South Africa

Abstract

This chapter focuses on contemporary issues in South Africa’s evolving and unique system of quasi-federal governance. In what appears to be an unending and polymorphous federal reforms further complicated by the ongoing COVID-19 imposed fiscal pressures, the chapter explores the rationale and effectiveness of constitutional and fiscal institutions underpinning South Africa’s multi-level governance. Coming from a difficult apartheid past, the country was able to install a “compromised” intergovernmental relations system, constituted by the Constitution as three spheres of government that are distinctive, interrelated and interdependent. The system is supported by a myriad of enabling legislations and institutions to harness accountability and fiscal management as well as the intergovernmental transfers to facilitate delivery of basic services. Notwithstanding the legislative and institutional framework, the system is beset by a gamut of challenges as it evolves in search of an identity. Foremost among these challenges is the absence of political commitment and clear vision for decentralisation, which manifest (and often impinge) in the execution of concurrent, own and delegated expenditure responsibilities and more importantly the assignment of taxing powers across the three spheres of government. As the system continues to mature in search of optimal decentralisation, this chapter argues for a “clearer federalism vision” around which intergovernmental fiscal relations reforms could be anchored.

Book Chapter prepared for the Forum of Federations (May 2020).

1 Introduction

Towards the end of the twenty-first century, South Africa emerged as one of the latecomers into the prevailing international political order of parliamentary democracy, following decades of authoritarian and oppressive rule by the white minority government under the Apartheid era. The country gained international recognition and reverence in 1994 when it managed to achieve a peaceful transition from white minority rule into a multi-party democracy. The reforms that followed soon thereafter sought to steer the country away from the historical centralist system of government into a modern and constitutionally legislated multi-level government that espouses power sharing between the national and subnational governments. This was a great leap from the apartheid system of governance that was organised along racial lines rather than functional linkages and the fundamental principles of a centralised or decentralised political and fiscal regime. The system created superficial tiers of governments that mainly acted as administrative organs of the apartheid system and instruments of state security control. Arguments continue to rage across the spectrum as to whether multi-level government that South Africa adopted has served the country well.

Readers, unfamiliar with South Africa, can identify the country at the southernmost tip of Africa where the Atlantic and Indian Ocean meet. It has a population of just under 60 million. Black Africans constitute 80% of the population, Whites and Coloured (mixed race) account for 9%, respectively while Indians/Asians comprise 2.5%.¹ The composition of the population, as described herein, has had and continues to have a substantial influence on the shape of modern day intergovernmental fiscal relations (IGFR). Post democratic transition decentralisation reforms sought to inter alia unite historically “race demarcated” jurisdictions and entrench equity in the delivery of basic services and the distribution resources and economic activity. Addressing the historical legacy of racial and spatial inequality remains a central sticking point in the organising of constituent units.

Fundamentally, though, the design and structure of multi-level governance is underpinned by the Constitution, which establishes three distinctive, interdependent and interrelated spheres of government. Furthermore, the Constitution introduces a framework for assignment of powers and functions and sharing of nationally raised revenue across the three spheres. These arrangements resonate with the dominant trend that has emerged worldwide towards decentralised system of governance and fiscal system. In its current form, the South African IGFR system comprises of the national government, nine provinces and three categories or tiers of local government (257 in total), each with specific expenditure and revenue responsibilities. The nature of the fiscal arrangements is such that expenditure responsibilities are highly decentralised while tax powers are centralised. To this end, national government accounts for a lion's share of national revenue and spending while provinces are largely reliant on national transfers for revenue to the tune of over 95% of total revenue. The local government sphere comprises of 257 highly diverse constituent units distinguishable by various characteristics including executive and legislative authority, spatial and socioeconomic conditions, population size and own revenue mobilisation capacity. Municipalities range from those regarded as metropolitan constituencies (with greater national economic significance) to rural local constituencies (with little to zero economic activity).

The size and wealth of provinces or municipality matters little for the influence of national policy and access to resources because the Constitution recognise each sphere and tier of government as an independent constituent unit. All spheres and tiers are overseen by public representative structures elected through “closed party lists” proportional representation system. The system allows every political party which meet registration requirements set by the Electoral Commission to contest for seats or power at every sphere and tier of government thus making government essentially accountable to the legislator and local councils—and ultimately to the electorate. These arrangements are what makes South Africa a rather unique quasi federal state, the so-called administrative federalism, where there is a partial devolution of political, administrative and fiscal powers to the subnational governments. The structure further reflects the dominance of the ruling African National Congress (ANC) party whose traditions are rooted in democratic centralism. This ideological orientation resulted in commentators referring to the South African IGFR system as a “compromise” because of the balance that emerged out of strong arguments for centralisation by the ANC and push back for federalism by small political parties during the pre-1994 negotiations. Haysom (2016), notes that discussions about devolution of powers to subnational government during the democratisation process were polarised along racial lines with those who benefited (Whites) from Apartheid needing to retain formal and informal pre-1994 structures (as federal fiefdoms) while those who were concerned about transforming the institutions and patterns of privilege (Blacks) wanted a unitary state. The government system has remained stable since then, but is constantly challenged to reflect the de facto ANC centralist aspirations.

Beyond, political and citizens accountability, the Constitution provides for a number of levers to promote accountability. The levers include independent institutions supporting democracy such as the Human Rights Commission, the Auditor General, the Public Protector, the Gender Commission and the Financial and Fiscal Commission, which makes recommendations on key constitutionally defined areas, and report to Parliament and Provincial legislatures. These institutions are particularly created to foster progressive realisation of basic rights (i.e. right to food, water, housing, health care, etc.) to the citizens as enshrined in Chapter 2 of the Constitution (The Bill of Rights). South Africa became one of the few countries in the world to introduce justiciable socioeconomic rights. This means that citizens can turn to the courts as an additional layer of accountability to enforce state provision of basic rights. One of the hallmark successful cases of enforcing state provision of basic rights was recorded in 2000 when the Constitutional court was called upon to rule on the failure of the state to deliver housing to a homeless elderly. Court cases often have far-reaching implications on the design of intergovernmental relations and ignite debates on separation of powers between the executive, legislature and the judiciary.

In terms of economic attributes, South Africa is an upper middle-income country with per capita income of $6,300. While this income level is dwarfed by that of developed countries (e.g. OECD at $40, 300), it is considerably higher than the sub-Saharan Africa average ($1, 500). Unlike many other African countries, the South African economy is relatively diversified and less depended on natural resources. The mining industry has played a crucial role in shaping the South African economy, but its contribution to gross domestic product (GDP) has declined since 1994 (World Bank, 2018). Mineral exports, however, remain the largest earner of foreign exchange reserves, with China having become the largest trading partner, as it continues its crusade for rare earth minerals. A combination of sluggish commodity prices, adverse weather conditions and the aftermath of the 2009 financial crises as well as years of internal fiscal mismanagement have landed the country in a precarious macroeconomic situation. The country is battling deteriorating macroeconomic conditions, with unemployment sitting at 29% and debt to GDP ratio expected to reach 71% by 2022 (National Treasury, 2018). The declining national fiscal position affects the majority of the grant reliant subnational governments, which continue to propagate for a bigger slice of national tax collections rather than taxing powers. To compound the country’s problems, South Africa is now saddled with having to deal with the negative ramifications of the COVID-19 pandemic which exerts untoward pressure on the country’s intergovernmental system.

