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Where is South Africa’s intergovernmental fiscal system going?

The Constitution established three “distinctive, interdependent and interrelated” spheres of government. Provincial government is one of these spheres and the provinces are responsible for performing the functions assigned to them, including education (except tertiary), health, and provincial roads. Despite being assigned these significant expenditure responsibilities, provinces have limited sources of own revenue. In 2023/24, transfers to provinces accounted for 97% of provincial revenues. Most of the other income is raised from motor vehicle license fees.

Nationally raised revenue is shared equitably – what does this mean?

Section 214 of the Constitution requires that nationally raised revenues are divided equitably between the three spheres of government, through the Division of Revenue. This division “takes into account the powers and functions assigned to each sphere; fosters transparency, predictability and stability; and is at the heart of constitutional cooperative governance”.[i]

The annual Division of Revenue Bill is tabled before parliament with the budget, supported by a rich technical discussion of how the equitable division principles listed in the Constitution are considered when determining transfers to provinces and municipalities.

The Constitution lists ten principles that must be considered. In combination, these principles guide the equitable vertical division (sharing between the three spheres of government) and the equitable horizontal division (sharing across a sphere – e.g. the division of the provincial equitable share across the provinces). These ten principles – and the explanation of how they are interpreted – constitute government’s approach to defining “equitable”.

Equitable differs from equity and does not mean equalisation (which is often an objective of revenue-sharing in other countries). The equitable division considers, amongst other things, the availability of resources, government’s priorities and developmental objectives, the fiscal capacities of provinces and municipalities, economic disparities, and the obligations placed on provinces and municipalities.

Each province receives their share of nationally collected revenues through the provincial equitable share (PES) allocation and through provincial conditional grants. The PES is divided across provinces using an objective formula that considers the principles of equitable division. These allocations are supplemented by conditional grant allocations, the share of which are calculated separately, since the equitable share formula does not support the equitable sharing of funds for the objectives the conditional grant aims to achieve. But more on that later. In 2023/24, 81.4% of transfers to provinces were through the PES and 18.6% through conditional grants.

The PES formula has six components (education, health, basic component, institutional, poverty, economic activity), and each component is weighted to support the equitable division of the provinces equitable share across provinces. The weights of the education and health components are roughly in line with the proportion of expenditures these sectors command of total provincial expenditures, 48% and 27% respectively. Overall, the weights assigned to these components, and the calculation of each component, captures government’s interpretation of “equitable” (and how best to achieve this with the available data). For instance:

  • the institutional component is shared equally to ensure all provinces have an equal amount to operate their administrations;
  • data on the size of the school-going population and number of children at schools is used to calculate the education component, which is an implicit incentive for provinces to provide quality education that keeps learners in schools, but also punishes those with high repetition rates;
  • the economic component incentivises provinces to grow their economy;
  • the basic component rewards (and/or compensates) provinces that create favourable living conditions that encourage people to migrate to their province.

The weights for the economic and poverty components are 1% and 3% respectively. It is a matter of perspective as to whether it would be more or less equitable to give the economic component a 3% weight and the poverty component 1%, or even giving the economic component a larger weighting and accommodating this by reducing the weights of other components.

The equitable share is an unconditional transfer to provinces. Provinces are advised of the final amount allocated to them, but have significant leeway to exercise discretion in allocating the funds in accordance with their own priorities. Figure 1 compares shares of provincial budgets allocated to compensation of employees (salaries, on the left axis, dotted line). The bars compare shares of the budget allocated to administrative functions.

Figure 1: Proportion Allocations to Compensation of Employees and Administrative Functions

There is significant variance across the provinces in the above expenditure indicators. Of all the provinces, the Western Cape allocates the smallest proportion of its budget to salaries, but the Office of the Premier accounts for a larger share than in any other province. Provinces have the discretion to make these allocative decisions, although they must enable them to meet minimum standards.

The value of each component of the PES is not indicative of provincial budgets. Although much is made of the fact that provinces have discretion, in reality the amount of discretion provinces have is limited by the obligation to meet minimum standards set out in national legislation for core services (education, health, social development). Nevertheless, the incentives in the equitable share do reward provinces that make smart decisions. Expenditure on preventative programmes that reduce costs – such as vaccination programmes – will not reduce the provincial equitable share allocation. So, provinces that make these smart investments are rewarded with cost savings. The same argument applies with respect to provinces that make investments that result in efficiencies, such as hiring honest and competent people, and training them to be more effective.

