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Republic of South Africa

Republic of South Africa
bongani khumalo
and renosi mokate
The Constitution establishes South Africa as a constitutional republic
founded on the principles of democracy. There are a number of political
parties that are represented in all spheres of the government – national,
provincial, and local. Some political parties emerge only during election
periods and disappear thereafter. The political landscape is dominated by
the African National Congress (anc), which holds a more than two-thirds
majority in the National Assembly. The anc also controls all of the provincial
legislatures and most metropolitan municipalities.
The system of government in South Africa is generally stable, with a
clear separation of powers between the executive, the legislature, and the
judiciary. However, given that the decentralized system of government has
only been in existence for ten years, some aspects of it are still evolving.
This is particularly true with respect to the assignment of powers and functions
among the three spheres of government and the exercise of those
powers where they are concurrent. The government has made significant
strides in enacting enabling legislation, which is required for the exercise
of powers and functions. However, implementation of such legislation has
presented its own challenges. For example, there is uneven distribution of
technical and institutional capacity between national, provincial, and local
governments in the area of housing. Although the enabling legislation for
the exercise of powers in this concurrent area exists in the form of the National
Housing Act, implementation in the form of delivery of houses to
those that need them has not progressed smoothly.
Provincial government executives are appointed by the premiers who, in
turn, are appointed by the president. In the local government sphere,
councils are elected by the people and the mayors are elected by the councillors.
In all the subnational governments, the majority party has a significant
say in the choice of mayor through executive structures.
264 Bongani Khumalo / Renosi Mokate
The Constitution establishes an independent legislature, judiciary, and
executive. The executive, which can be loosely referred to as the government
at all spheres, is held accountable to the electorate through the relevant
legislatures. The National Assembly and the National Council of
Provinces are at the national level, the nine legislatures are at the provincial
level, and the councils are at the local level. All these legislative institutions
have a role in monitoring and ensuring that the government is held
accountable to the people through their own institutions, which ensure
citizen participation. Over and above these institutions, the Constitution
establishes other institutions such as the Human Rights Commission, the
Gender Commission, the Constitutional Court, and so on, all of which ensure
that the government is held accountable for any violations of the Constitution.
All these statutory bodies are independent.
These independent institutions also receive complaints from the general
public regardless of race, gender, colour, or creed, and they can influence
the activities of the government. For example, where the government fails
to deliver on the provisions in the Bill of Rights (Chapter 2 of the Constitution),
aggrieved parties can and have challenged the government in the
Constitutional Court, where judgments can and have been made for the
complainants. The Human Rights Commission has also received complaints
from aggrieved parties and made pronouncements in their favour.
The media in South Africa are free and, as such, provide a key avenue for
keeping the government under scrutiny. Several government corruption
scandals that have ended up being investigated were initially exposed by
the media.
South Africa has a population of 44.8 million people and a surface area
of 1.2 million square kilometres. It has a racially and ethnically diverse society.
Its gross domestic product (gdp) was $212.8 billion in 2004, and its
per capita gross national income was $3,630. South Africa has a stable macroeconomic
environment characterized by moderate growth rates, low
inflation, and low interest rates.
the intergovernmental f i s cal
relations system i n s outh africa
The intergovernmental fiscal framework inherited from the apartheid era
was one in which the various provinces differed markedly in their economic
endowments and administrative capacity. In 1994, following protracted
negotiations between the liberation movements and the apartheid
government and a series of compromises on both sides, South Africa
settled on a democratic, fiscally decentralized, unitary state. The system
consisted of nine provinces and more than one thousand municipalities
that, in 2000, were reduced to 284. With respect to provinces, the fiscal
Republic of South Africa 265
decentralization process could be characterized as mainly involving the
decentralization of service responsibilities, with limited revenue-raising
capacity. Allowing provinces to choose applicable tax rates and tax bases
could result in tax competition that would interfere with trade, investment,
or migration across provincial boundaries, thus reinforcing economic
disparities and potentially creating a highly skewed distribution of wealth
and economic activity. In addition, the weak administrative capacity (and
institutions) inherited by most of the provinces, especially those that inherited
the apartheid legacy of the homelands, and self-governing states
meant that disadvantaged provinces would be ineffective in optimizing and
Table 1
Basic political and geographic indicators
Official name: South Africa
Population: 47.4 million people
Area (square kilometres): Western Cape = 129,370 sq. km.
Eastern Cape = 169,580 sq. km.
KwaZulu-Natal = 92,100 sq. km.
Northern Cape = 361,830 sq. km.
Free State = 129,480 sq. km.
North West = 116,320 sq. km.
Gauteng = 17,010 sq. km.
Mpumalanga = 79,490 sq. km.
Limpopo = 123,910 sq. km.
Total Area = 219,090 sq. km.
gdp per capita in rands (year): R32,483
Constitution: 1996, constitutional democracy
Orders (spheres) of government: National, provincial, and local
Constitutional status of local government: Autonomous sphere
Official languages: English, Afrikaans, IsiZulu, Sesotho, Setswana, isiXhosa, siSwati,
isiNdebele, Xitsonga, Tshivenda, and Sesotho sa Leboa
Number and types of constituent units: Nine provinces
Population, area, and per capita gdp in South African rands of the largest constituent unit
Northern Cape
902,300 people
361,830 sq. km.
gdp per capita R32,870
Population, area, and per capita gdp in South African rands of the smallest constituent unit
9,415,231 people
17,010 sq. km.
gdp per capita R43,923
Exchange rate = .73
266 Bongani Khumalo / Renosi Mokate
maximizing any expanded revenue-raising powers granted by the Constitution.
