectors. The country’s fiscal constraints are reflected in the real year-on-year growth, which is forecast to decline to 1.2% in 2015/16, down from 1.7% in 2014/15.
The current tight fiscal conditions mean that the overall level of public investment is limited. Therefore, efficiency needs to be maximised through better economic growth and management of investment spending. The roll-out of the infrastructure plan was initially slow and spending lower than expected. Nevertheless, spending performance seems to have improved. For example, state-owned enterprises (who are responsible for the bulk of infrastructure delivery) improved infrastructure spending markedly, from 60.1% in 2010/11 to 98% in 2013/14. Similarly, provincial spending on infrastructure increased from 84.7% in 2010/11 to 92.9% in 2013/14, while local government spending on infrastructure grants increased from 78.5% in 2011/12 to 90.6% in 2013/14. If this spending trend continues and is well-managed, public infrastructure investment can contribute to a robust economy.
Public infrastructure investment can be a powerful lever for transforming public resources into assets that support growth and development. However, South Africa faces certain challenges that hinder the effective use of resources for development. Since 1994, government has prioritised access to services, as a moral and political imperative, but a number of problems are preventing universal access to reliable infrastructure. These include inadequate technical capacity, neglect of routine maintenance, governance challenges and poor systems. Moreover, the many infrastructure-related programmes operate independently, spreading capacity and effort ever thinner, and resulting in duplication and inefficiencies. Public investments must provide the best value for money and have the greatest impact on growth, which means improving governance, coordinating investments and building capacity within subnational governments.
The Division of Revenue for the 2016/17 Submission
The Submission looks at how the intergovernmental fiscal relations system can be leveraged to create better conditions for the efficient delivery of public infrastructure, the redesigning of grants and accountability systems, and optimising investment in human capital. Government’s public investments are inefficient for a number of reasons, including limited short-term capital, weak intergovernmental coordination and a lack of accountability. Planning and institutional issues also restrict access to service delivery, as implementing public investment is a shared responsibility across state organs, which is complex and requires significant (and competent) coordination.
Local government, as the government sphere closest to the people, has a developmental role to play (guided by national government’s macro-economic policies). Therefore, the Constitution assigns municipalities with substantial powers and functions for providing infrastructure that supports the delivery of socio-economic services (including water, sanitation, roads, storm water drainage and electricity). Funding is predominantly through conditional grants: indirect grants, whereby no funds are transferred and functions are performed by national government; and direct grants, which are funds transferred to the province/municipality that performs the functions; and municipal own revenues.
Historically, municipalities have under-spent grants, which implies foregone or postponed investment, increased backlogs and, ultimately, diminished growth. In recent years, indirect grants have proliferated, often as a kneejerk response to the perception that municipalities (and provinces) have failed to concentrate on national policies and in the absence of a policy for reclassifying grants from direct to indirect. This proliferation distorts accountability, which is the cornerstone of development and good governance.
Local government accountability for infrastructure delivery and spending is complicated by the fact that most infrastructure is funded through grants, rather than municipal own revenues. National (or line) departments administer indirect grants but are rarely held to account for under-spending, and are not directly answerable to communities where such infrastructure is destined. Community accountability helps prevent corruption, by making it more difficult for public officials to divert public resources for undesignated purposes. Yet, even at local level, accountability to communities is minimal. For instance, citizens may be consulted about infrastructure during the development of the Integrated Development Plan (IDP) but have no say thereafter, once the IDP is in place. Addressing under-spending requires accountability lines to be clarified and the needs of communities to be factored in.
Greater accountability for how public funds are spent is especially important in sectors that consume a large share of government funds. One of these sectors is education. With economies becoming more knowledge-based, investing in human capital is crucial for development. However, in South Africa, where unemployment is high and more job growth is needed, schooling has not delivered fully on its promise to be the driver of economic success. What has been missing is attention to the quality of education – ensuring that students actually learn. In previous submissions, the Commission has made recommendations for promoting excellence in higher education and lifelong learning, and for dealing with problems in pre-school education, e-learning and adult skills.
This year, the focus is on early childhood development, public sector productivity and the use of ICT to enhance productivity, while recognising the importance of excellence in higher education and lifelong learning, and the need to address problems in vocational training and adult skills.
Given the huge planning and delivery requirements and complex interdependencies, addressing these constraints to growth and development will not be easy. The required infrastructure investments will need to be determined for each constraint. Then, depending on the total capital grant funding available, trade-offs will have to be made and projects prioritised, based on the principle of willingness to pay.
To overcome the constraints and strengthen cross-departmental collaboration, certain preconditions will need to be in place. The Commission’s recommendations for the 2016/17 Division of Revenue cover:
- Conditions for creating prosperity for all through infrastructure-led growth.
- Economic growth effects of municipal capital expenditures.
- Management of direct and indirect conditional grants.
- Accountability for local government infrastructure delivery.
- Fiscal arrangements for financing early childhood development.
- Measures to improve public sector productivity.
- The use of ICT to improve government operations.
Conclusion
If managed effectively, public investment has the power to stimulate the economy, leading to increased revenues that will enable government to meet the NDP socio-economic goals. While government will need to take some tough decisions in order for all the proposed measures in this Submission to bear fruit, the Commission believes that implementing these recommendations will result in more efficient delivery of public infrastructure, leading to improved production and trade, higher human capital and, ultimately, increased economic growth and attainment of the NDP goals for 2030.
Enquiries:
Ansuyah Dowra
E-mail: Ansuyah@ffc.co.za