The rest of the chapter is organised in the following way: Sect. 2 discusses the structure of government followed by a discussion of taxation powers in Sect. 3. Section 4 outlines fiscal transfers and revenue transfers while Sect. 5 discusses macroeconomic and fiscal policy management. Having acquired a grasp of the working of South Africa’s intergovernmental fiscal relations, we offer a preliminary discussion of the ongoing implications of COVID-19 on the country’s version of fiscal system including response measures put in place in Sect. 6. Finally, Sect. 7 concludes the chapter by highlighting successes and challenges of fiscal federalism in South Africa.

2 The Structure of Government

South Africa’s system of multi-level government derives its structure and shape from Section 40 of the Constitution. Government is constituted as comprising three arms of the state and three spheres of government (national, provincial and local spheres) which are distinctive, interrelated and interdependent. These three rather incompatible elements of the system are most evident in the institutional design for democracy and power sharing, exemplified by (a) the establishment of democratically elected representative institutions in each sphere of government; (b) the division of functions among the spheres of government with many important functions allocated concurrently to the national, provincial and, sometimes, local governments; (c) revenue sharing arrangements prescribed by the Constitution and (d) the constitutional recognition of the importance of intergovernmental arrangements, capped by a second chamber, the National Council of Provinces, which gives provinces a direct say in national decision-making (Murray, 2009). At the advent of democracy in 1994, nine provinces were created alongside three categories of wall-to-wall municipalities, namely:

• Category A or Metropolitan municipalities: A municipality that has exclusive municipal executive and legislative authority in its area (8 in total).

• Category B or Local municipalities: A municipality that shares municipal executive and legislative authority in its area with a category C municipality within whose area it falls (205 in total).

• Category C or District municipalities: A municipality that has municipal executive and legislative authority in an area that includes more than one municipality (44 in total).

Prior to 2000, there were 857 municipalities that included several transitional local councils in former homeland areas (Blacks only localities under the Apartheid system of separate development). In 2000, 284 wall-to-wall municipalities were established. The demarcation process in 2005 and 2016 subsequently resulted in some municipalities being amalgamated as part of the rationalisation agenda. This agenda resulted in the current composition of eight category A (metros), 205 category B (local) and 44 category C (district) municipalities (Financial and Fiscal Commission, 2011).

The establishment of fully-fledged representative institutions in each sphere and the Constitution’s recognition of the functional and institutional integrity of all governments ensures that each government at every level has the constitutional status and institutional basis for its legislature and executive to function as coherent bodies. This is in line with the age-old principle of trias politica, which advocates that state power should be dispersed among the three existing arms. Hence, the Constitution provides that there should be separation of powers between the legislature, executive and the judiciary, with the necessary checks and balances to ensure accountability, responsiveness and openness (Munzhezdi, 2017). In this way, each organ of the state is able to respond to citizens’ needs and exercise the level of discretion necessary to make appropriate decisions on matters under their responsibility. In particular, as distinct political entities, provinces and locals are expected to develop policy, to legislate and to manage their own administrations. However, in doing all these things, they are required to work co-operatively and adhere to national policy imperatives where applicable.

In keeping with the principle of separation of powers, the Constitution establishes three independent arms of government, namely, the legislature, executive and the judiciary. Table 1 gives a schematic representation of the composition of the three arms of government.

Table 1 Arms of state and composition

The legislature is made up of the National Assembly and the nine provincial legislatures. They are primarily discharged with the responsibility to represent the aspirations of the electorates (decide on matters of national interest) through election of the President, passing of national legislations and overseeing the executive arm in their role as implementers of laws and delivery functions. The cabinet as constituted by President, Deputy President and national minister represent the executive arm and is duly accountable to parliament for the performance and implementation of their functions both as a collective and individually. The judiciary is accorded the ultimate independency and is expected to apply the laws of the republic impartially and monitor the application of separation of powers. Reviews conducted by Siyo and Mubangisi (2015), conclude that South Africa’s Constitutional and legislative framework sufficiently insulate the judiciary from improper influence. Notwithstanding, the dejure power sharing arrangements, subsequent section will however illustrate that power relations between the legislature and the executive defy the doctrine of separation of powers. This is a common challenge across many democracies that arises from the skewed distribution of budgeting powers and the party-political hierarchy dynamics between the legislature and the executive.

The principles of separation of powers further emphasise the need to allocate specific powers and functions to each sphere of government and each with clear roles and responsibilities. The Constitution of the country specifically allocates powers and functions to the three spheres, emphasising the obligation to cooperate with one another when undertaking their respective mandates. Some of the powers are exclusive in nature, meaning that only one sphere is responsible for setting policies, funding and implementation, while other functions are concurrent or shared. Function of exclusive national competence includes defence, macroeconomic management, foreign affairs, higher education, criminal justice system (safety and security) and administration and tax collections among others. National exclusive functions typically require strong financial muscle, central coordination and uniformity but also absorb a significant portion of the national budget—which subnational government can barely afford. Provincial functions of exclusive competence include provincial roads, ambulance services and provincial planning.

The bulk of the powers and functions, especially, those concerned with redistribution and transformation are allocated concurrently between national government and provinces and as well as between provinces and local government—as per Schedules 4 and 5 of the Constitution.

Sections 44 and 104 of the Constitution respectively give the national Parliament and provincial legislatures the authority to legislate on matters listed in Schedule 4. Sections 85 and 125, which deal with the executive authority of the national and provincial governments, confer the power on the national and provincial executives to implement such legislation. Local government is not expected to engage in any substantive law making except in cases of passing by-laws to manage their local spaces (Schwella, 2016). Table 2 gives an overview of the current assignment of the key functions across the three spheres (see Table 9 in Annexure A for a detailed outline of concurrent functional assignment). The governance system clearly bears the hallmark of a federation.

Table 2 Assignment of major exclusive and concurrent functions across the three spheres

As can be deduced from Table 1, national government wields legislative and executive authority over provincial and local government shared area of responsibilities. The established practice in the execution of concurrent responsibility and as prescribed by the Constitution is that national government is responsible for providing leadership, formulating policies, regulations and norms and standards, support subnational governments and monitor implementation. Provinces and local governments are mainly responsible for implementation in line with the nationally determined frameworks. However, in some cases (such as water and electricity) national government is directly responsible for bulk supply while local government takes care of reticulation to households. To a larger extent expenditure assignments follow the principles of benefit spillovers, redistribution, vertical equity and fiscal efficiency. Functions whose benefits are regional in scope (e.g. education and health) are assigned jointly to national and provincial government while local government retains localised services such as electricity and water (Financial and Fiscal Commission, 2012b).

De Visser (2008) is of the view that only section 156 (4) of the Constitution may be understood as deriving from the tenet of subsidiarity. The section state that “national and provincial governments must assign to a municipality, by agreement or subject to any conditions, the administration of functions listed in Part A of Schedule 4 and 5, which necessarily relate to local government, if (a) that function would most effectively be administered locally and (b) the municipality has the capacity to administer it”. For de Visser (2008), section 156, should be viewed in the context of building a developmental local government rather than a deliberate pursuit for subsidiarity as applied in the European Union (EU) charter. We will illustrate in the subsequent sections that provinces have been reluctant to cede certain powers to local government.

