South Africa’s finance minister, Enoch Godongwana, announced in his October mid-term budget policy statement that cabinet had approved funding for an early retirement programme to reduce the public sector wage bill. R11 billion (about US$627 million) will be allocated over the next two years to pay for the exit costs of 30,000 civil servants while retaining critical skills and promoting the entry of younger talent.
The statement states that this will assist in improving the structure and organisation of the state.
But past initiatives of this kind have done little to reduce costs. In 2019 there was a similar offer, but it didn’t solve the problem. In 2020, the government took the more drastic step of reneging on the final year of a three-year wage agreement. The main effect of early retirement offers is always to enable capable and experienced people to move on to other careers without losing their accumulated pension benefits.
As an economist, I believe there is a more fundamental problem with this proposal. To improve the structure of the state, and to narrow the gap between promise and delivery of public services, government functions and activities must be reviewed. The state must cut back what is inessential or ineffective. This will create room to expand core services and activities that promote growth and development.
Time for structural reforms
In times of fiscal restraint – with revenue growth too slow to finance existing policy commitments – tough choices must be made. This is the opportunity to make the structural and organisational changes that will bring enduring improvements to delivery of public services. Further delays simply deepen the problem.
Some of what needs to be done is hinted at in the mid-term budget policy statement.
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Godongwana says the National Skills Fund administered by the Department of Higher Education and Training, and the programmes governed by the Skills Development Act, will be reviewed.
Yes, the skills levy system involves a tax on employment. This is unhelpful in an economy which needs to encourage job creation. The system for funding training is administratively cumbersome. There are 21 sector education and training authorities (Setas) which serve no discernible productivity-enhancing purpose.
In recent years, skills development funds have been diverted to meet shortfalls of the National Student Financial Aid Scheme. The temporary fix exposes another policy over-commitment. If the government was serious about addressing the national skills crisis, it would repeal the Skills Development Act. State resources should be refocused on improving colleges and formal vocational education.
The policy statement also indicates that financial support for the unemployed is to come under scrutiny. Also that the social security landscape is fragmented. Indeed.
It is more than 20 years since the Taylor Committee canvassed these issues thoroughly. But there has been no progress on institutional rationalisation.
The Unemployment Insurance Fund, in the meantime, is embarking on business support ventures under the guise of job retention and employment creation. Its financial statements reveal large impairments from these investments, amounting to R2.7 billion in 2019 and 2020 alone. No further analysis is needed: it is time for the finance minister to instruct that the Unemployment Insurance Fund not use its funds for activities other than its core statutory purpose.
It is also more than 20 years since the Satchwell Commission’s report on the Road Accident Fund, which drew attention to its financial unsustainability. It recommended an alternative social security arrangement to compensate victims of accidents.
But the country is no closer to replacing the road accident fund with a defined benefit fund. Nor eliminating its wasteful spending on legal disputes, and uncapped income compensation that should be dealt with through the insurance market.
Targeted expenditure reviews
The Government Technical Advisory Centre, an agency of the National Treasury, initiated a programme of public expenditure reviews in 2013. Since then, over 200 reviews have been undertaken, covering a wide spectrum of national and provincial functions.
After all this work, you would think that there would be detailed proposals to take to cabinet and parliament for meaningful changes to the structure of the state. But no, we have instead a blunt and untargeted instrument likely to generate unhelpful outcomes.
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Expenditure reviews sometimes indicate opportunities for terminating programmes or merging institutions to save costs. There is, at last, progress towards an integrated national water infrastructure entity, and a single economic regulator for the transport sector.
But more often, reviews indicate incremental reforms or programme design changes that could contribute over time to better services and cost-effective delivery. They also provide evidence on what should be cut back where private sector alternatives would be more efficient.
In rural provinces, for example, the drift of people to towns and peri-urban areas has left many schools and clinics serving declining village populations. There has been some progress in closing small multi-grade schools in parts of the Eastern Cape. But not enough has been invested in expanding the classroom numbers or capacity of health clinics that serve growing urban populations.
The dysfunctionality of housing subsidy projects and poorly integrated national, provincial and local responsibilities for human settlements has been studied intensively. Practical steps to focus on what works and discard what doesn’t are hard to find, though.
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In the criminal justice system and in policing, long delays in investigations and court proceedings and overwhelming caseloads must be addressed to relieve congestion. This will require deliberate efforts to accelerate court processes and promote alternative dispute resolution mechanisms. It could cut unnecessary duplication, for example, in medico-legal cases and challenges to public procurement decisions.
Over time, there has been an increase in the number of non-departmental organs of state whose personnel structures and remuneration are not subject to the oversight and controls of national and provincial treasuries. In many of these entities, and in state-owned companies and provincial agencies, executive pay and directors’ remuneration have increased disproportionately. This, without commensurate improvements in functional efficiency. In keeping with the principles of consolidated budgeting and accountability, they should come under stricter oversight.
Restructuring local government
The most challenging area of “structural reform” ahead is likely to be in local government. Almost without precedent internationally, South Africa has a two-tier system of district and local municipalities. They have no distinction in governance between urban and rural zones. This is a critical underlying cause of financial and service delivery shortcomings at the local level.
District municipalities serve no discernible public accountability purpose. Their service delivery responsibilities should fall under local councils, through jointly overseen administrative arrangements if warranted by spillovers across borders.
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For the fiscal integrity of local municipalities to be secured, their urban zones must be ring-fenced and the current patchwork of financial transfers from the national budget must be overhauled. Recruitment of engineers into municipal government must be hugely stepped up.
Here, just perhaps, there might be a useful targeted application of the cabinet’s new initiative to promote the entry of young talent, while retiring redundant incumbents.
Andrew Robert Donaldson, Senior Research Associate, Southern Africa Labour and Development Research Unit, University of Cape Town