Conditional grants supplement the equitable share

According to the 2000 Intergovernmental Fiscal Review , the role of conditional grants is to:

  • Provide for national priorities in the budgets of other spheres.
  • Promote national norms and standards.
  • Compensate provinces for cross-border flows and specialised services of nationwide benefit, such as the training of medical professionals.
  • Recognise that other spheres implement some national government functions, such as the provision of housing.

Conditional grants are not envisaged to be permanent, and are to be considered only if a national department can demonstrate that the co-operative governance and equitable share mechanisms have failed to get provinces to budget for specific priorities.

Since the 2000 IGFR, government has not explicitly updated the role of conditional grants. What has not changed is:

  • There are supplementary conditional grants – which provinces are required to allocate to specific programmes, and as this money “supplements” existing programmes, the planning, budgeting and reporting for them are part of routine processes.
  • There are specific purpose conditional grants – which provinces are required to submit business plans for and are subject to various approval and reporting processes.
  • Significant variations in the value for money are achieved through conditional grants.

While some things have remained constant, many revisions and adaptations to conditional grants have been made through the annual legislative division of revenue process.

A conditional grant is allocated according to its own “allocation criteria” and formula, which differs from the PES formula. As the equitable share formula does not result in the most equitable allocation of resources for all government programmes and priorities, there is often a need to allocate funds through a different formula. So, some conditional grants are needed to enable funds sharing across provinces in a way that compensates or adjusts for cross-border flows and/or externalities that the equitable share formula cannot take into account.

Example 1 – The National Tertiary Services Grant

The National Tertiary Services Grant funds tertiary health services. There are significant cross-provincial flows of patients needing tertiary services, so the grant compensates provinces with greater tertiary capacity for treating patients from other provinces.

Figure 2 compares shares of the NTSG to the shares of PES:

Figure 2: Shares of the NTSG compared to shares of the provincial equitable share

Note how the share of the NTSG differs from that of the PES. Tertiary health services are highly specialised, and benefit from the aggregation affect. It is better for the country to concentrate these services in a few large urban locations rather than trying to achieve an even distribution of these services across the country. At the time of writing, health funding is undergoing several reforms, so this arrangement may soon change. However, the NTSG remains a supplementary grant, and its existence is primarily motivated by the need to compensate for cross-border flows, which the equitable share formula is unable to do.

Example 2 – Provincial Roads Maintenance Grant

The Infrastructure Grant to Provinces was introduced in 2000/01 as a supplementary grant to fund backlogs in health, education and provincial road networks. In 2010/11, the IGP was split into three sectoral grants, including the provincial roads maintenance grant. Like the IGP, the PRMG is a supplementary grant. The splitting of the IGP into sectoral grants has enabled the National Department of Transport to tailor the PRMG with an allocation mechanism that is responsive to the needs of the provincial road networks.

The grant “supports the cost of maintaining provincial roads. Provinces are expected to fund the construction of new roads from their own budgets and supplement the cost of maintaining and upgrading existing roads. Grant allocations are determined using a formula based on provincial road networks, road traffic and weather conditions.”[ii] The reason it is not incorporated into the PES is that it is “intended to ensure that provinces give priority to road infrastructure and promote efficiency in road investment.”[iii]

While the total PRMG is not necessarily an indicator of the total resources needed for this programme, it is equitably divided according to each province’s share of the network, taking local conditions into account.

To receive this grant, provinces must submit infrastructure reporting models, road asset management plans, projects lists, and reports during the year. These are routine planning and reporting requirements that would be required by the sector even if the conditional grant did not exist. So, provinces are simply required to follow set processes, but they have the discretion to choose which road projects they spend the grant on. In addition, provinces are expected to show commitment to the maintenance of roads by budgeting from the provincial equitable share to match or exceed grant allocations.

Figure 3 compares each province’s share of the PRMG with that of the PES (bar chart). The line graph shows the proportion of their transport infrastructure budget programme that is funded from own sources. If provinces match the grant allocations, this should be at least 50% which is illustrated by the straight dotted line.

Figure 3: PRMG, PES  and Transport Infrastructure Budgets

As can be seen, the grant compensates for a distribution of need that is not captured in the PES formula. If provinces were required to fund road maintenance entirely from the PES, the Free State and Northern Cape would be disadvantaged, as their share of the grant is larger than their share of the PES. In comparison, Gauteng’s share of the PES is larger than its share of the PRMG. In the other provinces, there are no major differences between their respective shares of the PES and the grant, which is how things work out in a fiscal system like ours.