The manner in which concurrent functions are exercised is a cause for ongoing disputes especially because the Constitution confers provinces executive powers to co-legislate on functions listed in Schedule 4 (Murray, 2009). The question that arises is whether provinces exercise executive power when executing concurrent responsibilities in which case they are accountable to their legislatures and electorate or exercise a delegated power, in which case they are answerable to the national government. These disputes persist despite there being a cooperative governance framework laid out in the Constitution and subordinate legislations² to foster mutual consultation and decision-making. Much of this quagmire is explained by the skewed distribution of taxation and spending powers—which invariably relegates provinces and majority of local government units to the status of subordinate jurisdictions of national government.

The complex and questionable nature of decentralisation and ambiguities in concurrent power sharing arrangements makes the governance system susceptible to tension and conflicts. Tensions are especially prevalent in the exercise of authority—in its different dimensions, including:

• 1. Political authority—the authority to establish presence in minds of citizens as a central point of decision-making and initiative. Provinces and local governments run a high risk of losing political credibility due to growing incidents of delivery failures and the consequential assumption of responsibilities by national government either through intervention or through tighter control of the transfers. Simeon and Murray (2008) attributes this risk to the inability of subnational government to establish themselves as autonomous and centres of economic power. This assertion maybe overly simplistic however, in that provinces and local government are more accountable to the political party than to the legislature and councils as prescribed in the Constitution. An ANC discussion document on the role of provinces for its 2007 Policy Conference highlighted deep seated uneasiness to provinces arguing that provinces add little value to the democratic project and are simply too costly to administer (ANC, 2007).

• 2. Legislative authority—authority to formulate policies and legislation responding to specific needs and preferences of the citizens and to hold the executive to account. Although provinces routinely bemoan the lack of autonomy to set policies, many have not initiated legislations speaking to their concurrent mandates. National government actively discourages introduction of complementary legislations through informal “non-binding Agreements” but also exerts inordinate influence on subnational policies through nationally led intergovernmental forums. Tension also arises because of asymmetric assignment of functions between Category B and C municipalities. Certain Category C municipalities are authorised to perform functions on behalf of Category B municipalities while other districts have limited expenditure responsibilities despite receiving considerable amount of transfers.

• 3. Fiscal authority—the authority to command resources necessary to facilitate execution of assigned responsibilities.

• 4. Bureaucratic authority—the latitude to actually deliver services to the citizens.

• 5. Intergovernmental authority—the ability to cooperate and coordinate activities across all levels of government irrespective of hierarchy.

Overall, the framework for the assignment of functions has had serious implications for the functioning of the intergovernmental fiscal system in South Africa, with ambiguities and contradictions (see Box 1 for an illustrative case of the complexity with respect to basic education).

Box 1: Complexities of concurrency in basic education delivery

Basic education is a concurrent function shared between national and provincial governments where the former is responsible for policy and the latter undertakes actual delivery. A supporting Act of parliament (Schools Act) makes provision for delineating roles and responsibilities between the national minister and the member of executive council responsible for basic education. The national minister is charged with the responsibility to determine policy on wide ranging matters including guideline criteria for school admission and norms and standards for school infrastructure, capacity of schools and provision of learning and teaching material (i.e. classroom size, learner-teacher ratio, school furniture). Members of the provincial executive are expected to “provide public schools” with funds appropriated for this purpose by the provincial legislature.

Provision of public schools is not well defined, but is interpreted as building of schools according to the infrastructure norms, hiring and firing of teachers and purchasing of learner-teacher support material. This delineation seems straight forward enough for all stakeholders to execute yet delivery of basic education, as a concurrent function is fraught with complexities.

First, national government does not always perform its policy duties as legislation prescribe. It was only in 2013 that legally binding norms and standards for infrastructure were published following protracted court battles. Even after publishing, it became clear that such norms and standards were neither costed nor accompanied by a detailed funding plan. For these reasons, provinces find it easier to deviate from national policy citing a lack of funding. Appointment of teachers is another contentious area. Whereas provinces are in principle responsible for teacher appointment, teacher salaries are determined through a national wage bargaining council. Adhering to learner-teacher ratio norms when personnel costs are determined elsewhere causes frictions in the system. Turning to outputs, the national minister of basic education is held responsible for the performance of the system as whole with matriculation pass rate used as a yardstick. The ministry often bemoans shouldering such a responsibility because it lacks the powers to direct allocation of resources by provinces. At the same time, members of the provincial executive are regarded as being accountable to the provincial legislature rather than the national executive. The challenges experienced in concurrency largely reflects weaknesses in upholding cooperative governance as espoused in the Constitution. Even a clear separation of roles and responsibility cannot achieve desired benefits of decentralisation if there is no harmony between the spheres.

This ambiguity causes misalignment between subnational budgets and national priorities and leads to fragmentation (and fluidity) of functional responsibilities and transfers as national government attempts to usurp subnational functions. There is however no shortage of levers to ameliorate intergovernmental disputes. The Constitutional court is the final arbiter on intergovernmental conflicts, but in the interest of cooperative governance, spheres are implored to resolve differences through intergovernmental forums before approaching the courts—a covenant that has been sustained by dominance of ANC in South African body politics. The emergence of stronger opposition parties is likely to agitate for a clearer decentralisation.

Meanwhile the ANC remains steadfast in their disapproval (interpreted as indecisiveness) for a multi-level system of governance. Their own policy statement states that the “three sphere system is a complex system to operate, which results in inefficiency, overlapping roles, long decision-making processes, weak information flows, and the dispersal of public sector skills and experience within the state. To operate the system requires multiple layers of effective political leadership and highly skilled public servants, huge investments of time in coordination, and very strong intergovernmental processes” (ANC, 2007).

3 Taxation Powers at a Glance

Traditional theories of fiscal federalism prescribe limited tax handles for subnational government despite the compelling evidence that greater subnational government powers improve the benefits of decentralisation. Tax sources that are regarded as suitable for subnational governments are only those whose incidence are local residents, can be administered locally and do not cause problems for tax policy harmonisation, intra jurisdiction competition and macroeconomic management difficulties. Admittedly, tax sources that can pass this test are scarce. Over and above, national governments throughout the world are generally reluctant to assign significant tax powers to subnational governments (Bahl and Bird, 2008). South Africa is no exception: Taxation powers in the country are highly centralised for reasons stated above but also related to the country’s historical context. The country’s troubled history of spatial economic disparities (fiscal capacity) necessitated that government adopts a centralist stance when assigning tax powers in order to drive a national redistribution agenda. Arguably, the de jure tax sharing arrangements were a way for the ANC to retain its aspiration for central control having lost the debate on extreme centralisation.

Section 228 and 229 of the Constitution gives provinces and local government the powers to levy taxes as outlined in Table 3. Provinces are allowed to impose a surcharge on any tax except those restricted by the Constitution (i.e. Corporate Income Tax, VAT and custom duties). The Provincial Tax Regulation Process Act of 2001 (for provincial government) and the Municipal Fiscal Powers and Functions Act of 2007 (for municipalities) further regulate the exercise of subnational tax powers. The two legislations specifically require provinces and municipalities to seek approval for introducing new tax from the Minister of Finance, stating reasons for application, the tax base, desired tax rate and the contemplated collection authority among other things. The absence of locally or regionally suitable new tax sources makes the tax application process superfluous and virtually impossible for subnational government to introduce new taxes. Further, the tax approval requirements reflects signs of mistrust in the capacity of subnationals to handle tax matters responsibly. This is yet another indication of hostility towards multi-level government or federalism. Rao and Khumalo (2000) and Amusa and Mathane (2007) argue that provinces have largely failed to exploit their constitutionally assigned powers. Only two provinces have ever attempted to introduce a Personal Income Tax (PIT) surcharge (Gauteng) and surcharge on fuel levy (Western Cape) since 1994 but the proposals never materialised. Similarly, a proposal to create tax room for provinces made to national government by the Financial and Fiscal Commission³ was rejected on administration and efficiency grounds.

