---------------------------------------------------------------- FFC SUBMISSION FOR THE DIVISION OF REVENUE 2002/03 ---------------------------------------------------------------- Provincial Hearings August 2001 7 May 2019 For an Equitable Sharing of National Revenue

Background: Financial and Fiscal Commission The FFC was established in terms of Section 220 of the Constitution Advisory body, required to be independent and impartial Role of the Commission: Annual recommendations on the division of revenue between the national, provincial and local spheres of government (vertical division) Annual recommendations on the distribution of the provincial and local equitable shares (horizontal division) Recommendations on any legislation relating to fiscal powers of provinces or municipalities 7 May 2019 For an Equitable Sharing of National Revenue

For an Equitable Sharing of National Revenue FFC Submission for 2002/03 Recommendations for 2001-2004 MTEF Cycle Consideration of all three spheres of government Central theme: constitutionally mandated basic service obligations Focus on local government 7 May 2019 For an Equitable Sharing of National Revenue

Equitable Sharing of Nationally Collected Revenue The division of total national revenue should ensure that constitutionally mandated basic service obligations have priority claim FFC study: provide clear definitions of constitutionally mandated basic services and other constitutional obligations Programme analysis framework could complement and guide the decisions on the equitable division of national revenue 7 May 2019 For an Equitable Sharing of National Revenue

National sphere (current/capital) Utilisation of total revenue, net of debt servicing costs and the contingency reserve National sphere (current/capital) Provincial sphere (current/capital) Local sphere Total Equitable Share S-Element (Constitutionally mandated basic service obligations) I-Element (Institutional and Administrative) B- Element (Other constitutional functions) Conditional grants -PCG - LCG + PCG + LCG CG=PCG+LCG (NES-PCG-LCG)+ (PES+PCG)+ LES+LCG= TNR 7 May 2019 For an Equitable Sharing of National Revenue

For an Equitable Sharing of National Revenue Sources of Revenue National Sphere Provincial Sphere Local Sphere Total Taxes User Charges Borrowing 7 May 2019 For an Equitable Sharing of National Revenue

National Equitable Share Priority claim: constitutionally mandated basic service obligations Contingency reserve: study to determine objective criteria for the use of contingency reserves 7 May 2019 For an Equitable Sharing of National Revenue

Provincial Equitable Share Review of current equitable share formula in light of provincial tax bill and capital grants scheme Most feasible provincial own revenue sources: surcharge on personal income tax, fuel levy, gambling and betting taxes Provinces should determine own tax rates within bands Tax room should be created to maintain national targets 7 May 2019 For an Equitable Sharing of National Revenue

Provincial Equitable Share Cont’d Further work has been done on the capital grants model. The model is based on: Actual capital expenditure for each service and province Efficient capital expenditure Actual capital stock for each service and province Capital backlog relative to international benchmark Rate of depreciation Future work: add roads and housing, and take account of capacity to spend 7 May 2019 For an Equitable Sharing of National Revenue

For an Equitable Sharing of National Revenue Local government finance: A proposed framework 7 May 2019 For an Equitable Sharing of National Revenue

Local government equitable share: Constitutional provisions Section 214(2) of the Constitution states that the equitable share should enable local government to: Provide basic services and perform other functions allocated to them Address developmental needs Meet their obligations in terms of national legislation Take account of fiscal capacity and efficiency 7 May 2019 For an Equitable Sharing of National Revenue

IDENTIFYING “BASIC MUNICIPAL SERVICES” (S) Role of Government: Identification of basic municipal services (BMS) Constitution and legislation facilitate the identification of BMS. Five criteria can be used: Schedule 4B/5B Bill of Rights Essential for life (Systems Act definition) Promotes development (S153a) Highlighted in policy and legislation Result: potable water, sanitation, municipal health, firefighting, stormwater drainage, refuse removal, municipal roads, electricity 7 May 2019 For an Equitable Sharing of National Revenue

Local equitable share cont’d Formula should be revised by 2004/05 to take full account of costs of basic service delivery and fiscal capacity Currently, only the I grant measures fiscal capacity, and cost estimates require updating Primary responsibility for funding free water and electricity to come from national government 7 May 2019 For an Equitable Sharing of National Revenue