However, an interesting story unfolds when one compares the grant allocations with the provincial budgets for roads maintenance. According to the 2023/24 budget data, only three provinces met the requirement to match or exceed the grant funding in that year, while three contributed less than 20% of their own revenues to the total expenditure on their road networks. And because provinces have discretion in compiling their budgets, they cannot be forced to allocate funds to this from their own revenue.

Now, when a province under-invests in, or delays spending on, their portion of the roads network, the maintenance costs of keeping it functional increases exponentially. Provinces are not compensated for these increased expenditure needs, nor will they be compensated for the increased cost of reaching schools and hospitals due to their dysfunctional road network. Rather, their economy is likely to shrink and their residents likely to semi-migrate to other provinces, causing the province’s equitable share allocations to shrink similarly.

So, given that the road network is the backbone of provincial economies, and despite the incentives implicit in the PES and the cost savings that derive from preventive maintenance, the majority of provinces do not see fit to ensure timely maintenance of their road networks. National government can only do so much to incentivise provinces to make the right investments in their road networks.

Example 3 – The National School Nutrition Programme

The National School Nutrition Programme (NSNP) grant “aims to improve the nutrition of poor school children, enhance their capacity to learn and increase their attendance at school. The programme provides a free daily meal to learners in the poorest schools (quintiles 1 to 3)[iv].” This programme effectively started on the health budget in 1999, and has been a specific purpose – or Schedule 5 – grant managed by the basic education sector since 2005.

According to the 2023/24 grant framework, “10.1 million learners were provided with meals in 20 497 primary, secondary and special schools” in 2021/22. This is an important grant. For many of these children, it is their first meal of the day. There are mountains of research demonstrating the link between food in the stomach and concentration in the class – as well as good behaviour. It is something one would expect a country that cares about its children to prioritise.

In 2023/24, the NSNP was one of only five provincial conditional grants that received additional funding to “ensure that the meals provided to almost 9 million learners meet the nutritional requirements”. This is, rightly, a priority of government.

Provinces must submit business plans for approval that comply with a long list of minimum requirements. Some of the minimum feeding requirements are:

  • comply with approved food specifications and menu guidelines consisting of meals containing starch, protein and fresh vegetable/fruit.
  • fresh vegetables/fruits must be served daily and vary between green, yellow and red.
  • a variety of protein-rich foods must be served in line with approved menu options– such as supporting and promoting sustainable food production and nutrition education in schools.

Disbursements of the grant are conditional on things like:

  • evidence (copies of orders, invoices, etc.) of procured kitchen facilities, equipment and utensils including the names of benefiting schools.
  • evidence of procurement of resources to district offices in line with approved business plans.
  • submission of quarterly performance (narrative and indicators) and financial reports.

According to the grant framework, the NSNP is not incorporated into the PES because:

  • It is a government programme for poverty alleviation, specifically initiated to uphold the rights of children to basic food and education.
  • The conditional grant framework enables the DBE to play an oversight role in the implementation of all NSNP activities in schools.

Note that a conditional grant is not needed to achieve either of these things. More on that below.

The NSNP is allocated using a distribution formula that “is poverty-based in accordance with the poverty distribution table used in the national norms and standards for school funding as gazetted by the Minister of Basic Education on 17 October 2008”. Figure 4 compares the shares of the PES to shares of the NSNP in 2023/24. Provinces are ordered in descending order of shares of the NSNP.

Figure 4: Shares of the NSNP compared to shares of the PES

There are significant differences between NSNP and PES shares in Limpopo, Eastern Cape Gauteng and the Western Cape, indicating that disbursing the funds through a conditional grant is justified – but this does not justify the micromanagement of these funds.

The first thing to note is that the underlying poverty data used to divide the grant is outdated. The poverty distribution table was last revised in 2013. Since then, no new data has been available to “update the national poverty distribution table (Paragraph 111 of the NNSSF) in terms of Paragraph 112 of the NNSSF[v]”, according to various gazettes of the DBE.

The green markers in Figure 5 show the percent change in enrolment between 2012 and 2022, and the bar charts compare the shares of the NSNP allocated in 2013/14 and in 2022/23 (all data used for this is from the 2013 and 2023 Annexure W1).