Table 3 Tax powers by sphere of government

The Table above reveals further the stark absence of natural resources-based tax in South Africa despite the country boasting among the world’s largest mineral reserve, especially the Platinum Group Metals (PGMs). Other mineral endowed federations around the world use resource receipts as the primary source of discretionary revenue to subnational government allocated on the basis of derivation principle or fixed share (Bird and Smart, 2002). Mining companies are only liable to standard company income tax (same for all industries) and a 5–7% royalty tax on gross sales collectable by the national government. The decentralisation of resources revenue has been criticised as economically and administratively impractical given that mineral deposits are only concentrated in certain regions whereas mining companies declare profits mostly in the major economic hubs.

The tax bases assigned to provinces are generally narrow and as such they collect very little own revenue as a share of total revenue, averaging around 4% since 1994. Table 4 shows the composition of provincial taxes and the size of collection. Overall, the tax source with the largest base or capacity is motor vehicle licences, whose average share has increased from 46 to 77% of total tax receipts between 2005 and 2013. Taxes as a share of total own revenue amount to 65% (between 2010 and 2013), a slight increase from 61% (between 2005 and 2008). This figure buttresses the view that provinces are administrative, implementing and delivery agents of national government as argued in Simeon and Murray (2008).

Table 4 Average provincial tax (and other revenues) collection by source

Municipalities have broader own revenue base derived from utility fees and surcharges on fees for service rendered and the property rates in particular. The power to levy property rates is only granted to Category A and B municipalities. Property rates are regulated through the Property Rates Act No 6 of 2004, which among other things set the limit on annual rate increases for different types of properties, and outline guidelines for exemption, rebates and reductions. Unlike provinces, this Act provides municipalities some level of flexibility to determine rates in accordance with their respective local circumstances. In addition to property rates, a selected number of municipalities are eligible to a share of the fuel levy as a replacement revenue source for a local business tax (RSC levy) abolished in 2006 for administrative inefficiencies and overlapping with VAT tax base. As can be seen in Fig. 1, taxes constitute approximately 10% of total local government's own revenue. The ability to raise tax revenue and own revenue in general varies markedly across different types and sizes of municipalities. Property rates contribute 17–18% of total revenue for large cities in the urban areas while they account for only 10 per cent of revenue in rural municipalities (Financial and Fiscal Commission, 2019).

Fig. 1

(Source Financial and Fiscal Commission [2019])

Local government own revenue composition

The debates about the devolution of taxing powers to subnational governments in South Africa can best be described as enigmatic, hollow and stop-start. There are a number of contributing factors for this. First, national government is indelibly reluctant to create the fiscal space for provinces and municipalities to at least impose taxes granted by the Constitution. This is of course unsurprising given the ruling ANC’s affinities to centralist ideals. There are fears of losing political grip from building stronger subnational governments through greater fiscal capacity. This is likely to be reinforced by recent events wherein the ANC lost control of key metropolitan municipalities in elections.⁴ The second reason explaining the unwavering position on tax decentralisation lies in the growing incidents of subnational inefficiencies, governance and delivery failures overlaid by claims of growing corruption or perceptions thereof. Fiscal malfeasance weakens the argument for greater subnational tax power and undermines the legitimacy of sub-central units. The third and perhaps most counterintuitive factor is that subnational governments are unwilling to assume greater tax collection responsibilities because of the guaranteed national transfer entitlements. As an illustration, according to the Financial and Fiscal Commission (2014) rural municipalities are under-collecting their potential property rate base by a factor of 50%. A similar study on provinces revealed mixed results showing that rural provinces have a higher tax effort relative to their urban counterparts while others were found to be over-taxing (Financial and Fiscal Commission, 2012a, b).

4 Anatomy of Fiscal Transfers and Revenue Sharing

The design and structure of South Africa’s intergovernmental fiscal transfers and revenue sharing arrangements were shaped in part by economic and political imperatives that prevailed before 1994, key among which was the desire to create conditions for redress and foster equality (racial, gender and space wise). Conscious to the prevailing, historical and deep-rooted economic disparities across the country, the Constitution adopted a socioeconomic reformist approach to the vertical and horizontal revenue sharing model. This was done first by guaranteeing every citizen basic socioeconomic rights, second providing entitlements to the nationally raised revenue and third, obliging each sphere of government to progressively realise delivery of basic rights as per their respective mandates. Sections 214 and 227 of the Constitution specifically state that provinces and local government are entitled to an equitable share of nationally raised revenue. The equitable share is an “unconditional transfer” to ensure delivery of both exclusive and concurrent mandates referred to earlier. Section 214 (1) (c) further provides for additional allocations over and above the equitable share, to the subnational government, to which national government can attach conditions. Conditional transfers in South Africa have been used mainly for two purposes, to aid the implementation of specific national priorities, particularly basic and social services and to address inter-jurisdictional spillovers. The manner in which conditional grants are instituted and implemented is a source of growing tension in the system. These tensions are discussed in subsequent sections.

The vertical and horizontal shares are determined through a criteria outlined in section 214 (a–j) of the Constitution. Factors to be considered include national interest, debt provision, needs of national government and emergencies, the resource allocation for basic services and developmental needs, fiscal capacity and efficiency of the provincial and local spheres, reduction of economic disparities and promotion of stability and predictability. However, the Constitution is not prescriptive on how each of the factors are applied in the division of revenue process across the three spheres. Suffice to point that debt service cost is traditionally treated as a first charge against national revenue. The vertical division of revenue process follows a political process through which the vertical pool is determined by setting national priorities each year. This is part of an elaborate and inclusive budget process which commences with national ministers together with provincial members of executive council (for a particular function) setting spending priorities for the year through consultative forums called MINMECs (Ministers and Members of Executive Council). Adopted decisions from MINMECs are filtered through a number of committees where the finance minister’s committee on budget and the Budget Council represents subnational governments until they reach final ratification.⁵ There are however concerns that the consultation process with subnational government is superfluous as it tends to overlook provincial policy proposal. To be fair, even the quality of subnational representation during the policy debates is questionable.

It is worth noting that the respective baseline vertical pools of the three spheres results from historical patterns of expenditure and not necessarily estimates of expenditure needs based on responsibilities. Once the vertical share for sphere is determined, it is divided horizontally across the 9 provinces and 257 municipalities through a formula driven process. The principle underlying both the vertical and the horizontal allocations in particular is equity and redistribution, expressed through a range of indicators in the respective transfer formulae of provinces and municipalities.