For an Equitable Sharing of National Revenue Suggested Formula: 2004/05 ES = CSR – CR – RRC ES = equitable share CSR = cost of service responsibilities (basic municipal services) CR = cost recovery for electricity and water from tariffs, national funding, and consumer cross- subsidy RRC = revenue-raising capacity (includes tax capacity and user charges from other basic municipal services) 7 May 2019 For an Equitable Sharing of National Revenue

Principles for funding basic municipal services Extent to which basic municipal services are prioritised by a municipality will depend upon local circumstances One basic level of service, but different types of service delivery within the basic level If municipalities not delivering the full range of services, phase-in parameters may be needed 7 May 2019 For an Equitable Sharing of National Revenue

MUNICIPAL INFRASTRUCTURE TRANSFERS Current infrastructure grants: CMIP, CWSS, LED, Urban Transport Fund, SA Housing Fund, Electrification Fund Evaluation of current system: fragmentation, duplication, administrative costs Sustainability Investment decision and operating responsibility are not always held by same organisation 7 May 2019 For an Equitable Sharing of National Revenue

RATIONALISATION OF GRANT SYSTEM National Treasury Proposals One integrated grant, formula-based approach Allocations granted on 3 year basis Outcomes of projects will monitored as performance indicators FFC supports the principle of a single integrated capital grant In the interim a mechanism to promote co-ordination between national departments is required Introduction of a grant-matching system Municipalities should be required to fund a certain proportion of a particular project from their own revenue 7 May 2019 For an Equitable Sharing of National Revenue

Trends in local government borrowing General holding back by lenders Uncertainty accompanying restructuring process Uncertainty surrounding the actual amount of outstanding municipal debt Private lenders playing a less significant role DBSA largest player in the market, followed by INCA New boundaries may erode creditworthiness 7 May 2019 For an Equitable Sharing of National Revenue

PRINCIPLES FOR LOCAL GOVERNMENT BORROWING Long-term loans at market or near-market rates Assistance to fiscally weak municipalities Improved capacity Predictable revenue flows Off-the-shelf loans Rules-based approach to complement market discipline Regulatory framework to provide clarity on the pledging of equitable shares to access loan finance 7 May 2019 For an Equitable Sharing of National Revenue

Fiscal powers and functions: District and Local Municipalities Allocation of powers and functions to Category C (district) and Category B (local) municipalities stipulated in legislation, but can still vary according to circumstances Key principle: service authority should have jurisdiction over funding source Reform of RSC levies: Revenue should be retained in the local government sphere Revenue instrument should be subject to local control Until reform is effected, equalisation is necessary to address varying tax capacity 7 May 2019 For an Equitable Sharing of National Revenue

DISTRICT AND LOCAL CONT’D Source of funding for basic municipal services: two options Regional levies still ear-marked primarily for infrastructure, BMS funded through revenue-sharing Regional levies converted into general revenue source, infrastructure funding from national government Functions assigned by legislation (e.g. water, sanitation, health) funded through levies Any additional functions assigned by provinces funded through revenue-sharing FFC supports the second option 7 May 2019 For an Equitable Sharing of National Revenue

FUNDING OF DISTRICT AND LOCAL HEALTH SERVICES Funding trends: Extent of “own revenue” contribution of local municipalities varies between 0% and 100%, and contribution of metros varies between 12% and 50% District health services mostly funded through provincial agency agreements / contracts Expenditure trends: Significant differences in expenditure per capita between urban and rural districts, with higher expenditure in urban areas 7 May 2019 For an Equitable Sharing of National Revenue

FUNDING OF DISTRICT AND LOCAL HEALTH SERVICES CONT’D Long-term solution: Determine the proportion of primary health care to be funded by municipalities and how it will be funded No reason to exclude primary health care from local government equitable share, but should only occur in the long term 7 May 2019 For an Equitable Sharing of National Revenue

FUNDING OF DISTRICT AND LOCAL HEALTH SERVICES CONT’D Interim solution: health funding Calculate provincial health care subsidy to local government as a whole This amount is then subdivided amongst districts by formula These amounts will provide a guideline to provinces with respect to equitable allocations District allocations are then calculated for each local municipal area, and can be allocated to district or local municipalities Local municipalities can “top up” their local allocation to achieve or maintain a higher level of service 7 May 2019 For an Equitable Sharing of National Revenue