Workshop Select Committee on Finance 27 February 2008 Lungisa Fuzile, Kenneth Brown, Jonathan Patrick, Jo-Ann Ferreira 27 February 2008

Budget Process Budget process at the heart of government Guided by policies, priorities & making trade-offs Not a bean-counting process Co-ordination between planning, budgeting, policy development and implementation Budget Preparation Collectively agreed in Cabinet / EXCO Involves consultation with provinces and LG through Budget Council, Budget Forum and Extended Cabinet (Premiers and SALGA) Budget approval after tabling Role of finance portfolio and standing committees, Joint Budget Committee Role of all portfolio committees

Budget Process Stages Four periods / stages: Period One: 1 March to 31 May (Preparation and Reprioritisation) Period Two: 1 June to 31 August (Division of Revenue) Period Three: 1 Sept to 30 November (Allocation of Resources) Period Four: 1 Dec to 31 March (Finalisation of Documentation)

Period One (end 31 May) Period One: 1 March to 31 May Three processes Closure of 2007/08 financial year 31 May deadline for submission of financial statements IGFR data Preparations for 2008/09 budget implementation & PFMA reporting Re-visit baseline info against actual outcome Initial info on consolidated budgets Detailed departmental budget info Capturing info onto the system DoRA Preparing for the 2009 MTEF TCF Strategic Planning session Budget Council Lekgotla

Period Two (1 June to 31 August) Provincial budget and expenditure review Will not publish one this year Will consolidate information for parliament Work from Cabinet lekgotla Finalise budget priorities, pressures and policy work of 4 x 4s Conditional grants (finalised as per appendix to Annexure W1) Joint Minmecs in October Budget Council and Budget Forum for division of revenue Extended Cabinet meeting with Premiers (October) Provinces submit draft budget to NT on 31 August

Period Three (1 Sept to 30 Nov) From extended Cabinet on DoR to MTBPS MTBPS published end-October Revised macro framework MTBPS to contain draft Annex W1 and draft DORA Bill MTEC hearings in provinces Second provincial visit by NT Adjustments Estimate (provincial by end-Nov)

Period Four (1 Dec to 31 March) From MTBPS to tabling of budgets Further priorities Submission of draft printer’s proofs by 1 Dec Assessment of provincial budgets (twice) Info on projected 2008/09 expenditure based on actual expenditure up to end December (s32 report) Tabling of budgets Preparation for implementation in 2009/10

Major Budget Events Bi-laterals with departments (April to May) 10 X 10 (June) 4 X 4’s (July) Cabinet Lekgotla (July) Provincial Visits (End July) Budget Council Lekgotla (End August) National and Provincial MTEC (September) Division of Revenue Workshop/Peer Reviews Joint Minmecs (October) Extended Cabinet (20 October) MTBPS (27 October) Budget Day (Feb) Provincial Budgets (within two weeks)

Budget documentation Budget legislation Budget documentation Division of Revenue Bill Appropriation Bill Revenue laws Budget documentation Budget Speech Budget Review Estimates of National Expenditure Estimates of National Revenue Provinces have own budget documents Provincial budgets and expenditure review (post-budget) Adjustments Appropriation Bill (post-budget) MT budget policy statement (pre-budget)

Departmental budget documents Portfolio committees can use budget docs to improve oversight over departments Strategic and performance plans and ENE Outputs and measurable objectives and targets In-year quarterly and end-financial year performance targets Annual report requires reporting against these measurable objectives Many departments provide poor performance info Section 32 PFMA monthly and quarterly reports allow for in-year monitoring

Budget Reform Agenda Entrenching transparency Reinforcing accountability Clarifying and separating roles Executive Set policy, oversee delivery by administration and account for outcomes Administration Implements, manages budgets, accounts for outputs Parliament Exercises oversight over executives NT runs budget process and produces documents to support all of the above