The issue of revenue assignment is discussed in more detail below.
Provinces neither impose nor collect levies on broad-based taxes such as
corporate income and profits, personal income, consumption, and trade.
Most of the taxes available to provinces are narrow-based and relate to fees
levied on motor vehicle licences, gambling, liquor, hospital fees, and tourism.
However, the Constitution grants provinces the power, subject to national
legislation and national economic policy objectives, to impose other
taxes, such as a surcharge on personal income tax and a fuel levy.
By comparison, an interesting feature of South Africa’s intergovernmental
fiscal system is the degree to which local governments, especially the
larger municipalities, have been given revenue-raising powers. This feature
provides the country with a mechanism to develop a much more efficient
intergovernmental fiscal system than can other lower-income developing
countries with similar fiscal systems. Similar to the White Local Authorities
(wlas) under apartheid, the major sources of revenue for local government
include taxes, user charges, and private-sector equity in infrastructure
provided by local authorities. Although in the aggregate, local government
in South Africa raises a substantial amount of own revenue (90 percent of
expenditure needs are financed from own revenue), the situation changes
drastically when municipalities are viewed individually. For example, some
metropolitan municipalities finance as much as 98 percent of their expenditure
needs from own revenues, while some small rural municipalities may
depend entirely on transfers in the form of equitable share transfers, conditional
transfers, and grants from other spheres and institutions.1
expenditure and revenue-raising
responsibili t i e s
Macroeconomic policy management in South Africa is the function of
national government. Financial and fiscal matters of the state are stipulated
in Chapter 13 of the Constitution. This chapter establishes the key
institutions and roles for dealing with macroeconomic management. The
National Treasury, through the minister of finance, has the role of determining
and implementing the country’s fiscal policy. An independent
central bank, the South African Reserve Bank (sarb), has the role of determining
and implementing the monetary policy of the country through
constant consultation with the minister of finance. The National Treasury,
through Parliament, has set the key parameters within which monetary
policy is exercised, while the Reserve Bank is responsible for determining
the instruments for effecting that policy. South Africa follows an inflationtargeting
policy, with the current target for the consumer price index (excluding
mortgage rates) set at 3 percent to 6 percent, and it has a floating
Republic of South Africa 267
exchange rate policy. The governor and deputy governors of sarb are appointed
by the president of the country after consultation with the sarb
board of directors and the minister of finance.
In 1994, South Africa was in an undesirable fiscal condition, with a budget
deficit close to 10 percent, inflation hovering around 20 percent, and debt
service costs at 4.7 percent of gdp. The priority of Nelson Mandela’s government
was, thus, to get macroeconomic policy right. This was achieved with
significant success through the implementation of a tight fiscal program.
The government adopted its national Growth, Employment and Redistribution
(gear) macroeconomic strategy through extensive consultation with
organized labour and business. The stance adopted by the government was
that of macroeconomic stabilization, and it has been under implementation
for over five years. The main achievements of this strategy have generally
been seen in terms of a substantial reduction in the budget deficit to under
2 percent in 2005 (from the 1994 level of over 10 percent), stable inflation
at under 6 percent (from around 20 percent in 1994), reduced debt service
cost at 3.5 percent in 2005 (from a high of 5.6 percent in 1997), and general
stability in subnational budgets.2
However, due to the austerity measures that accompanied the strategy
of government investment, infrastructure especially suffered. Investment
in social services did not grow as quickly as some sections of society expected.
Therefore, while access to social services greatly improved, this
was achieved mainly through efficiency gains rather than increased investment.
The success of the government’s gear strategy has been tempered
by lack of adequate growth in employment. Unemployment currently
stands at about 26 percent.
As has already been indicated, macroeconomic policy management is the
exclusive function of the national government, and, under times of fiscal
austerity, subnational governments must follow the direction of the national
government. The impact of the austerity measures in the early years of gear
was to enforce the same measures at the subnational government levels.
Over the past five years, rapid reforms in the fiscal arena have strengthened
tax administration and improved tax buoyancy and public expenditure
management. This development has allowed the government to embark on
new investments and the rehabilitation of infrastructure as well as to accelerate
investment in basic services.
A comprehensive budget reform process has been carried out alongside
the overhaul of the intergovernmental system. Key reforms have included
the introduction of three-year budgeting. This has introduced certainty on
transfers to subnational governments and allows for decentralized budgeting
as captured within the Medium Term Expenditure Framework (mtef)
and the Medium Term Budget Policy Statement (mtpbs). It has also
transformed a “bean-counting” treasury into a treasury with strong policy
268 Bongani Khumalo / Renosi Mokate
assessment capacity, modernized financial management through the Public
Finance Management Act and the Municipal Finance Management Act,
removed bail-outs/guarantees for provincial municipal debt and the possibility
of ad hoc allocations during the financial year, and finally enhanced
the development of clear fiscal frameworks for provincial and local governments.
The results have been seen in improvements on expenditure management
at both the provincial and local government levels.
However, on the revenue side, much work still needs to be done, especially
around the issue of revenue forecasting. As the National Treasury has
noted, inaccurate revenue forecasting – either in the form of over- or underestimation
of receipts – could result in the expansion of unnecessary
borrowing or in the inadequate allocation of funds. This could hamper the
implementation of crucial socio-economic programs.3
Despite budget reforms and the overhaul of the Intergovernmental Fiscal
Relations (igfr) system, many challenges remain. The following sections
identify key weaknesses in four dimensions of the igfr system in
South Africa – expenditure assignment, revenue assignment, intergovernmental
transfers, and fiscal management – some of which have persisted
despite policy reforms. In turn, such weaknesses pose significant challenges
for effectiveness and efficiency in the delivery of constitutionally
mandated basic services as well as for the transparency and accountability
of the igfr system as a whole. These weaknesses are explored in greater
detail below.
