Comments on Division of Revenue Bill, 2005 Presented to: NCOP Select Committee on Finance

Introduction The report present the absolute objective views of SALGA regarding the division of revenue to local government. The presentation was structured along some of the guiding principles observed when equitable share formula was formulated; namely:  Predictability  Simplicity and transparency  Cost of service

Predictability Current allocations (2004) versus proposed allocations (2005) The proposed allocations show a decrease from the current allocations on some of the municipalities. This matter was raised last year and the explanation was that changes is due to the statistics showing the movement of people from rural to large cities. The concern is that the very people counted at the large cities still forms part of the constituencies in the rural municipalities and still expect better service there.

Predictability (Cont.) 2005/06 indicative allocations versus proposed allocations. Although explanatory memorandum to the division of revenue indicates that the indicative allocations for 2005/06 and 2006/07 are guaranteed, we observed that there is a slight decrease in the proposed allocations of some municipalities.

Predictability (Cont.) It is proposed that in future when the new information which affect the allocation of equitable share is obtained the current year allocation be guaranteed, but the amount by which the LG equitable share will increase be distributed only to those municipalities negatively affected by this new information.

Simplicity and Transparency Equitable share Allocation formula  The allocation formula used is not clearly outlined apart from outlining and explaining the new formula.  There is no break-down of the equitable share amount clearly showing the weight and the amount allocated to each component of the formula just as it has been done on the Provinces and MIG allocations.

Simplicity and Transparency (Cont.) MIG allocations  The aim of MIG is to rationalize the number of conditional grants within the system of intergovernmental transfers and create flexible capital funding source which municipalities can freely allocate to their prioritized IDP needs. MIG allocation now constitutes of an inflexible portion and if promoted many of these inflexible portions may be created in future which signals the national government’s lack of confidence in the MIG structure and its ability to redress infrastructural backlogs.

Simplicity and Transparency (Cont.) Restructuring grant  The allocation of this grant is still in a very small scale due to the fact that many applications by eligible municipalities are turned down as a result of such applications found to be of poor quality. National Treasury should create the conditions that will promote simplicity and transparency in accessing this grant by eligible municipalities.

Cost of Service The revised average cost of service for serviced areas is acknowledged and that of non-serviced areas is even fully supported. The concern for cost of service on serviced areas is that the fit for all cost of service approach tends to disadvantage municipalities with fairly high service costs due to factors outside their control.

Cost of Service Government should consider to introduce different average service costs for municipalities with relatively comparable cost of services. The approach would mean having more than one average cost of service.

Transfer of equitable share to municipalities The timing of equitable share installments transfer should seek to complement basic cash management requirements in municipalities. These period for installments transfer must thus be kept consistent and not to be changed with each year’s division of revenue legislation. Government supportive measures should be quite outstanding before the action to with-hold transfers to municipalities is constituted.

LG Fiscal Framework SALGA proposes that in order to avoid a major shift in revenue availability to local government the elimination of RSC levies by 2006 be replaced in all municipalities affected by the revenue source or tax instrument which is easily collectable.

LG Fiscal Framework (Cont.) Unlike the property tax which its revenue forms a bigger percentage of the debt owed to municipalities because credit control measures are difficult to enforce, the new revenue source or tax instrument should allow credit control measures to be highly enforceable.

Discrepancies between DOR Bill and LG Legislations Section 9 DORB 2005 Section 9 discusses a number of funding issues related to the provision of services through public entities. Issues are as follows:  Section 9(1)(b) is confusing and seems to contradict the rest of that subsection. Perhaps there is a grammatical error, but even so, why are the Municipal Systems Act and/or Municipal Finance Management Act not left to govern this issue in the spirit of cooperative governance?

Discrepancies between DOR Bill and LG Legislations  Section 9(4) exempts municipalities from compliance of processes and procedures of Part 2 of the Systems Act that a municipality comply with before entering into a service delivery agreement.  It is not clear what is referred to as Part 2 of the Systems Act.  Why should such, apparently, substantial sections of the Systems Act not apply?  In the case of confusion, which legislation (Systems Act, MFMA or DORA) supersedes which?

Discrepancies between DOR Bill and LG Legislations Section 10 DORB 2005  Section 10 requires that a public entity providing funds to municipalities must provide this in writing to National Treasury 14 days before transfer. Section 36 of the MFMA is much more consistent with initiatives to create intergovernmental fiscal coordination.  What is the difference between the transfers described in section 10 of DORB 2005 and those envisaged in section 36 of the MFMA?  Why is this section (section 10 of DORB) here?

Conclusion Members should note that during the drafting of the DOR bill SALGA through the consultation process submitted the inputs for consideration to National Treasury (see the attached letter). SALGA will thus interact with National Treasury in order to seek a formal response on such issues not considered in this bill.

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