Turning to the vertical allocation, a national legislation called the Division of Revenue Act outlines the amount of funding allocated to each sphere on an annual basis. Throughout the years since adoption of the new system national government has been commanding the largest share of revenue available for sharing across the three spheres. As can be seen from Table 5 the national share of revenue has remained higher than that of provinces and municipalities even though it is declining—to the benefit of local government. Notwithstanding the declining national vertical share subnational governments consistently lament their shares as inadequate insinuating possible existence of vertical fiscal gaps. Arguments for bigger subnational vertical pool are, however, not informed by quantitative estimates of expenditure needs from the de facto assignment of expenditure responsibilities. To be sure, even the roles and responsibilities per concurrent functional areas are not clearly defined.

Table 5 Vertical shares of available national revenue—%

The absence of an approach to translate expenditure responsibilities into expenditure needs causes constant frictions and misunderstandings between levels of government. Subnational governments consistently bemoan the current level of funding while the national government argues that the current level of financing is more than adequate. The ongoing rounds of discussions and positions papers from either side on what to do about more financing via additional taxes, tax sharing or other forms of transfers turns out futile because there is no consensus on what expenditure needs of national and subnational governments are. Subnational governments make countless formal and informal submissions to the Financial and Fiscal Commission about the inadequacy of their transfers without quantitative backing of expenditure needs. This is not to say, there are no vertical fiscal imbalances. Until such time, overlapping responsibilities are resolved, this question shall remain a moot point in South Africa.

Disparities are more prominent horizontally, in terms of both fiscal capacity and access to services. Some of these imbalances are historical but have also been perpetuated through a combination of lacklustre spending performance and funding inadequacies. Underspending is a common occurrence across all spheres but is prevalent at subnational governments (see Auditor General [2017]). Figures 2 and 3 illustrate the prevailing economic and fiscal disparities across the nine provinces. Three provinces (Gauteng, Western Cape and KwaZulu-Natal) that host the majority of metropolitan municipalities account for two-thirds of GDP. As can be seen from Fig. 2 both Gauteng and Western Cape Province boast the highest GDP per capita while at other extreme Limpopo and Eastern Cape provinces (homes to the racially segregated territories under Apartheid) have the lowest GDP per capita. By implication, a significant proportion of taxes are collected in the top three provinces. Approximately 48% of Personal Income Tax (PIT) were obtained in Gauteng province. Such acute disparities partly derive from skewed natural resource endowments as well as historical Apartheid spatial planning practices (Human Sciences Research Council, 2017). Post-Apartheid intergovernmental fiscal relations reforms and the ANC’s insistence on central control was in part influenced by these disparities. The inherited spatial and racial inequalities called for a stronger national government to effect redistribution through transfers to weaker subnational governments.

Fig. 2

(Source Statistics South Africa [1996, 2016])

Gross regional product per capita by province—1996 and 2017

Fig. 3

(Source Human Sciences Research Council [2017])

Personal income tax assessed per province—2015

Service access and provision disparities are also prevalent across the local government constituent units. Table 6 shows service provision variation in two key functions (water and electricity) assigned to Category A and B municipalities. Category B municipality is further disaggregated into four sub-categories to reflect nuanced spatial characteristics. Metropolitan Municipalities and secondary cities typically have higher service provision levels compared to the small rural town type of municipalities (B3 and B4 in the table). The table further reveals an important implication of asymmetry in the assignment and provision of electricity function. Electricity access is almost identical across all municipalities despite the relative variation in the capacity to deliver. This is explained by active involvement of a national electricity supplier (ESKOM) in the reticulation of electricity in the rural parts and semi-urban areas of different municipalities. Electricity reticulation is an exclusive function of municipalities but ESKOM performs the function in most municipalities that lack the technical capacity to do so. Several years of discussions to devolve the responsibility back to municipalities have been fruitless to date, depriving those municipalities of a potentially important revenue source.

Table 6 Household access to basic service by category/type of municipality—2016

The extent of regional disparities inherited from South Africa’s Apartheid past necessitated that fiscal transfer formulae for horizontal allocations are designed with a view to redistribute revenue collected nationally to subnational units with poor socioeconomic attributes and low fiscal capacity. It is for this reason that the Constitution guarantees each sphere an “equitable share” of nationally raised revenue. Government uses the Provincial Equitable Share (PES) and the Local Government Equitable Share (LGES) formulae to determine the respective horizontal allocation for the nine provinces and the 257 municipalities. These formulae were proposed by Financial and Fiscal Commission in 1996 and have been operational since then albeit subjected to periodic reviews. It is worth noting that the PES and LGES are not traditional equalisation grants in the true sense, because of the limited subnational tax powers highlighted earlier. The main thrust underlying these transfers is redistribution and to equalise difference in expenditure needs where the primary need indicator is population rather than an explicit service delivery needs.

The PES and LGES formulae as allocation tools mainly comprises various components as relative indicators of functional responsibilities and need at a given period, across all subnational units. Each component is assigned a weight to express the relative significance of a particular function or need. When combined these components complete the structure of the formula and ultimately determines each province and municipal share of the horizontal pool.

The provincial equitable share formula is made up of six components that resemble constitutional functional assignments. Each component is assigned a weight that is informed by historical expenditure patterns. The components weightings in the formula are neither indicative budgets nor guidelines on how much should be spent on functions assigned to each province or collectively. For every component, each province is allocated its proportional share relative to national total so that the allocation is given as follows:

$$P_a = \sum {(E_i^{48} + H_i^{27} + B_i^{16} + P_i^3 } + E_i^1 + I_i^5 )$$

where P_a is the total provincial equitable share and E_i⁴⁸ is the education share of province i (Table 7 describes the full structure of the PES).

Table 7 Structure of the PES formula

The LGES formula on the other hand slightly resembles a traditional equalisation grant because it attempts to capture local expenditure needs and fiscal capacity. The formula takes the asymmetric functional assignment, explained earlier, as an inbuilt constraint and allocates resources to fund delivery of basic municipal services through the basic, institutional and community services components. The LGES formula is given as follows:

$${\text{LES}} = {\text{BS}} + ({\text{I}} + {\text{CS}})^* {\text{RA}} \pm {\text{C}}$$

Table 8 gives a detailed description of each component.

Table 8 Structure of the LES formulaFootnote

The current structure of the LGES resulted from a review conducted in 2011 that sought to update the formula with latest census data and improve its redistributive ability.

A key question that arise with every transfer formulae is whether they are able to achieve the desired objective. As mentioned earlier, subnational governments in South Africa are consistently questioning the redistributive powers of the horizontal transfers. In particular, rural subnational units claim that the formula ignores historical social and economic disparities and infrastructure backlogs, which result in uneven service standards between provinces. Figure 4 suggests that the PES formula makes no discernible variation in allocations to provinces commensurate with provincial patterns of disparities. Per-capita allocations are almost even across all provinces. Attempts to enhance the redistributive capacity of the PES by incorporating the poverty component have yielded insignificant results not only because the weighting attached to the component is small but also because poverty is increasingly urbanising (poor people are migrating to urban provinces in search of opportunities). This is a function of over-reliance on demographic variables as need indicators. Up to 90% of PES allocations are driven by the proportion of each province’s share of various population groupings such as school-age population, proportion of poor people and people without medical insurance. Similarly, the economic activity component fails to capture the essence of equalisation principles in that each province's share of this component is progressively determined rather than regressively as is done in traditional equalisation grants. In other words, the higher a province’s contribution to economic activity is the higher the allocation. Thus the economic activity component constitutes a revenue sharing mechanism, albeit, poorly designed.