Expenditure Assignment
According to public finance theory, a crucial element of fiscal decentralization
requires that a clear and concise set of functions, responsibilities, and
services be provided by the jurisdiction with control over the minimum
geographic area that would internalize the benefits and costs arising from
the provision of such services (and other functions). The current assignment
of expenditure functions in South Africa, which is closely aligned
with the above theory, aims to achieve three main objectives – efficient
resource allocation via a responsive and accountable government, an equitable
provision of services to citizens in different jurisdictions, and macroeconomic
stability and growth.
Expenditure functions that have a national dimension (justice, defence,
correctional services, foreign affairs, and tertiary education) as well as macroeconomic
and redistributional implications are the primary responsibility
of the national government. These expenditures account for around
39 percent of total budgeted expenditure. By contrast, provincial governments
account for about 55 percent of total budgeted expenditure but
generate less than 6 percent in revenue.4 Most of the expenditure
Republic of South Africa 269
Table 2
Legislative responsibility and actual provision of services by different spheres
of government
Legislative responsibility
(de jure) Public service
Actual allocation of function
(de facto)
National/provincial Administration of indigenous
National/provincial Social security and welfare National/provincial
National/provincial Agriculture Provincial
National Health National/provincial/local
National Correctional services National
National Defence National
National Justice and constitutional
National Safety and security National
National Water affairs and forestry National
National Trade and industry National
National Transport National
National Minerals and energy National
National Foreign affairs National
National Home affairs National
National/provincial Casinos, racing, gambling
and wagering, excluding lotteries
and sports pools
National/provincial Vehicle licensing Provincial
Provincial Ambulance services Local
National/provincial Education National/provincial
Provincial Libraries other than national
Provincial Liquor licences National
National Museums other than national
Provincial Provincial planning Provincial
Provincial Provincial recreation and amenities Provincial
Provincial Provincial sport Provincial
270 Bongani Khumalo / Renosi Mokate
Provincial Provincial roads and traffic Provincial
Provincial Veterinary services, excluding
regulation of the profession
National/provincial/local Air pollution Local
National/provincial/local Building regulations National/provincial/local
National/provincial/local Child care facilities Local
Local Electricity and gas reticulation Local
National/provincial/local Firefighting services Local
National/provincial/local Local tourism Local
National/provincial/local Municipal airports Local
National/provincial/local Municipal planning Local
National/provincial/local Municipal health services Local
National/provincial/local Municipal public transport Local
National/provincial/local Stormwater management systems
in built-up areas
National/provincial/local Water and sanitation services
limited to potable water supply
systems and domestic waste-water
and sewage disposal systems
Provincial/local Beaches and amusement facilities Local
Provincial/local Billboards and the display of
advertisements in public places
Provincial/local Cemeteries, funeral parlours, and
Provincial/local Municipal parks and recreation Local
Provincial/local Municipal roads Local
Provincial/local Street lighting Local
Provincial/local Traffic and parking Local
Provincial/local Refuse removal, refuse dumps and
solid waste disposal
Table 2
Legislative responsibility and actual provision of services by different spheres
of government (Continued)
Legislative responsibility
(de jure) Public service
Actual allocation of function
(de facto)
Republic of South Africa 271
responsibilities are derived from Schedule 4 of the Constitution, which stipulates
that provincial governments are responsible for primary and secondary
education, health and welfare services, provincial roads, and local
economic development. Local governments account for just over 4 percent
of total budgeted revenues and are tasked with the delivery of key basic municipal
services such as housing, water, electricity, and sanitation.5
Despite the fact that the Constitution sets out clear responsibilities and a
solid framework, some matters related to the assignment of expenditure
functions continue to remain unresolved. These are the persistent potential
for unfunded mandates, a lack of clear delineation of responsibilities
when functions are transferred to other spheres of government, and the
lack of a detailed and comprehensive framework for the assignment of
powers and functions. Unfunded mandates refer to situations in which
subnational governments are legally mandated in terms of the Constitution
or by policy pronouncement to undertake specific functions but do
not receive funds from nationally raised revenues in order to fulfill these
functions. This scenario is highlighted in cases where the framework underlying
the provision of particular services requires provincial and local
governments to implement nationally determined minimum-service standards.
However, the funding for the delivery of such services fails to reflect
the cost of the service standards, forcing subnational authorities to divert
scarce own-revenue funds to meet the standards set.
A clear classification of responsibilities for some functions shared by the
different spheres of government is still required. For example, some roads
have yet to be classified either as district or local roads. Until such classification
is finalized, these kinds of roads may end up not being maintained,
a scenario that could hinder improved access to socio-economic infrastructure.
Closely linked to the classification issue is the lack of clarity on the nature
of transfer of functions – whether assignment, delegation, or agency
agreement. Where this occurs, planning and budgeting for service delivery
becomes difficult as each type of assignment has its own implications.
Although a draft policy framework for assigning powers and functions to
the local government sphere has been developed, the proposals contained
in the framework are not comprehensive. They fail to cover all legislation
originating in national line function departments. For instance, in the
health sector, the national government has yet to specify the range of activities
that comprise the environmental health services that should be provided
by local authorities. This lack of specificity has necessitated laborious
negotiations between local municipalities and their respective district
municipalities regarding which entity should bear responsibility for providing
environmental health. Another drawback of the draft framework is that
it applies only to functions assigned to local governments and excludes
shifts/transfers of functions from the national sphere to the provincial
272 Bongani Khumalo / Renosi Mokate
sphere. In the absence of an appropriate framework, subnational governments
either initiate legislation to fill gaps or develop policies that could
place increased future demands on the country’s treasury.
