LOCAL GOVERNMENT FISCAL FRAMEWORK REVIEW Portfolio Committee on Cooperative Governance and Traditional Affairs Presenter: Wendy Fanoe | National Treasury | 21 August 2012

Contents Overview of the current situation in LG What is the LG fiscal framework? Principles of the LG Fiscal Framework Evolution of the LG Fiscal Framework Major stages in evolution so far Next steps Opportunities for municipalities Conclusion

Overview of the current situation in Local Government The LGFF is one part of the broader LG system Local government is the youngest of the three spheres, only coming into being in its current system of demarcations in December 2000 and with several key pieces of legislation only following after that (MSA, MFMA) Municipalities are much criticized for the things they do wrong (and often rightly so) But the LG system is also showing some signs of progress: Improving Blue Drop scores (from 51% in 2009 to 88% in 2012, nationwide) Improved budget reporting Stabilisation of finances (State of Municipal Finances report) Major rollout of infrastructure projects in many areas The local government system is still being built, and there is a long way to go, but municipalities are making progress

What is the Local Government Fiscal Framework? LG Fiscal Framework The LGFF refers to all the revenues municipalities have at their disposal to meet their expenditure obligations These include own revenue, borrowing and transfers Own revenue makes up 75% of the total LG Fiscal framework But as the next slide shows the proportion own revenue and transfers contribute to the revenue of different municipalities varies greatly It does not make sense to look at municipal finances without considering both own revenues and transfers 75% Own revenue 25% Transfers

Importance of different sources of revenue is very different for different types of municipalities: Municipal Revenue Sources (percentage) per Type of Municipality, 2010/11 LG Fiscal Framework 75% Own revenue 25% Transfers Source: National Treasury Local Government Database

What are the principles the LGFF should be measured against? The Local Government White Paper (1998) sets out principles for the full local government fiscal framework These principles remain valid, even if some of the technical details of the fiscal system envisaged in the LGWP have changed

Summary of LGFF principles in the LG White Paper Revenue adequacy and certainty: Municipalities need to have access to adequate sources of revenue – either own resources or intergovernmental transfers – to enable them to carry out the functions assigned to them. Sustainability: Financial sustainability requires that municipalities ensure that their budgets are balanced (income should cover expenditure). Effective and efficient resource use: Important that local residents provide the necessary checks and balances. Accountability, transparency and good governance: Municipalities should be held responsible and accountable to local taxpayers Equity and redistribution: Municipalities must treat citizens equitably with regard to the provision of services. In turn, national and provincial government must treat municipalities equitably with regard to intergovernmental transfers. Local government cannot be solely responsible for redistribution, and national government has a critical role to play in this regard, particularly with respect to subsidising the provision of basic services. Development and investment: Meeting basic needs in the context of existing service backlogs will require increased investment Macroeconomic management: Municipalities need to operate within the national macroeconomic framework

How is the LGFF performing against the principles set in the LG White Paper? Performance Revenue adequacy and certainty - 3 year budgeting creates certainty - Adequacy requires mix of own revenue and transfers (transfers have increased dramatically) Sustainability Many municipalities not budgeting sustainably, but many are improving Effective and efficient resource use Mixed performance (significant wastage). Community oversight of budgets is institutionalised - is it working? Accountability, transparency and good governance - Publishing budgets increases transparency - But audit outcomes reflect poorly on municipalities Equity and redistribution - Principle of cross-subsidisation well established - Transfer allocations based on funding services for the poor Development and investment Infrastructure rollout has been disappointing despite billions spent Macroeconomic management - Municipalities have acted responsibly

Major stages in the evolution of the LGFF – to date Own revenues Municipal Finance Management Act (2003) sustainable financial management & budget structures that enable financial planning Municipal Property Rates Act (2004) create a transparent and fair system of property rates Municipal Fiscal Powers and Functions Act (2007) provide authorisation for municipal taxes and regulate surcharges Replacement of RSC levies with a transfer until powers and functions of district municipalities are resolved; and introduction of fuel levy sharing with metros Borrowing Larger municipalities have succeeded in borrowing and issuing bonds Transfers Equitable share introduced (formula reviewed and changed in 2005 ) MIG introduced – consolidated numerous smaller grants Separate urban and rural grants introduced Massive increases in all transfers

The value of transfers to local government has increased dramatically since 1998 Total transfers to local government

Growth has been very rapid, but will be slower in future Percentage annual growth in total transfers to local government

Growth in allocations for ‘rural’ municipalities has been particularly rapid Growth in transfers to different types of municipalities Rand thousands Both “rural-traditional” local municipalities and “Districts W&S” provide services in rural areas – and their allocations have increased the fastest

Total municipal budgets have grown rapidly, but transfers have grown most consistently Over this period transfers grow by 18%, own revenue by 13% Value of total municipal budgets Rand millions Annual per cent growth

Are we achieving as much as possible with the funds available?

Likely future steps in the evolution of the LGFF and municipal finances Transfers Equitable Share formula is being reviewed New formula introduced in 2013 will be more transparent and better targeted to enable municipalities to provide services to the poor Conditional Grants Infrastructure grants will be reviewed based on progress in improving access to services revealed in the 2011 Census results Increased differentiation Own revenues Improving revenue collection Improved costing and tariffing will enable municipalities to be more transparent about surcharges and budget and plan maintenance better Measures to enable more municipalities to access borrowing (responsibly) Differentiated approach could include different revenue raising mechanisms for different types of municipalities

Opportunities for municipalities to increase the resources available to them Many of the challenges municipalities face also provide opportunities for them to increase the resources available to them. For example, many municipalities have water losses in excess of 50% of their bulk purchases. Reducing those losses would reduce the money spent on bulk purchases and free up funds for other services. The next slide shows the different opportunities municipalities have to increase the resources available to them

Factors leading to the “Gap” between delivery and needs LGFF Opportunities for municipalities

Conclusions Local government is a dynamic environment Despite many problems the performance of the LG system is improving (perhaps too slowly?) The LG fiscal framework has supported municipalities by giving them a sound policy framework and significant additional resources through transfers – challenge now is to get value from these funds The LG Fiscal Framework will continue to evolve to respond to the needs of municipalities, including through review of the Local Government Functional and Fiscal Framework being conducted jointly with the Department of Cooperative Governance Municipalities also have significant opportunities to take actions to improve their own circumstances