Fig. 4

(Source Authors’ calculations)

Per capita PES allocation

The design of the provincial equitable share formula and its outcomes (invariable per capita allocations) is partly a direct reflection of the centralised nature of taxation which obviate the need to factor in fiscal disparities when determining PES allocations. However, those with opposing views suggest the disregard of expenditure needs disparities in the PES formulation prejudice rural and poor provinces, whose developmental needs are lagging and perhaps the cost of delivering services are relatively higher. Little effort has been made in this regard to measure expenditure needs or obligation of provinces. A 2001 proposal by the FFC to determine allocations on the basis of a set of costed norms was met with resistance and rejected as discussed earlier.

Contrary to the popular perception, the Financial and Fiscal Commission (2013) suggests that the PES formula is horizontally redistributive. Figure 5 shows this by estimating the average amount of revenue provincial government can potentially generate given the respective size of their economies⁷ and the amount by which the revenue should be adjusted to meet current PES funding levels. All provinces with the exception of Gauteng and Western Cape (two of the richest provinces) are unable to meet their funding unless redistribution takes place. In contrast to the PES, the LGES is generally regarded as redistributive. A 2011 review resulted in a significant shift in allocation from the urban to the rural municipalities by increasing the poverty threshold and changing the structure of the formula. The LGES share of rural towns increased from 20 to 23% in one go with some municipalities failing to absorb the sudden increase in spending allocations.

Fig. 5

(Source Financial and Fiscal Commission [2013])

Hypothetical horizontal fiscal gap—(2013)

Seemingly, horizontal equity is not an overwhelming area of contention in South Africa’s quasi federal system. In the main the equitable share transfers suffers from flaws in the design of other basic pillars of South Africa’s decentralisation system. This relates to the perceived lack of discretion by provinces in budget allocations and misalignment between national policies and provincial budgets within the context of concurrent functions. Provinces perceive the earmarking of PES funds for national priorities and the subsequent expenditure benchmarking exercises, which prescribe guidelines on what to allocate to policy priorities, as an erosion of their authority over expenditure and budgets. Intrinsic in this view, is the recognition that provinces have an executive and legislative authority to take decision independently through qualified institutions and by extension the prerogative to allocate their unconditional share of nationally raised revenue. However, the extent of this discretion is a matter that continue to be uncertain given the understanding that the equitable share may not be used by the national government as a means to force provinces to fulfil their functions (Murray, 2009).

As mentioned earlier, the Constitution of South Africa provides for additional subnational transfers which can be dispersed with conditions. Conditional grants were introduced in the early 2000s following rising concerns about the ability of subnational governments to deal with historical infrastructure backlogs. A backlog component was removed from the PES formula and replaced with a package of conditional grants.

The Division of Revenue Act (DoRA) provides four types of conditional grants listed below:

• Schedule 4 conditional grants are allocations to provinces and municipalities made to supplement the funding of programmes or functions funded from provincial and municipal equitable shares.

• Schedule 5 type grants are allocations made for specific purposes of national interest, without a requirement for additional funds from provincial and municipal own budgets.

• Schedule 6 type grants are also specific purpose in-kind allocations to provinces and municipalities for designated special programmes.

• Part A of Schedule 7 type grants are specific allocations that may be released to provinces and municipalities to fund disaster response, in terms of the Disaster Management Act, 2002 (Act No. 57 of 2002).

Between 2005 and 2017, conditional grants transferred to provinces increased considerably in number and value (FFC, 2014). The number and value of provincial conditional grants increased from 15 (R25 billion) in 2006 to 24 (R100 billion) in 2018, respectively. Local government conditional grants grew even stronger (at an average rate of 122%) from R7 billion in 2006 to R50 billion in 2018. Figure 6 below shows that the share of conditional grants as share of total transfers to provinces has remained steady at 20% level while the growth rate of both unconditional and conational transfers is seemingly uniform at 8% per annum in nominal terms. There is general perception that conditional allocations for infrastructure are not appropriately synchronised with unconditional transfers to fund attendant operational costs.

Fig. 6

(Source Authors’ computations)

Conditional grants share of total transfers and growth rate

The lack of clear expenditure responsibilities as well as perceptions of subnational poor delivery performance in recent times has resulted in a proliferation of the so-called indirect conditional grants where national government gets directly involved in the implementation of projects on behalf of subnational governments. The reality with conditional grants is to limit the attendant discretion or spending authority of recipient subnational governments. In the final analysis, the fiscal Constitution inherently entrenches through the asymmetric expenditure assignment a “centralised system” within the fiscally decentralised government through constrained decision-making spaces for subnational government in areas of concurrency and to an extent, exclusive responsibility.

5 Macroeconomic and Fiscal Policy Management

The South African fiscal Constitution vests economic and fiscal policy powers in the Minister of Finance when it comes to intergovernmental financial and fiscal matters and an independent Reserve Bank when it comes to monetary policy. The Minister has the sole discretion to determine national debt and expenditure levels, unconstrained, after taking into account the country’s macroeconomic conditions and service delivery requirements. The mandate of the Reserve Bank on the other hand is expressly stated in the Constitution as being to protect the value of the currency. Inflation targeting has been chosen as the primary instrument for managing price stability. In the 25 years that the system has been in place, debt levels and price stability have been managed prudently.

A package of post constitutional fiscal legislation was enacted to facilitate the management and control of intergovernmental fiscal affairs to promote good financial management, accountability and prevent profligacy. These pieces of legislation derive directly from Chapter 13 of the Constitution and require the Minister of Finance and Parliament to put in place national legislation to enable the powers of the different spheres of government in terms of finance to be exercised. Key among these pieces of legislation are the Public Finance Management Act of 1999 (PFMA) and the Municipal Finance Management Act (MFMA). These pieces of legislation mainly deal with, national treasury norms and standards, budget and expenditure related controls and are often further expressed in the form of Treasury Regulations, Circulars, Instructions and Practice Notes. They define roles of Accounting Officers and Executive authorities and seek to decentralise decision-making to Accounting Officers of institutions with Executive Authorities exercising oversight on the organs of state. Because these are national pieces of legislation, subnational Governments often regard the accompanying regulations and instructions as infringements of discretion over their budgets. It has been argued that through the excessive use of secondary legislation such as Treasury Regulations, Circulars and Instructions imposes undue interference with the decision-making space of Accounting Officers and Executive Authorities in the provincial and local government sphere and further on other organs of state, and thus creating an all too powerful National Treasury at the centre. Recently municipalities in particular have raised concerns around this particular tendency of running their finances through Circulars. Noticeably this has a negative impact on the fiscal decentralisation process.

In addition, the Provincial Tax Regulation Processes Act of 2001 and the Municipal Fiscal Powers and Function Act of 2007 set controls and consultation requirements for managing the conduct of subnational governments when setting the tax rates. In all instances, the approval of the Minister of Finance and consideration of the recommendations of the Financial and Fiscal Commission must happen before power is exercised. This again means the legislation is designed in such a way as to leave all discretion to the central government.