Revenue Assignment
Despite improvements in revenue-sharing arrangements since 1994, there
still remain marked differences in revenue-generating capacity across the
three spheres of government. The differences stem largely from the structure
and assignment of taxation powers allocated by the Constitution to
the spheres of government. South Africa’s revenue system is based on ensuring
fiscal uniformity, harmony, and efficiency. However, the assignment
of revenue functions involves lower fiscal autonomy for subnational governments.
All broad-based taxes (mainly personal income, corporate, and
consumption taxes) are assigned to the national government, while narrow-
based/minor taxes (such as motor vehicle licence fees, hospital user
fees, and gambling taxes) are assigned to provincial authorities. In comparison,
municipalities have greater revenue powers than do provinces as
Table 3
Direct expenditures by function and level of government
Function Federal (%) State or provincial (%) Local (%) All (%)
Defence 100 0 0 100
Debt servicing 100 0 0 100
General administration 44 0 56 100
Law and order 100 0 100
Economic services 100 0 100
Social services 100
health 78.3 21.7 0 100
education 66.1 33.9 0 100
Social development 74.5 25.5 0 100
Subsidies 0 0 0 100
Total 100
Local public services* 0 0 0 100
* Local public services include: primary and preschool education, secondary education, public health,
hospitals, urban highways, urban transportation, drinking water and sewerage, waste collection, electric
power supply, fire protection, public order and safety, police.
Republic of South Africa 273
they are assigned property rates and turnover and utility user charges.66
The collection of most revenue in South Africa is carried out by the South
African Revenue Service. Currently, the Revenue Service only collects revenue
for the national government, although there is nothing that stops
provinces and municipalities from entering into agency arrangements with
it so that it can collect on their behalf as well.
The exercise of subnational revenue-raising powers can only be implemented
subject to the enactment of enabling legislation by the national
government. The enactment of this legislation in South Africa has taken
quite a while, although it has happened. The Property Rates Act is currently
being phased in and is envisaged to take a period of seven years before
it is fully phased in. The Municipal Fiscal Powers and Functions Bill is
still being developed, as required in Section 229 of the Constitution, while
the Provincial Tax Regulation Process Act only came into effect in 2001.
All these pieces of legislation give certain discretion to the national minister
of finance and, to some extent, local government with respect to the
exercise of revenue-raising powers by subnational governments.
In general, South Africa’s intergovernmental fiscal relations are characterized
by relative centralization on the revenue side and highly decentralized
expenditure responsibilities. Although expenditure on the delivery of social
services constitutes about 89 percent of total provincial spending, these services
generate very little in terms of revenue. Unable to raise adequate revenue
from their assigned taxes, in order to achieve their constitutional
mandate, the provinces have come to rely heavily on intergovernmental
transfers (or grants), which make up 95 percent of the total revenue utilized
at the provincial level.
While subnational governments argue that narrow-based taxes limit their
capacity to increase revenue, efficient administration and collection of revenue,
especially by provincial governments, remains a significant problem.
In most provinces, the major revenue-generating departments – public
works, economic affairs, education, health, and transport – lack dedicated
and staffed internal revenue collection units. The establishment of dedicated
revenue collection units is critical for ensuring that fees for services
are adjusted in a timely manner, that due revenues are collected, and that
projections or forecasts of revenues are provided to enhance the budgeting
abilities of provincial treasuries. Over the past decade, most provinces have
rarely adjusted fees and tariffs unless pressured by the national government,
and they have continued to collect less revenue.
The inability of provinces to maximize collection of own revenue has reinforced
the dependence of the provinces on transfers from the national
government, an outcome that affects expenditure in two important ways.
First, it imposes a constraint on the provinces’ ability to change their
expenditure patterns. Thus, the volume of expenditure incurred by each
274 Bongani Khumalo / Renosi Mokate
Table 4
Tax assignment for various orders of government
Determination of Shares in revenue (%)
Base Rate
Tax collection
administration National Province Local
Direct taxes
1. Taxes on
Income, profit,
and capital gains
2. Payroll taxes
3. Taxes on
Indirect taxes
1. Value-added
2. Excise duties
3. Taxes on international
and transactions
Other revenues
1. Stamp duties
and fees.
Taxes under
direct taxes
and indirect
taxes are
to 1996
100% determined
by the
100% determined
Taxes collected
the South
80.8 1.1 18.1 100
State or provincial
Tax Revenue
1. Casino Taxes
2. Horse Racing
3. Liqour
4. Motor vehicle
Non-tax revenue
1. Sale of noncapital
2. Transfers
3. Fines, penalties,
and forfeits
4. Interest
5. Sale of capital
6. Other financial
Tax bases are
in line with
Section 228
of the 1996
1. Review of
rates carried
out by relevant
treasuries and
submitted to
the minister of
finance for
2. Regarding
non-tax revenue,
rates and
prices wholly
determined by
Relevant line
in conjunction
with the
Republic of South Africa 275
province depends on the volume of transfers. Second, this dependence
means that the national government has significant influence on equity
considerations in spending through the structure of the provincial equitable
share formula. Encouraging provinces to raise more of their revenue
needs could result in provinces’ being better able to alter spending in line
with their local circumstances and priorities.
