T Pillay (National Treasury) Intergovernmental Fiscal Review 2001 Local Government NCOP T Pillay (National Treasury) 18 October 2001

Background Municipalities have significant fiscal power Two thirds from user charges business activity (electricity and water) One third from tax funded services (local decisions and discretion) Direct transfers from national government Equitable share, CMIP, capacity (What more does national need to do?) (Focus on sequenced capacity building?) Provincial Transfers (How can provinces support Local government?) (Can provinces afford to transfer more?)

Purpose and evolution Review of intergovernmental trends to support budget and policy processes 2000 IGFR made first attempt to cover local government but data weak or non-existent 2001 IGFR though information sketchy due to new structures - progress noted attempts to depict trends and highlight challenges going forward

Objective Allows for comparisons and benchmarks Assists legislatures in understanding different pressures and dynamics at local government Informs policy-making process sharing of analysis and dissemination of information Promotes co-operative governance Aligning policy, budget, planning processes Tool for NCOP to strengthen oversight

Local Government Chapters 8. Transformation challenges 9. Overview of municipal budgets 10. Transfers to local government 11. Capital investment Annexure D (trends, budget income and expenditure, levies, employee numbers)

Introduction Overview of intergovernmental system 3 distinct, but interdependent spheres national role largely policy formulation & setting of norms and standards provinces & local government mainly responsible for implementation System premised on cooperative governance

Local Government Transformation Challenges amalgamation and establishment of new munis re-alignment and re-assignment of powers and functions (between cat B and C) integrating over 200 000 employees without raising costs co-ordinating activities of cross border munis re-prioritisation of service delivery and expansion of infrastructure to service all citizens introduction and implementation of new legislative environment (Structures Act, Systems Act, MFMB, Prop Rates)

Personnel Expenditure PE case study: real increases over past 10 years (Table 8.2 page 126) Minimum salary in some metros R4000 pm Pension variation (Table 8.3) Up to 35%, with 27% from employer Shifting of functions involves shifting personnel risk of significant cost increases without any improvement in service delivery

Restructuring/Amalgamation Shifting functions between district and local munis What does it mean for effective service delivery and accountability? Restructuring of services, e.g. Regional Electricity Distributors How does this affect service quality and equity? Funding gap and impact on cash flows Funding implications Financial effects when moving personnel What does this do for affordability and sustainability of services? Impact on tariffs and incidence of taxes Tshwane case study on page 136

Restructuring and Support Decentralisation or devolution of functions Is this the right time to devolve functions to munis? e.g. primary health care, water services, public transport Free basic services How do we make this possible? What mechanisms do we use? How do we allocate subsidies efficiently? Local Government transformation plan Support by government Institutional and fiscal support Equitable share, Consolidation of grants (infrastructure and capacity) Reforms budget reforms, revenue reforms, planning reforms

Local Govt Budgets Budgets Reforms required Budget trends formats, classification, presentation, understandable information, build linkages with planning, etc Budget trends overall local budgets now at R 61,8 bn need to improve on capital and infrastructure spending now at R 13,7 bn growth in personnel expenditure to 31 % and lack of revenue collection impacts on infrastructure spending wide differences between municipalities

Local Govt Budgets Sources of income Expenditure Property rates 21 % Utilities (electr, water) 32 % Intergov transfers 8 % RSC levies 7 % Expenditure Salaries 31 % Bulk (electr, water) 30 % Capital charges 13 % Repairs and Maint 8 %

Sample Metro budgets New classification - sector / functions Electricity 30 % Water & Sanitation 19 % Administration 8,8 % Public safety 7,5 % Roads and Stormwater 6,3 % Refuse 5,1 % Need to implement country-wide, develop, improve reporting formats & system

Local Govt Transfers National Transfers Proportion of allocation responsibilities & functions of local gov. subsidy to assist poor households for basic services expansion and rehabilitation of infrastructure skills training and development to assist in service delivery Proportion of allocation Equitable share 57 % Infrastructure 35 % Capacity 8 %

Local Govt Transfers Equitable share (unconditional) efficacy of usage/local discretion access to basic services policy directed towards poor households overall average ES per household Smaller category B munis from 2001/02 to 2003/04 - R 510 to R 611 Metros category A munis from 2001/02 to 2003/04 - R 151 to R 194

Capital Capital / Infrastructure grants R2,7 bn in 2001/02 facilitates expansion of services to all citizens faster (basic services) improve standards and level of services provide economic and other infrastructure unlock and stimulate country’s growth potential upgrade and update infrastructure (township/R293 areas) Borrowing inability for infrastructure means higher grants from national and province less infrastructure funds spread more thinly

Capital How do we address service backlogs? Who will build infrastructure? Private Public Partnerships Examples Table 11.1 Municipal borrowing leveraging of grants and revenue short term loans - expensive longer term loans - cheaper municipal bonds Stagnant borrowing at R20 bn Two large players - INCA provides new lending in private sector, DBSA in public sector How do we attract new money and participants?

Conclusions Efficient and cost effective service delivery to all our citizens Focus on better targeting equitable share Focus on infrastructure grant consolidation Focus on strategic management capacity building initiatives Enhance and leverage new infrastructure money to address backlogs Improve reporting and information flows Continue to deepen and improve budget process Move toward measuring service delivery indicators

THANK YOU!