Sections 100 and 139 of the Constitution and by extension, provisions 6 and 136 of the PFMA and MFMA, respectively provide for a continuum of national interventions in cases where subnational governments fail to fulfil their executive obligations or fall into financial distress. This is done through monitoring, support and supervision, issuing directives to take remedial steps and actual take-over of powers and functions. Failure to fulfil obligations entails among other things inability to deliver services, failure to approve a budget, default on financial obligations, inability to pay suppliers, unbalanced budget outcomes, operating deficit in excess of five per cent of revenue, inability to submit annual financial statements and sustained adverse audit opinions.

As already indicated, Section 220 of the Constitution and the Financial and Fiscal Commission Act of 1996 establish an independent Financial and Fiscal Commission responsible for making recommendations on the equitable division of revenue between the three spheres of government. The Commission’s recommendations are addressed to Parliament and the Minister of Finance responds to such recommendations on behalf of government. The Minister of Finance is obliged to respond to them as part of the documents that must be tabled with the Division of Revenue Bill. Parliament has the responsibility to ensure that recommendations that have been accepted by government are implemented. Further, in terms of legislation the Minister of Finance is also required to consult with the Financial and Fiscal Commission at least two weeks before tabling the budget. Feedback on how the Minister has considered the recommendations is exchanged through this process.

Section 230 of the Constitution grants provinces and municipalities the right to borrow. However, this right is granted under specific conditions. Borrowing to finance current expenditure is only permitted for bridging purposes within a fiscal year. Long-term borrowing is strictly restricted to funding of capital expenditure (RSA, 1996) and should only be denominated in local currency. Provincial borrowing is regulated by the Borrowing Powers of Provincial Government Act (BPPGA) of 1996 while Municipal Finance Management Act of 2003 regulates municipal borrowing. The BPPGA establishes the Loans Coordinating Committee, constituted by the Minister of Finance and his/her provincial counterparts, to coordinate the borrowing requirements of national governments, assess contingent liabilities, risks and ability to service the debt and consult the Financial and Fiscal Commission for its recommendations. Section 5 of the BPPGA further prohibits national government from providing guarantees on or underwriting any loan granted to provinces to prevent moral hazard problems associated with contingent liabilities in order to foster hard budget constraints. The MFMA makes similar provisions with regard to municipal debt.

With respect to provinces, there is standing moratorium on provincial borrowing agreed to at the Budget Council, in response to the potential macroeconomic risk that ensued when certain provinces fell into financial problems prior to 1998. Recently, national government borrowed on behalf of Gauteng province to fund the rapid rail transport system and Gauteng used proceeds from its own revenue sources to pay back the national government. In local government, the situation is different with Metros and the large cities very active in the market, including the issuing of bonds by some of the bigger Metros. A significant number of relatively well-off local municipalities borrow mainly from a state owned DFI namely Development Bank of Southern Africa (DBSA) because their loans are accompanied by technical assistance.

South Africa has no specific solvency framework but legislation such as the MFMA and the PFMA to protect subnational government against prospects of insolvency. For example, sections 152 and 153 of the MFMA empower municipalities to apply through the judiciary for stay of legal proceedings by creditors and suspension and termination of municipal financial obligations to creditors for a period not exceeding 90 days. There are, however, stringent conditions under which such application can be granted. For instance, the municipality must have demonstrated inability to meet financial obligation to creditors in the foreseeable future, all assets not reasonably required to deliver minimum basic services must have been liquidated and all employees discharged. In the period the MFMA (2003) has been in existence, no such application has ever been made. This is attributable to the active monitoring of municipal debt by the National Treasury. Stricter loan approval process, the explicit no-bailout rule and a combination of market discipline mechanisms have had a discipline enhancing effect on subnational governments. Provinces are systemically disallowed from borrowing and municipalities can only access the capital market subject to meeting strict credit rating requirements. Only a handful of municipalities from a total of 257 has been assessed for credit rating. Cases of soft budget constraints largely arise from expenditure mismanagement rather than borrowing.

6 Intergovernmental Response to COVID-19 in South Africa

Just before concluding this chapter, South Africa was overwhelmed by the most severe and deadly health crises which has morphed into a global economic catastrophe. It took 3 months for the Coronavirus Disease 2019 (COVID-19) since first being reported to the World Health Organization (WHO) on 31 December 2019 following a pneumonia of unknown cause was detected in Wuhan, China to reach South Africa. South Africa recorded its first case of the coronavirus on March 5, 2020 in KwaZulu-Natal province. Since the confirmed index case, the number of confirmed COVID-19 cases has risen steadily reaching 5000 within a two months period, well below the infection rate experienced in the key pandemic epicentres such as China, Spain and the US.

South Africa’s Constitution governs states of emergency; inter alia to prevent the abuses of earlier times. The main legislation around which South Africa’s response to the virus has been organised is in terms of the Disaster Management Act 57 of 2002.⁸ Two weeks from the first reported case for the country, the President announced a national disaster (March 15) in terms of Section 27 of the Disaster Management Act, followed on 25 March 2020 with amendments made to the legislation to cater for the outbreak, with the main intervention being an initially 21-day national lockdown commencing from midnight of March 26 which was then extended for another two weeks to end of April 2020. The amendments outlined contain measures pertaining to (a) restrictions on the movement of persons and goods, (b) prohibition of public transport and (c) resources by the state during lockdown. On the economic policy front, because of the high budget deficit, there is limited room available to the government for direct expenditure increases. Instead, government effort initially focused on mobilising off-budget funding (Unemployment Insurance Fund (for workers)) and Industrial Development Corporation (for businesses), special loan schemes, tax relief for those affected as well as exemption of banks from the Competition Act to allow them to provide relief for affected customers. The Central Bank has reduced the repo rate twice in the space of a month by 200 basis points to pump liquidity in the economy. Government has recently announced a sizable fiscal support package of R500 billion or 10% of GDP. These interventions will have implications on the effectiveness of these type of response relative to direct expenditure.

Given the exceptional circumstances around the COVID-19 pandemic, we have designed in Box 2 an outline of how government’s responses to the crisis have taken shape in the context of the country’s quasi federal system. There are other non-fiscal responses led by the country’s central bank as well as the private sector that are not covered here given the focus of the chapter.

Box 2: Intergovernmental response to disasters—The case of COVID-19

This chapter was written at the time when the world was overwhelmed by a health crises which has morphed into a global economic catastrophe. It has taken approximately 3 months for South Africa to record its first case of COVID-19 on March 1, 2020 when there were already nearly 150,000 existing cases worldwide. The rapid spread of the disease has forced governments throughout the world to institute unprecedented disaster responses and economic relief measures in an effort to contain the virus, save lives and prevent economic meltdown. Governments have reacted with varying approaches, speeds and intensity, but generally settled on a set of similar measures including imposing varying degrees of lockdowns, social (physical) distancing, voluntary and obligatory isolation, providing different types of economic relief and importantly directing additional resources to the health care system for personal protective equipment (PPE) for health workers, testing kits, ventilators, field hospitals, etc. These measures recognise that the COVID-19 pandemic is a human tragedy that is both a health and economic crises.

Response to disasters in South Africa are governed in terms of the Disaster Management Act which primarily facilitate integrated and coordinated preventative and mitigation measures for risk of disaster, rapid and effective response to disaster and post-recovery measures. The Act further provides for the President to establish an Intergovernmental Committee on Disaster Management made up of the relevant Cabinet ministers and provincial heads of executive as well as the national, provincial and municipal disaster management centres whose role is to promote integrated and coordinated disaster prevention, mitigation and recovery approach across the three spheres of government.