Figure 5: Comparison of shares of the NSNP and changes in enrolment compared to shares of the PES

Enrolment increased by 26% in Gauteng and decreased by 6% in the Eastern Cape. However, the NSNP distribution only changed marginally. Gauteng’s share increased from 11.7% to 11.8%, while the Eastern Cape’s share decreased from 18% to 17.8%. As poverty is not evenly distributed across the country, a direct relationship between changes in enrolment and shares of this grant is not expected. But something is definitely out of kilter.

Let’s recap what has been said so far:

  • The purpose of the grant is to ensure the feeding of the poorest children at school. Absolutely everyone should be in favour of this programme, and all provinces should want to, and gladly prioritise, resources for this critical issue.
  • This programme has, in its current form, been in place since at least 2004. After 20 years, the DBE still feels it is necessary to impose stringent conditions and controls to ensure that provinces allocate resources to feed the poorest children in the country, rather than making this a supplementary grant and trusting provinces to manage the programme properly.
  • There has been no new data to update the distribution formula of this grant since 2013. Government does not care enough to collect data about the state of child poverty in the country that can improve the accuracy of calculations used to share out funding for this vital priority.

So, the question here is, can the provinces not be trusted, or is the DBE desperate to control this money? It’s probably a bit of both. Some provinces cannot be trusted to ensure that funding reaches the poorest children. But, at the same time, the national department does not need to use a specific purpose grant, with all its administrative burdens, to achieve this objective.

The national department can legislate minimum feeding requirements at schools, using a framework to gazette specific details on an annual basis. Then, for example, just as the DBE gazettes the “Amended National Norms and Standards for School Funding”, it could also gazette (in the same gazette, if it chose) “Minimum Funding Norms for School Nutrition” and exercise oversight that is just as effective, but through legislative powers it gets from Section 100 of the Constitution. The NSNP could be disbursed as a supplementary grant and support an implementation system that provides provinces with more discretion over how they deliver on this key programme, while still ensuring that the funding is allocated to school nutrition.

Where is the system going?

The PES ensures the equitable distribution of revenues, in so far as available data allows. The divergent outcomes seen across provinces is largely driven by how provinces prioritise the allocation of funds in their budgets, the effectiveness of their spending and the extent of leakages to corruption. The grant examples, highlight the continuing need for conditional grants to supplement the PES to improve the equitable distribution of funding across provinces. However, again the failure of certain provinces to budget adequately for roads maintenance highlights the impact of provincial choices, and that certain provinces cannot be trusted to make sensible budget choices. This lack of trust in some provinces’ budget choices very likely is the driver behind DBE’s reluctance to simplify the management of the NSNP by converting it into a supplementary grant. However, why punish all provinces with additional administration for the failings of some. The DBE should implement a differentiated approach to the NSNP whereby certain provinces receive the funds as supplementary grants and are allowed to manage the funds themselves, while others are subject to intensive administrative oversight of a specific purpose grant.

Endnotes

All data used in this article is publicly available.

The primary source of quotes and data is the Explanatory Memorandum to the Division of Revenue “Annexure W1”. All quotes are taken from the 2023 Annexure W1 to the Division of Revenue Bill 2023. All data used to compare the shares of the PES to shares of the grants discussed are taken from the same document. Any references to grants in earlier years is from Annexure W1 for those years. This information can be found in the relevant subfolders visible on this site https://www.treasury.gov.za/documents/national%20budget/default.aspx

Budget estimates for the PRMG are from the EPRE tables (estimates of provincial revenue and expenditure) which can be found here:

https://www.treasury.gov.za/documents/provincial%20budget/2023/4.%20EPRE%20tables%20in%20Excel%20Format/Default.aspx

Department of Basic Education. South African Schools Act (1996, Act 84 f 1996). Amended National Norms and Standards for School Funding:

  • No. 1502 Gazette Number 32683 Dated 6 November 2009
  • No. 166. Gazette Number 36222 Dated 3 March 2013
  • No 2874 Gazette Number 47756 15 December 2022

[i] Annexure W1, Division of Revenue Bill 2023, page 6.

[ii] 2023 PRMG Conditional Framework

[iii] Annexure W1, Division of Revenue Bill 2023, page 92.

[iv] All quotations regarding the NSNP are from the 2023 NSNP Grant Framework

[v] Gazettes by the Department of Basic Education with Amended National Norms and Standards for School Funding in 2013 and 2022 (Gazette numbers 36222 47756 respectively)

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