Therefore, it is important that the implementation of the Provincial Tax
Regulation Process Act, 2001, considers various ways in which the assignment
of revenue powers could incorporate appropriate incentives for provinces
to raise more of their own revenues and that it direct such revenues
towards expenditure programs that support sustainable local economic
growth and development. The act was passed as a necessary legislation to
enable provinces to exercise their revenue-raising powers, as detailed in
1. Regional levies
2. Property rates
3. User fees
(levied on electricity,
water, and
refuse removal
4. Subsidies
and grants
In line with
fiscal powers
and functions
outlined in
Section 229
of the 1996
With the
exception of
subsidies and
grants (intergovernmental
transfers) and
from nationally
raised revenues,
on other tax
sources 100%
determined by
local government
in certain
of rates
on property is
done in accordance
with the
Property Tax
Act (2004)
by revenue
Table 4
Tax assignment for various orders of government (Continued)
Determination of Shares in revenue (%)
Base Rate
Tax collection
administration National Province Local
276 Bongani Khumalo / Renosi Mokate
Section 228 of the Constitution. Although most of the provinces have not
used the act, recent moves by the Western Cape province to impose a fuel
tax and the recent decision by the minister of finance to rescind the
regional services levies accruing to local governments have significant implications
for both local and provincial fiscal sustainability. These implications
make the case that reform of tax assignment at the subnational level
is all the more necessary. The regional services levy was a tax levied on the
payroll bill of business entities.
Intergovernmental Transfers
Intergovernmental transfers (grants) within South Africa’s igfr fall within
two main categories: general purpose grants and specific purpose (conditional)
grants. Given that the expenditure responsibilities of the provincial
and local governments are extensive but their revenue-raising abilities are
minimal, general purpose transfers are intended to reduce fiscal imbalances
arising from these asymmetric revenue-raising capacity and expenditure
functions. Specific purpose grants are intended to correct
interjurisdictional spillovers, meet national redistribution objectives, and
achieve specific national priorities and policies concerning services provided
by subnational spheres of government.7 Provinces and local governments receive
general purpose grants through the provincial equitable share (pes)
and the local equitable share (les), respectively. Both pes and les are formula-
driven and utilize factors such as population, poverty, and household
income and expenditure in determining the per capita share accruing to
each province or municipality.8 Furthermore, the Constitution specifies the
criteria that must be taken into account in allocating the equitable share
to the three spheres of government. These criteria are listed in Section 214
(2) [a-j] of the Constitution of the Republic of South Africa. General purpose
grants can be spent at the discretion of subnational governments.
Since 2000, specific purpose grant allocations to subnational governments,
which are allocated on an ad hoc and discretionary basis, have
represented a growing share of transfers (see Figures 2 and 3). Over the
2001/02 to 2007/08 fiscal years, growth in conditional grants allocated to
local governments averaged over 23 percent compared with the equitable
share’s average growth of 22 percent. In the case of provinces, and over
the same period, growth in conditional grant allocations averaged just over
14 percent compared with the 11 percent recorded for equitable transfers.
To a large extent, the increasing importance of conditional transfers reflects
the proactive policy stance of the national government and the unsustainable
expenditure assignments to subnational governments.
Despite their intended objectives, a number of problems hinder the
effective implementation of conditional grant-funded programs. Most
Republic of South Africa 277
notably, the grant system is characterized by a high number of conditional
grants, many of which are allocated on an ad hoc and discretionary
basis.9 The ad hoc and discretionary nature of allocations in turn creates
unintended, negative consequences. First, aims and objectives tend to be
duplicated, and this exerts an unnecessary administrative burden on implementing
subnational governments. Second, many grants are poorly
designed: they lack clear purpose and either lack measurable outputs or
have outputs or conditions that are unreasonable. Third, the ad hoc and
discretionary nature of grants makes the transfer system less transparent,
an outcome that makes monitoring difficult and that undermines coordination
between policy and budgeting. It also enhances budget game playing
and confusion regarding accountability.
In addition to the above problems, some research studies have highlighted
poor financial and project management skills, a shortage of staff,
and inadequate facilities as hindering the smooth spending of conditional
grants.10 Despite the teething problems identified with conditional grants,
their use in the South African igfr system continues to grow. This growth
is largely driven by the introduction of new basic services programs, notably,
those geared towards hiv/aids prevention and treatment, school nutrition,
and adult basic education programs as well as infrastructure and
institutional capacity-building grants. Conditional grants have also been
used to provide for services that are clearly needed (e.g., early childhood
education), but where the institutional framework for delivery either
needs to be transformed or is not adequately understood and where the
cost structure for providing the service needs to be clarified.
f i s c al equity, e f f i c i e n cy concerns,
and intergovernmental f i s c al transfers
South Africa adopted a formula-based approach to the equitable division
of nationally collected revenue. This approach was proposed by the Financial
and Fiscal Commission (ffc) and takes into account the expenditure
needs of subnational governments as determined by the government in
general. The ffc is an independent body established under Chapter 13 of
the Constitution. Its main function is to make recommendations on the equitable
division of nationally raised revenue among the three spheres of
government (vertical division) and across provinces and municipalities
(horizontal division). The Constitution requires that, before an Act of Parliament
affecting the equitable shares is tabled, the minister of finance
must indicate how the recommendations of the commission have been
taken into account.
The process for the division of revenue starts with the ffc making recommendations
that are subjected to consultations and public hearings
278 Bongani Khumalo / Renosi Mokate
with the national and provincial legislatures and organized local government.