By law disaster management is a shared function between national and provincial government whereas the health function is spread across the three spheres to the extent that local government provides environmental health. Guided by this legislative framework, South Africa responded to the COVID-19 pandemic through a Presidential declaration of a national disaster (not to be confused with a state of emergency) thus paving the way for the various functional authorities to develop enabling regulations. Such regulations relates to the release of resources, restrictions on movement of people, goods and services and dissemination of information among other things.

Since declaration of the national disaster, South Africa has arguably followed the international best practices in responding to the COVID-19 pandemic. That is, setting up a national nerve centre for coordination, planning and monitoring; focusing on surveillance, rapid response teams and case investigation; increasing the capacity of the national laboratories; improving case management (hospital care and home care); infection prevention and control; investing in early investigation protocols; risk communication and community engagement and suspending points of entry and mass gatherings.

The National Command Council made up of the President, Cabinet ministers, Premiers of provinces and Organised local government is responsible for monitoring the situation and making strategic decisions informed by a national joint operational and intelligence structure and COVID-19 Data Management Centre. Some of these interventions include deployment of the police and military to enforce lockdown and traffic restrictions, 10,000 fieldworkers to screen, test, trace and help with medical management of COVID-19 cases, designating certain public hospitals to deal with COVID-19 cases, 24 hour hotline and procurement of test kits and PPEs for medical personnel. Provinces and municipalities have also introduced interventions of their own focusing on social relief for homeless and the vulnerable, distribution of sanitizers to those without access to running water and disinfecting public spaces. They have also deployed provincial police to enforce lockdown procedures within their jurisdictions. To date, the COVID-19 intervention has been well coordinated unlike other areas of concurrent responsibility as discussed in the chapter.

Much of the initial COVID-19 interventions in South Africa had occurred without additional budget allocation to the most affected functional sector(s) and subnational governments despite the crises being declared a national crisis and there being a legislative leeway (through section 16 of the PFMA) for the Minister of Finance to use the National Revenue Fund to defray expenditure of exceptional nature which has not been provided for or cannot be postponed to the future. Section 25 of the PFMA also states that provinces can use up to 2% of the provincial revenue fund to deal with unforeseen expenditure. Both these provisions require authorisation from the relevant legislative structure (In other words, a Special Appropriation is required to ratify the s16 PFMA expenditure and extend it further to meet the necessary funding requirements.). A study by the FFC (2012) found that funding for disasters in South Africa is generally characterised by lengthy bureaucratic processes and prone to focus on relief rather than mitigation. On 21 April 2020, Government finally announced a sizeable fiscal support package for the economy of R500 billion, or approximately 10% of GDP. This intervention has been made within a context of very restricted and fragile state for government finances.

The low COVID-19 hospitalisation cases or disease burden due to low incidence rates and decisive Government interventions that have slowed viral spread, mean that the country has bought some time. Paradoxically, this may partly explain the timid approach adopted by government in appropriating emergency funding for the disaster and enunciate the reason why provinces in particular are unperturbed by the potential budget crises.⁹ The country is yet to reach the devastating COVID-19 hospitalisation rates of 15–20% seen in China or the calamitous 40% observed in Italy (WHO, 2020). In fact, as of 13 April 2020, whereas the country has reacted swiftly to contain the virus, there remain concerns about the capacity of the healthcare system, subnational governments and the overall budget to handle the abnormal pressure that will be impacted on the various budgets (should a doomsday pessimistic scenario of the pandemic spread materialise).

Source Authors’ compilation.

7 Successes and Challenges of Fiscal Federalism in South Africa

With a focus on South Africa’s evolving unitary federal system, this chapter has examined the range of fiscal institutions used as well as their rationale and effectiveness. Issues covered included the structure of Government and allocation of expenditure responsibilities, taxation responsibilities, intergovernmental fiscal transfers and revenue transfers, macroeconomic management and challenges to fiscal federalism. The story of multi-level government reforms and the associated democratisation process in South Africa is one of success and a marvel to a number of countries undergoing transition. Coming from a catastrophic Apartheid past, the new dispensation was able to install and operationalise a new system of multi-level governance within 5 years of adopting the Constitution. An important part of the success story commences with a constitutionally recognised framework for distinctive, interrelated and interdependent spheres of government, each with its own constituency who elect their preferred public representatives through a democratic process. The current structure of subnational governments result from a complex process of integrating a myriad of white and black only regional and local authorities into a single union made up of nine provinces and 257 municipalities. The government system is supported by a myriad of enabling legislations and institutions to harness accountability and fiscal management as well as the intergovernmental transfers to facilitate delivery of basic services. Since establishment of the provinces in 1994 and the new local government structure in 2000, the system has enjoyed relative stability, having undergone six and four elections, respectively. More recently, the system appears to have weathered two severe external shocks, namely the Great Recession of 2008/2009 and the ongoing COVID-19 pandemic. Provinces and local authorities are accountable to their own legislatures, local councils, subnational executives can make spending decisions with relative autonomy, and the national government has sufficient powers to intervene where subnationals deviate from standard practice.

Whereas the legislative and institutional framework for multi-level government are firmly in place, challenges persist as the system evolves in search of an identity. The first challenge is linked to the absence of political commitment to a clear model of federal decentralisation, especially on the part of the ruling party. Policy makers and politicians continue to debate the desirability of subnational structures (provinces and district municipalities in particular) which in turn contributes to disorderly intergovernmental fiscal and political arrangements. There is no firm decision about the future of provinces currently, but ongoing reforms points to a gradual “hollowing out” exemplified by the following (Ajam, 2014):

• 1. Shifting certain functions to national level: The new National Health Insurance Bill seeks to centralise funding and provision of healthcare leaving provinces as mere administrators of residual responsibilities.

• 2. Devolving other provincial functions to cities and other municipalities: These would include accreditation of housing functions, public transport and land use planning.

• 3. Restrictions on the input side of the budget: Centralised procurement at national level of large tenders such as school books have been introduced to overcome supply chain management weaknesses and corruption within the provincial sphere

• 4. Allocating transfers via indirect (in-kind) grants: National government builds schools on behalf of provinces to overcome weakness in capacity to deliver.

The lack of a clear vision for multi-level governance serves to reinforce long standing challenges in the execution of concurrent functions i.e. clarity on the nature of decentralised expenditure assignment, tax powers and revenue autonomy as well as vertical fiscal gap. An important factor affecting the working of IGFR relations is that a clear decision is yet to be made on the definition of “own” responsibilities of the provincial governments for which they can make decisions with complete autonomy and on the definition of “delegated” responsibilities, for which provincial governments have to comply with standards of provision provided by national government. Currently, for example, there is no clarity regarding whether general education and health services constitute “own responsibilities” or “delegated responsibilities”. It seems like the system continues to debate the desirability of both. There is a high degree of disquiet on the part of the national departments with what happens to funding priorities agreed nationally and the subsequent allocations at provincial level. These issues clearly affect the definition/quantification of expenditure needs in the provincial equitable share transfer and how provincial governments are to spend (some of) the funds they receive from national government. Lacking vision, reforms are carried out from a narrow perspective where the national government champions initiatives to improve the administrative and technical capacity of subnational governments while usurping a great part of the responsibilities.

Annexure A

(Table 9).

Table 9 Constitutional assignment of powers and functions