FFC SUBMISSION: DIVISION OF REVENUE 2002/2003 ---------------------------------------------------------------- PORTFOLIO COMMITTEE ON FINANCE 19 June 2001 4 August 2019 For an Equitable Sharing of National Revenue

BACKGROUND TO THE SUBMISSION FOR 2002/03 FFC Constitutional mandate Recommendations for 2001-2004 MTEF cycle Response from the Minister of Finance (Budget review Annexure E, Feb 2001) Stakeholder consultations during 2001 The issue of constitutionally mandated basic services(CMBS) Local Government issues 4 August 2019 For an Equitable Sharing of National Revenue

TOWARDS AN EQUITABLE SHARING OF NATIONAL REVENUE FFC PROPOSAL FOR STUDY OF: Defining CMBS Institutional Element Norms and Standards Other Obligations Infrastructure Funding 4 August 2019 For an Equitable Sharing of National Revenue

PROGRAMME ANALYSIS FRAMEWORK The FFC believes that a programme analysis framework could complement and guide the decisions on the equitable division of national revenue The matrices indicate the use of Equitable Share and Sources of Revenue May be used as a basis for progamme analysis framework 4 August 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 4 August 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 4 August 2019 For an Equitable Sharing of National Revenue

For an Equitable Sharing of National Revenue NATIONAL GOVERNMENT PRINCIPLES CMBS Progressive Realization of CMBS STUDY ON CONTINGENCY RESERVE 4 August 2019 For an Equitable Sharing of National Revenue

PROVINCIAL GOVERNMENT DEVELOPMENT OF 2001-04 MTEF RECOMMENDATIONS Provincial Equitable Share formula Review of the formula to account for Section 228 (Provincial Tax Powers) and capital grant scheme. Provincial Own Revenue Allow provincial access to taxes that raise significant tax revenue. The Commission reaffirms its previous position Allow provinces flexibility to determine own rates Creation of tax room in order to maintain national targets on tax burden. Capital Grants Model FFC capital grants model be applied in allocation of infrastructure grants 4 August 2019 For an Equitable Sharing of National Revenue

A Framework for the Local Government Equitable Share 4 August 2019 For an Equitable Sharing of National Revenue

CONSTITUTIONAL PROVISIONS FOR THE EQUITABLE SHARE 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 4 August 2019 For an Equitable Sharing of National Revenue

SUGGESTED FORMULA (LONG-TERM) The local government equitable share should therefore be structured like the provincial equitable share formula: LES = S + m + T + I + B S = basic municipal services m = spillover grant T = tax capacity I = institutional grant B = other constitutional and legislative obligations In the medium term (MTEF 2004/05): use S and T In the long term: incorporate I, B, and m 4 August 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, storm water drainage, refuse removal, municipal roads, electricity 4 August 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 4 August 2019 For an Equitable Sharing of National Revenue

PRINCIPLES FOR FUNDING LIFELINE TARIFFS Income should be derived from two sources: tariffs and low-income subsidies Subsidies could come from two sources: National subsidy: subsidies are a key instrument for redistribution and poverty alleviation Subsidy can be channeled through the equitable share or through a conditional grant, as facilitated by Municipal Systems Act Consumer cross-subsidy Limited application in many municipalities Government decides the proportion of national subsidy / cross-subsidy 4 August 2019 For an Equitable Sharing of National Revenue

SUGGESTED FORMULA: MEDIUM-TERM Long-term LES = S + T + I + m + B Medium-term ES = CSR – CR – RRC ES = equitable share CSR = cost of service responsibilities (basic municipal services) CR = cost recovery for electricity and water from tariffs, lifeline funding, and consumer cross-subsidy RRC = revenue-raising capacity (includes tax capacity and user charges from other basic municipal services) and CR = CCR + Li CCR = cost recovery from tariffs (electricity and water) Li = low-income subsidy (national grant and cross-subsidy) 4 August 2019 For an Equitable Sharing of National Revenue

Infrastructure and Borrowing LOCAL GOVERNMENT: Infrastructure and Borrowing 4 August 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 services viewed in isolation-not conducive to integrated development dissimilar institutional arrangements = higher administrative costs Duplication: CMIP covers water and sanitation but so does CWSS Funding ad hoc, based on one-year horizon No consistent criteria to assessing applications Sustainability Investment decisions and operating responsibility are not always held by same organisation 4 August 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 4 August 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 New boundaries may erode creditworthiness Limited access to private sector financial institutions No detailed impact analysis available on creditworthiness of new municipalities National Treasury studies suggest an erosion for non-metros 4 August 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 4 August 2019 For an Equitable Sharing of National Revenue