Select Committee on Finance 03 February 2009

MIG created out of consolidation of grants Background Intended to eliminate fragmentation and enhance municipal ability to coordinate and integrate planning for infrastructure Flow of the grant enhanced certainty but challenges still remain… MIG created out of consolidation of grants Profile of municipalities differ – capacity (technical +financial, migration patterns, drivers of backlogs) Cities need to balance economic & basic services, new infrastructure with rehabilitation Capacity in poorly resourced municipalities to support delivery Another phase of reform of MIG is needed to accelerate backlog eradication and foster improved “real world” impacts through greater integration at the local level

Households: Without access to basic services-2007 There are large demographic, economic and infrastructure differences between LGs Municipal types and share of economic sector Migration Households: Without access to basic services-2007 3 3

This creates very different investment challenges For cities: balance needs of poverty reduction, growth and asset replacement in an integrated way Capital expenditure as a percentage of the total value of buildings completed Maintenance expenditure by year against expected expenditure National and municipal capital expenditure in the built environment

The challenges are different for rural municipalities Capacity to design, built and operate services Sustainable levels of service Management of subsidies Expand access in fiscally and operationally sustainable way

LGs have very different capacity, grant and expenditure profiles Most capex occurs in metros But they receive the least in grants

Most city capex is from own revenues And expenditure performance is good Though some are better than others

A differentiated approach to funding municipal infrastructure is needed to recognise Support and strengthen healthy and sustainable communities Focus on real world outcomes, not just projects Growing urban problem of access to basic services that requires cities to coordinate and integrate investment to achieve built environment outcomes Need for government to increase capacity to support these municipalities with delivery through new forms of partnership with experts and with communities Growing rural poverty without access to basic services - funding for rural areas not properly targeted to respond to rural problems 10

Proposed allocation mechanism to recognise municipal differences flow differently in response to their challenges and conditions linked to outcomes associated with the built environment – greater need for integration across sectors and programmes Infrastructure grants for big cities Focus on unlocking rural development and capacity challenges Infrastructure grant for smaller and rural municipalities 11

The focus for rural municipalities Greater role for sectors Possible ringfencing of water and sanitation funding Greater rural development bias Target basic services Skills partnerships for design, construction and management of infrastructure Leveraging community capabilities, in managing small scale water schemes, etc Step up infrastructure delivery capacity 12

MIG for intermediate municipalities Encourages evolution of investment strategy Regulates projects at the input level Allows for intensive oversight Continue current approach that: Allow high performing municipalities the ability to access more discretionary funding (ie join MIG Cities) But … 13

Focus on outputs and outcomes of entire capital budget, not just grant MIG for Cities Support cities to integrate built environment investments Allow locally appropriate trade-offs between new infrastructure and replacements, growth and poverty reduction Recognise considerable capacity of large urban LGs : Capacity to spend and to do so responsibly Ability to respond to local needs and contexts Established commitment to poverty reduction Focus on outputs and outcomes of entire capital budget, not just grant Beyond arms length “reports” to ongoing strategic engagement with major cities on areas of shared interest through City Budget Forums Build new partnerships to scale up urban infrastructure investments, within a “real world” performance framework 14

Targeted generic outputs and outcomes (1) Impact area Outcome Intermediate output indicator 1. Combating poverty Universalizing basic services Number of new households receiving supporting basic municipal services per annum over a three year period, including water and sanitation, solid waste and electricity services and bulk & connector infrastructure. Job creation Number of jobs created using expanded public works guidelines for above outputs Labour intensity of construction process Investment coordination in the built environment Number of community and sports facilities developed No of households benefiting from the infrastructure linked to housing programmes. Extent of integration of poor people with wealthier communities within the city Lead times for capital project implementation (declining) Extent of success of efforts to identify land within strategically located areas for mixed use residential purposes 2. Supporting growth Reduced supply-side constraints to urban economic growth Rising capital spending relative to value of private fixed investment Number of kilometres’ roads developed, by type of road Increased self-financing of investment Increased own revenue as source of capital finance

Targeted generic outputs and outcomes (2) Impact area Outcome Intermediate output indicator 3. Sustainable service delivery Rehabilitating infrastructure Progressive improvement of good practices in asset management (ie. Asset registers ) reflecting declining asset ages and condition improvements Sustainable enhancement to expenditure capacity Declining variance between budgeted and actual capital expenditures, or specific revenue source improvements (debt, tariffs, development charges) Rising expenditures targeted at maintenance, refurbishment and renewal of infrastructure Reduction of leakages and network interruptions 4. Accountable governance Responsiveness to need Satisfaction survey results, project lead times Transparency for citizen oversight Regular reporting, published locally Good governance Audit opinion on capital programme (stable or improving, without adverse or disclaimed opinion)

Eligibility Conditions eventually be open to all that can show sustained performance in capital programmes and achievement of developmental outcomes Initially only largest 21 cities by budget size but opened to all from 20011/12 based on demand Approach Tests Test Entry Year Subsequent Years Expenditure capacity Expenditure of at least 87% of budgeted capital expenditure as revised in the annual adjustment budget in the previous financial year Expenditure of at least 92% of budgeted capital expenditure as revised in the annual adjustment budget in the previous financial year Good governance No disclaimer or adverse audit opinion for capital expenditures in the previous financial year No disclaimed, adverse or repeated qualification of audit opinion for capital expenditures in the previous financial year Partnership Performance matrix and targets/conditions agreed by not less 3 months of the start of the municipal financial year (i.e. 1 May of the preceding FY) Evidence of ratification by full council of matrix and performance conditions for the forthcoming year by not less than 2 months before the start of the municipal financial year (i.e. 1 June of the FY Evidence of ratification by full council of the matrix and performance targets/conditions for the forthcoming year by not less than 2 months before the start of the municipal financial year (i.e. 1 June of the preceding financial year) 17 17

MIG for Cities What are we looking for? What will this deliver? Pro-poor capital budgets (not just MIG) Strategic investment selection that delivers integrated developmental outcomes What are we looking for? Ongoing strategic engagement with major cities Stronger, more integrated investment pipelines that can deliver at scale Shorter project lead times Improved developmental outcomes What will this deliver? 18

Implementation of the differentiated approach to funding Ensure that no municipality loses as a result of changes 2 separate allocation frameworks Vertical split of current MIG allocation Reforms phased in from 1 April 2009, starting with 6 metros preparing and phasing in to the rest of big cities over 2 years Phased implementation Dplg continues administering both MIG windows Coordination of processes through existing structures: City Budget Forum, Social Cluster etc. Administration and coordination

Policy and implementation arrangements The way forward Noted the need to differentiate between different categories of municipalities Agreed to split municipal infrastructure grant Large urban and other municipalities from 1 April 2009 Agreed that the focus on large cities be on integrated built environment outcomes Agreed that the rural focus be on infrastructure that supports rural development and to step up service delivery capacity Cabinet has At advanced stage after extensive consultation with national departments and cities Strong support from cities Outstanding issues on reporting arrangements being resolved Policy and implementation arrangements 20