From the government side, these recommendations fit into the
process through the Budget Council and Budget Forum. The Intergovernmental
Fiscal Relations Act, 1997, established these forums, which consist
of the national minister of finance and his nine provincial counterparts
(the Budget Council). The Budget Council and organized local government
constitute the Budget Forum. These two then make recommendations
to the Minister’s Committee on the Budget, which, in effect, is a
subcommittee of the Cabinet chaired by the minister of finance and makes
recommendations to the Cabinet on the final budget allocations. Once the
division of revenue is finalized, a Division of Revenue Bill must be tabled to
be passed by Parliament. The bill contains memoranda explaining all the
formulas used to determine the allocations, which ffc recommendations
have been accepted, and whether any have not been accepted and, if not,
why not. The payment schedule for transfers is also included. In general,
the ffc’s recommendations have been accepted by the government. The
reason for this is that the ffc has steered clear of making recommendations
on actual allocations and, rather, has focused on the principles that
should guide the determination of allocations. Its recommendations have
also been based on thorough and sound research and analysis, taking into
account best practices on igfr matters.
An interesting aspect of the system as it has evolved is that, while the horizontal
division is formula-driven, the vertical division is determined
through a political process based on the government’s priorities for the
medium-term expenditure cycle. The pool of revenue available for sharing
among the provinces (and municipalities) is thus predetermined. In the
last couple of years, some quarters have raised concerns about the objectivity
of the vertical division, especially with respect to the transparency of the
issues surrounding the vertical division. The Select Committee on Finance
of the National Council of Provinces (ncop) has asked the ffc to comment
on the vertical division. This is in spite of the fact that, in its response
to the commission’s very first recommendations, the government adopted
an approach that implied that the vertical division was a political process
and could not be determined through a formula. Whether such an approach
might compromise the government’s power to determine and
resource its priorities is still subject to intense debate.
Once the vertical division has been established, the next step is the
horizontal equitable division of revenue among the nine provinces and
284 municipalities. This is followed by other allocations in the form of conditional
and unconditional grants to the provinces and municipalities. The
intergovernmental fiscal relations system in South Africa is structured in
such a way that subnational governments (provincial and local) are mandated
to deliver most basic social services. Although in terms of revenue
powers, the fiscal autonomy of the provinces is very limited, this is not the
Republic of South Africa 279
situation with local government. Thus, vertical and horizontal imbalances
exist due to the nature of the assignment of revenue sources and the vast
variation in fiscal capacity, especially in the local government sphere. Generally,
subnational governments are empowered to determine their own resource
allocation decisions in the context of the government’s broad,
medium-term, strategic objectives.
Currently, a number of conditional grants flow to provinces and municipalities.
Some of these are block grants, while others are specific purpose
grants.11 Generally, conditional grants have been problematic, and a comprehensive
review of these grants is currently under way to find out
whether they follow an appropriate framework/design. The review is being
carried out by both the ffc and the National Treasury (the two institutions
are working independently on this review).
The vertical division of revenue among the three spheres of government
involves a policy decision that reflects the priorities of the government over
an mtef period.12 The horizontal division of revenue is formula based and
takes into account demographic patterns and broad indicators of need. The
provincial equitable share formula is specified as follows: A = E + H+ B + P
+ EA+ I, where A is the allocation per province, E is the weighted share of the
province’s school-age population, H is the share of the population of the
province without medical aid, B is the share of population for the province,
P is the weighted provincial share of population living in poverty, EA is the
share of the province in economic activity, and I is an amount allocated
equally across provinces for governance costs.
The local government’s equitable share formula takes into account basic
municipal services, the number of poor households, the fiscal capacity of a
municipality, and an allocation for the cost of governance based on the
number of poor households in the municipality. The formula is driven by
the demographic patterns in the country and captures the need to finance
the constitutionally assigned functions of subnational governments.
In general, significant fiscal disparities are driven to a large extent, but
not exclusively, by differences in costs and capacity in the production
and delivery of public services. These are a matter of policy concern, and
mechanisms are being investigated to address them. Recently, there have
been comprehensive reviews of the fiscal frameworks of both the provincial
and local government levels together with the relevant revenue
allocation formulas. The reviews were conducted independently by the
National Treasury and the ffc. The outcome of both reviews was that the
recommendations of the ffc that were limited to the data that are used
for different components in the pes and the structure for the les were
all accepted, although the implementation will be phased in as the
relevant data become available. With respect to the les, the structure
that has been adopted is a component-based structure that mirrors that
of the pes.
280 Bongani Khumalo / Renosi Mokate
In general, the revenue-sharing mechanism ensures that the fiscal
gap between revenue and expenditure responsibilities for sub-national
governments is reduced. The formula also addresses horizontal disparities
within the spheres. However, the South African approach is not an
equalization approach but, rather, an equitable sharing of nationally
raised revenue.
financing capital investment
It is the government’s goal to expand investment and spending on capital
to boost economic growth and employment creation and to improve service
delivery. The critical question is the assignment of responsibilities
between different role players. In particular, the question concerns defining
the role that government needs to play in terms of financing capital
expenditure. In terms of funding, the government is driven by spending
priorities and functional responsibilities that each sphere of government
has to meet, taking into account policy changes. This is done through
intergovernmental transfers. In the last five years the government has
embarked on a program to accelerate investment in infrastructure. The
program incorporates what is known as the extended public works program,
which requires that infrastructure projects incorporate employment
generation by utilizing local people through labour-intensive
methods. The beneficiaries must include women and other disadvantaged
groups. The extended public works program extends beyond infrastructure
programs as it includes other activities, such as home-based
care for hiv/aids sufferers and so on.