Full impact on equitable shares

Local Government Equitable Share Origin Sections 214 and 227 of Constitution Characteristic Unconditional Purpose Assist municipalities

Evolution of the LGES Changes to account for the costs of: Transformation Data updates New Priorities

Evolution of the LGES 1998/99 – Introduction 2000/01 – incorporation of R293 town subsidies (ex R293 personnel) 2001/02 – incorporation of R293 personnel subsidies, adjustment to the measurement of poverty, increasing the poverty threshold from R800 to R1100, 2002/03 – the re-alignment of functions to the newly demarcated municipalities, the funding of district municipalities and the funding of a nodal component to support the operational costs, 2003/04 – the introduction of free basic services to support poor communities and the alignment of the equitable share to the division of powers and functions between locals and districts,

Evolution of the LGES 2004/05 – update data from the 2001 Census, and adjusting the guarantee mechanism to phase in the impact of the new Census results, and 2005/06 – introduction of the new equitable share formula, which is more redistributive with a revenue raising and development component 2006/07 – update data following the repeal of cross boundary municipalities, introduction of environmental healthcare subsidies

Formula Grant = BS + D + I - R ± C BS = Basic Services D = Development I = Institutional Capacity R = Revenue Raising Capacity Correction C = Correction and stabilisation factor

Basic Services Component Purpose Enable municipalities to provide basic services and free basic services Compliments the MIG Characteristics Supports households earning less than R800 per month Recognises water reticulation, sanitation, refuse removal and electricity reticulation Distinction between poor households actually serviced and poor households receiving no service

Basic Services Component BS = [Water Subsidy1 * Poor with Water + Water Subsidy 2* Poor without Water] + [Sanitation Subsidy1 * Poor with Sanitation + Sanitation Subsidy2 * Poor without Sanitation] [Refuse Subsidy1 * Poor with Refuse + Refuse Subsidy2 * Poor without Refuse] [Electricity Subsidy1 * Poor with Electricity + Electricity Subsidy2 * Poor without Electricity] [Environmental Health subsidy*Total number of households] Full subsidy for households that currently receive services Partial subsidy for un-serviced households set at one third of the full subsidy

Institutional Support Purpose Supplement the funding of a municipality for administrative and governance cost Structure I = Base Allocation + [Admin support*Population] + [Councillor Support*Number of seats] = R350 000 + [R1*Population] + [R36 000*Councilors]

Revenue Raising Capacity Correction Recommendation by FFC Lack of data No national property valuation roll Not enough effort to raise revenues Not equitable to use actual revenue raised Basic approach: Demonstrated revenue raising capacity Municipal Information from SSA Total available municipal revenue “taxed” at 5% R1.3 billion contributed towards costs of basic services

Development Developmental objectives Future policy Nodal allocations in previous formula Currently set at zero Further research in 2006

Stabilising Constraint Large-scale changes to LGES since 1998 Previous approach provided a 70% guarantee on prior year’s allocation New approach provides guarantee on indicative outer-year baseline amounts Ensure that allocations are not negative due to revenue raising correction

Other considerations Powers and Functions Basic Services allocation goes to municipality that actually performs function Balancing allocations Rescaling the BS, D and I components Grant = Adjustment factor*(BS+D+I) – R ± C Adjustment factor calculated so as to ensure that the system balances Two groups: Those who require a “top up” and those that do not Total size of top up deducted from municipalities that do not require the top up in proportion to the “surplus”

Measurement Issues Poverty Census 2001 Income method Servicing Levels Most municipalities unable to provide cost information per service Subsidy amounts in new formula are based on study by DPLG Full Subsidy (Service costs) is R130 for serviced poor households R45 for un-serviced poor households All households receive approximately R12 p.a. for environmental health

Conclusion Accuracy in measurement of variables is important Measurement is dynamic and future challenges are in new data revenue raising capacity cost parameters (subsidies) Allocation process is subject to regular changes and innovation

Thank you