South Africa is in the grip of national controversy over so-called delivery problems associated with the new push for public infrastructure investment. This controversy is to be welcomed. The infrastructure-investment initiative is of huge economic importance, and it is crucial that it not fail. In worrying about inefficiencies in provision, the public and the media are paying the issue the attention it deserves.
Provinces (along with municipalities) have become lightning rods for this critical concern. This is natural: they hold the lion’s share of direct responsibility for project selection and implementation. To the extent that they are perceived to be struggling with the task, a simple solution occurs to some people. Vicki Robinson (September 30) wonders whether provincial government is ”a waste of R16-billion” and says that ”many believe the debate we should be having is whether we need the provinces at all”, though she cites no specific person who argues that we do not.
The idea that we might be better off if we abolished the provinces rests on two beliefs. The first is that national government is much more efficient and effective. The second is that provinces exercise no real policy autonomy anyway.
It is true that the most efficient bodies are national. But these have two properties: they are either independent agencies, like the South African National Roads Agency, that are subject to corporate-style incentives, or they are ministries, like the Treasury, which rely on excellent technical minds.
Our national Treasury cannot be a model for the loosely coordinated machines that must implement infrastructure provision, such as transport, energy, public works and water affairs. In these cases, the assertion of national-level superiority is not so compelling.
To cite the sector I know best, the national Department of Transport has not delivered more or faster than the better of the provincial ministries; quite the opposite.
Many — not all — provinces exercise a great deal of day-to-day policy autonomy. They do so because that is the very point of them.
Precisely because (some) provinces have effective policy-controlling capacity, they can and have successfully guarded their domain against attempts at centralisation of authority over infrastructure. This happened in 2003/04, when provincial roads blocked a blueprint for a coordinated national strategy for maintenance and expansion. This should be set against Robinson’s contention that ”provinces have not had a shining track record as bulwarks against the central government”.
None of this implies that our current balance of incentives between national and provincial governments, where infrastructure provision is concerned, is ideal. In the 2001 Ross Report on South Africa’s Roads, commissioned by the South African Bitumen Association (Sabita), this question was explored in detail.
The basic point of that discussion starts from the fact that the provinces are in principle subject to national fiscal discipline, because national taxation is where most of their revenues come from. The recipient, knowing this, has an incentive to inflate costs and under-produce the goods. Fund recipients also have incentives to increase their discretionary scope for spending by over-recovering costs.
A number of structural features of the South African political economy make these effects likely. Municipalities can raise capital funding for roads and other public infrastructure on shared funding schemes with provinces in which the latter provide 60% of outlay. This encourages cost inflation; indeed, given the generally poor credit ratings of South African municipalities, it practically compels it.
The large quantities of economic literature on problems associated with fiscal decentralisation favours one stone for killing all birds, namely, transfer schemes.
Under such transfer-scheme arrangements, the funds provider — the national government to provincial governments, or provincial governments to municipal ones — announces a fixed budget to all potential recipients, which must balance. Recipients are then rewarded or punished based on their performance against targets set in the previous round.
If this mechanism is well designed, it can induce regional authorities to ”tell the truth” about their spending preferences over actual infrastructure and allows the funds provider to allocate resources optimally.
An ideal transfer mechanism probably is not constitutionally legal in South Africa; provincial budgetary autonomy is protected through a provision that prohibits the national Finance and Fiscal Commission from attaching conditions to operating transfers.
I do not think we can afford to make our infrastructure push hostage to constitutional reform. Fortunately, the restriction does not apply to capital grants. Thus, we should explore capital grant schemes, based on a fixed and balanced budget that implemented such an incentive system.
This solution is much less simple or dramatic than abolishing provinces.
Don Ross is professor of economics, University of Cape Town and University of Alabama at Birmingham, and executive director for Sabita Infrastructure Development Assessment Project