A question that arises relates to how borrowing can be used to finance
capital expenditures. In relation to this question, it can be argued that a
Table 5
Vertical fiscal gaps
Total revenue collected
in millions of rands
Total revenue available,
including net transfers for
that level of government
in millions of rands
in millions of rands
National 369,869 283,113
state/provincial 5,663 205,367 204,869
Local 72,900 8,100 86,000
All orders
Republic of South Africa 281
sound revenue base among governments is crucial before they can start
borrowing. The current situation in South Africa is one in which provincial
governments have limited borrowing powers, although the Provincial Borrowing
Powers of Provincial Government Act has been in place since 1996.
Generally, provinces raise an insignificant amount of revenue relative to
their expenditure needs. However, local governments raise a substantial
amount of revenue relative to their expenditure needs and, therefore, exercise
significant borrowing powers.
Increasingly, policy makers realize they need to distinguish among capital
investments in the local sphere. Investment in new infrastructure and
capital expenditure on maintenance need to be taken into account as
discrete components. It is important to ensure that capital investment also
takes account of maintenance needs for existing infrastructure. For
example, there has been a significant focus on the establishment of new infrastructure
to address the backlogs that were created under apartheid.
There is a growing recognition that, as new infrastructure was created, not
enough attention and resources were provided to maintain already existing
The lack of coordination in planning and implementing large capital investment
projects is another matter of concern. For example, the rapid-rail
project (Gautrain) is a provincial project, whereby the province of Gauteng
will receive some funds from the national government for constructing the
Gautrain. However, the implications of the project for the other spheres of
government have not been addressed. For example, it will require local
government to provide ancillary infrastructure such as feeder transportation
and amenities at the stations. This unintended cost for local government
has not been taken into account.
The government’s role needs to focus on helping those municipalities
that are not economically affluent and are therefore unable to raise project
financing through the capital markets. It is generally acknowledged that
the national government has an important role in terms of financing but
that it should not be expected to entirely absorb financing as the specific
province needs to take full responsibility. An additional question relates to
whether there are mechanisms in place for provinces to consult with the
national government before they initiate a large project that has significant
national or regional implications. The government is in the process of establishing
mechanisms that would guide the process on those issues, particularly
as equitable share transfers do not cater to huge investment projects.
In conclusion, it is important to take into account the need to synchronize
funds (expenditure versus revenue) with mechanisms to deal
with municipalities that have structural problems. It is a fact that municipalities
are the source of economic activities. Therefore, there may be a
need to review the pool of funds that goes to municipalities in the form
282 Bongani Khumalo / Renosi Mokate
of the equitable share. For the provinces, there is a need to align provincial
and national priorities on capital expenditure. Finally, there is
a need to investigate whether the national government should develop
alternative funding vehicles other than intergovernmental transfers
and borrowing.
institutional d imension and corruption
Appointments and Termination of Services
All spheres of government have the right to appoint their own personnel
without a directive from another sphere. The hiring and firing of staff
happens within the context of national legislation such as the Labor Relations
Act, 1988, the Basic Conditions of Employment Act, and the Skills
Development Act.
Secondment also exists in the system, taking the form of advisory teams
in cases of glaring gaps in human resource capacity. Apart from this, at the
very senior executive management level (e.g., deputy director generals and
director generals/superintendents), secondment also takes place, particularly
where there is a dearth of leadership.
Currently, there is a dualistic public service. National and provincial
conditions of service are governed in terms of a single law and policy,
while the local sphere has its own separate policy and laws regarding conditions
of service. Generally, it is felt that municipal employees have access
to relatively better conditions of service (remuneration and other
allowances) than do employees in the national and provincial spheres.
This is particularly true with respect to senior management at the local
sphere (e.g., municipal managers).
Despite the dualistic approach, in general the conditions of employment
and related matters in South Africa, both in the private and public sectors,
are governed by the overarching labour legislation indicated above.
Autonomy at Each Level of Government
Each sphere of government is autonomous and, thus, retains an independent
right to hire and fire staff. There is also a separation of powers between
the judiciary, the executive, and the legislature.
Nevertheless, there is a systematic process that allows for intervention in
one sphere by another and that is governed by law. Sections 100 and 139
of the Constitution enable the national and provincial spheres to intervene
in the affairs and the administration of a province (and a municipality) where
there is evidence of failure to deliver on mandates. It is important to note
that this form of intervention is temporary in nature. However, legislation
Republic of South Africa 283
does permit the intervening sphere to rectify the situation, and, in the case
of municipalities, measures may include firing or dissolving a council. This
is done on a case-by-case basis, depending on the merits of each scenario.
What often emerges as a potential threat to autonomy, particularly of
subnational government, is the issue of unfunded and underfunded mandates.
In principle and law (the Division of Revenue Act), funds should follow
function. However, in practice this principle is sometimes violated,
especially in incidents where the higher sphere lacks trust and confidence
in the subnational governments, particularly in their ability to plan, prioritize,
and spend resources. It also results from a lack of clear policy frameworks
on the assignment of powers and function, especially where such
powers and functions are concurrent in nature. This can lead to a lot of
frustration within the system. However, a framework for the efficient and
effective assignment of powers and function is currently being developed,
and it is anticipated that these problems will be dealt with in a more systematic
and controlled manner than is found in the ad hoc and discretionary
approach that has characterized the system thus far.
A matter related to unfunded mandates involves the fact that, quite often,
municipalities have received qualified financial reports in cases where they
have borne expenditure for functions that are not assigned to them by the
Constitution. Similarly, there are challenges with respect to concurrent functions
such as education and health. The national government sets policies,
which are often input norms and not output based. Due to the lack of sufficient
accuracy in the costing of services, this ultimately results in underfunded
mandates. In this way, the autonomy of a subnational government to
deliver services based on its own priorities may be largely compromised.
Corruption and the Use of Resources
The Public Finance Management Act (pfma) and the Municipal Finance
Management Act (mfma) were introduced to repeal the Exchequer Act
in order to modernize public financial management and to increase
public accountability.
The pfma has provided a solid background for a good mfma. The
mfma is considered to be more solid and comprehensive in some areas
where the pfma is silent. The government has indicated a desire to
strengthen the pfma in areas that were not very tight, such as supply chain
management. These two pieces of legislation apply to the financial management
practices in the provincial and national governments (pfma) and
in local government (mfma). They empower the authorities to hold public
officials accountable, provide checks and balances in the utilization of
public funds, and detail sanctions in case of violation of the law, including
imprisonment for offences deemed to be very serious.
284 Bongani Khumalo / Renosi Mokate
One of the outstanding pillars of South Africa’s igfr system is the auditor
general, who audits government departments and bodies across all
three spheres of government. However, the major weakness is that the auditor
general’s reports are often released a year after the incidents have
taken place, thus providing an opportunity for correcting future encounters
rather than for dealing with issues as they happen. The audits have
also tended to focus too much on financial management issues and the accuracy
of financial statements rather than on the overall performance of
the government. In the future, however, the audit process will focus more
on the performance of state institutions.
By law all government departments and agencies must have internal audit
functions. These are aimed at assisting management in identifying weak
management systems, which are potential areas for fraud and corruption,
and developing corrective systems where risks appear. Significant attention
is often given to fraudulent and corrupt activities in the government rather
than in the private sector and multinational corporations. The government’s
other fraud and corruption strategies include toll-free numbers,
bodies such as the Scorpions and the National Prosecuting Agency, Anti-
Corruption Summits, the Whistle Blowers Act, and the encouragement of
the development and implementation of fraud prevention plans.
The Constitution establishes the Parliament, which serves an overarching
oversight role on government activities and programs. The Parliament has
sectoral committees that focus on specific areas (e.g., education, finance,
etc.). The National Council of Provinces has committees that mirror those
of the National Assembly. In some instances, joint committees are established
to increase the effectiveness of the oversight role (e.g., the Joint
Budget Committee). One issue that is clear is that a significant amount of
work still needs to be done to ensure that legislatures and various committees
are able to competently and robustly take departments to task in key
areas of failure. This requires, among other things, that the committees be
given adequate capacity to undertake rigorous independent research into
the activities of the departments. Improving the oversight role of all the
legislatures is an ongoing process.
South Africa’s system of intergovernmental relations is still evolving as the
country is still a young democracy. The clarity with which powers and functions
are defined in the Constitution safeguards the country against arbitrary
reallocations of functions. Nonetheless, there have been some shifts
Republic of South Africa 285
in functions over the past ten years, such as the reallocation of social security
grants from the provincial governments to the national government
and the reallocation of primary health care from local governments to provincial
governments. A framework has been formulated for the effective assignment
of functions, and it ensures that the assignment remains true to
the spirit of the Constitution and that principles such as funding follows
function are adhered to. Issues of public accountability, anti-corruption,
and fraud prevention are important elements that are being inculcated
within South Africa’s democratic system.
1 See South African National Treasury, Intergovernmental Fiscal Review (Pretoria: South
African Government Printers, 2003).
2 See South African National Treasury, Budget Review 2006 (Pretoria: South African
Government Printers, 2006).
3 Ibid.
4 See Financial and Fiscal Commission, Annual Recommendations, Financial and
Fiscal Commission, Midrand, 2002.
5 Ibid.
6 Municipalities derive most of their revenue from tariffs on utilities, in particular water
and electricity. It is important to highlight that the electricity distribution industry
in South Africa is undergoing reform. The reforms will involve a movement
away from the current scenario, in which some municipalities distribute electricity
to consumers, to a scenario in which an electricity distribution holding company –
through regional electricity distributors – will be in charge. The amount of revenue
available to originally distributing municipalities may be affected and, therefore,
total revenues available to municipalities in the form of surpluses arising from the
sale of electricity.
7 W. Oates, Fiscal Federalism (New York: Harcourt Brace Javanovich, 1972).
8 Detailed explanations of the revenue-sharing formulas are provided in Annex E
of the Budget Review on an annual basis. The explanatory memorandum for these
formulas also captures revisions to the input data that occur either as the result of a
new census or new survey data, such as data on medical aid to the population with
respect to health, data on school enrolments in the provinces, or new poverty data
with respect to basic services for the local government.
9 According to the Division of Revenue Act (2005), provincial and local governments
administered more than twenty-five grants during the 2005–06 fiscal
10 See, for example, A. Hickey, “Provinces Improve Spending on Conditional Grants
for hiv/aids Health Programs,” Budget Brief of the aids Budget Unit, Institute
for Democracy in South Aftica, 2003.
286 Bongani Khumalo / Renosi Mokate
11 The Division of Revenue Act (the legislation that deals with the allocation and
equitable division of nationally collected revenue and is tabled annually with the
budget) has very detailed schedules that present the frameworks for the various
conditional grants to provinces and municipalities. These grants are classified into
specific and general purpose grants and then listed in the appropriate schedules.
12 Main budget revenue includes all revenue less payments made to the revenue
pool of the Southern African Customs Union. In 2005/06, this amounted to
12 billion rands. The Southern African Customs Union is the regional grouping
that existed during the Apartheid era and includes Botswana, Namibia, Lesotho,
and South Africa.