1. Ms S Makotoko Acting Deputy Director-General: Systems and Capacity Building 24 May 2006 Cape Town Presentation to the Select Committee on Finance “FFC Recommendations on the Division of Revenue 2007/08” Ms S Makotoko Acting Deputy Director-General: Systems and Capacity Building 24 May 2006 Cape Town

2. Contents 1.Introduction 2.Review of the Conditional Grants in South Africa’s IGFR System 3.Review of LG Equitable Share Formula 4.FFC Comments on NT RSC Levy Proposals 4.Review of the Development Component of the LG Equitable Share 6.Conclusion dplg 24 May 20062

3. 1. Introduction Purpose of the Presentation: To comment on the Financial and Fiscal Commission’s “Submission for the Division of Revenue 2007/08” dplg 24 May 20063

4. Review of Conditional Grants FFC Recommendations “Conditional Grants should only be used address spillover benefits and to deal with the funding of programmes identified as a matter of national priority that still need to be institutionalised in provincial or municipal budgets. In the latter case, such conditional grants should be phased into the equitable share once programmes has been institutionalised by provinces and municipalities.” dplg 24 May 20064

5. Review of Conditional Grants (cont) Comments: It is an appropriate direction that conditional grants must address or deal with the funding of programmes identified as matters of national priority; however the institutionalisation of programmes by either municipalities or provinces could not suggest that the conditional grants be phased into the equitable share The ultimate measurable objective of the conditional grants should be indicated by the institutionalization of a particular funded programme (through conditional grant) into the municipal business processes. This will ensure that conditional grants are not used to fund similar outputs or national priorities over and over again. dplg 24 May 20065

6. Review of Conditional Grants (cont) FFC Recommendations with respect to the design of conditional grants “The grants should be targeted to specific spending programmes with associated conditions but overtime these conditions could be relaxed to allow for greater sub-national spending autonomy and the grants may, eventually, be made unconditional”. dplg 24 May 20066

7. Review of Conditional Grants (cont) Comment The conditionality of the grants should be sustained as long as the national priorities attached to the grants remain, however the conditions attached to the funds should not exerting an undue administrative burden on provinces and municipalities nor should they stifle sub-national spending autonomy dplg 24 May 20067

8. Review of the LG Equitable Share Formula FFC Recommendations “Government should revise the current estimated cost if basic services to reflect current realities.” “Government should consider raising the current basic services cost to R175.” “In the longer term, the efficiency of the LES formula in addressing its stated principles and objectives will be enhanced if a comprehensive review and assessment of the cost of providing basic public services is urgently undertaken.” dplg 24 May 20068

9. Comments: The dplg is of the view that while it is important to review cost parameters and have them reflect as far as possible the true cost of providing basic services, the cost parameters for the four services were revised in 2004 together with the revision of the formula; In addition, raising/reviewing the basic services cost parameters in the formula should be done in a manner that takes into account the minimum standards for proving those services as set by the relevant sectors; It must be borne in mind that regardless of what the true cost of proving basic services is, the amount provided for in the formula will be reflective of what government can afford as the grant is meant to subsidise the cost incurred by municipalities to provide services; a comprehensive review of the cost of providing public services would indeed assist national government in addressing its long term objectives with respect to LG service delivery. dplg 24 May 20069 Review of the LG Equitable Share Formula (cont)

10. FFC Comments on a Local Business Tax (Coupled with a Business License Fee) “The National Treasury proposal does not clarify explicitly whether municipalities will generally have some leeway in the setting of local business tax rates”. Regarding the administrative convenience arrangements whereby SARS is a collecting agent for municipalities “FFC does not necessarily doubt the administrative convenience of this arrangement, it is not clear whether this proposal serves the interest of enhancing the fiscal capacity of local government ” dplg 24 May 200610 FFC Comments on NT RSC Levy Proposals

11. Comment The dplg concurs with the above comments by the FFC. In addition, regarding the Local Business Tax, the constitutional issues pertaining to the various options are cited in the National Treasury document titled “Options for the Replacement of RSC and JSB levies” but without a firm legal opinion being offered. What is required is a firm definitive legal opinion so that we have viable options from a constitutional perspective With regard to the administrative arrangements within, as long as the local business tax has some element of local government fiscal autonomy especially with regard to municipalities granted the power to set the tax rates, local government fiscal autonomy is enhanced In addition the issue of staff who administered the RSC levies at municipal level is not addressed by the NT document especially if SARS is to be a collecting agent dplg 24 May 200611 FFC Comments on NT RSC Levy Proposals

12. FFC Comments on VAT zero rating of municipal property taxes “The FFC notes the advantages listed by National Treasury and further notes that if the national fiscus is willing to sacrifice some tax revenue to accommodate this measure, this proposal will help to streamline municipal property taxes within the VAT system”. dplg 24 May 200612 FFC Comments on NT RSC Levy Proposals

13. Comment Although the dplg has no problem with the proposed, it must be noted that the option will benefit only local municipalities and metropolitan municipalities but not district municipalities, as the district municipalities have no power to levy rates, with the exception of district management areas. Hence, this option is not an appropriate option to replace RSC levies for district municipalities. dplg 24 May 200613 FFC Comments on NT RSC Levy Proposals

14. FFC Comment on Grants “The FFC supports the transitional arrangements for the replacement of the RSC/JSB levies since they are temporary and are meant to ensure that municipalities are not negatively affected by the abolition of the RSC/JSB levies” dplg 24 May 200614 FFC Comments on NT RSC Levy Proposals

15. Comment Although the dplg support the transitional arrangements for the replacement of the RSC/JSB levies, it does not support the notion of Cs entering into “funding arrangements” with Bs. This option could complicate the relationships between Bs and Cs. dplg 24 May 200615 FFC Comments on NT RSC Levy Proposals

16. FFC Recommendations regarding a long term revenue instrument replacement proposals “The need for wider discussion about the overall objectives of local government revenue and expenditure assignments and how these are expected to be aligned with the new proposals. ….The replacement of RSC/JSB levies should be viewed as an opportunity for aligning the local government fiscal framework with assignments of powers and function” FFC comments”. dplg 24 May 200616 FFC Comments on NT RSC Levy Proposals

17. Comment The dplg concurs with FFC comments that the replacement of RSC/JSB levies should be viewed as an opportunity for aligning local government fiscal powers with the division of powers and functions. In addition the decisions as to which categories of municipalities (A, B or C) are assigned the new local taxes or a mere grant funding should be based upon the powers and functions that individual municipalities perform. The current exercise of the review of the two tier local government system will impact on the division of fiscal powers and function. dplg 24 May 200617 FFC Comments on NT RSC Levy Proposals

18. FFC Recommendation: “the development component will not result in an overall increase in the LES; The Commission thus recommends that a development component should not be added to the current LES formula” “the development needs of LG should be better accounted for in the LES formula by designing a formula that more fully accounts for the full expenditure needs of LG.” dplg 24 May 200618 Review of the Development Component of the LG Equitable Share

19. Comments The dplg is of the view that not enough exploration on the merits and demerits of either inclusion/non-inclusion of this component or aspects of development in the formula has been undertaken and therefore such a recommendation may be premature Section 214(2)(f) if the Constitution should ideally be explicitly addressed by government when determining the equitable division of revenue to local government This is not explicitly done in the current formula and its being set at zero was done specifically so that government would explore the feasibility of its inclusion; Until such time that government (together with the FFC) has determined beyond doubt that there is no feasible way to address the “developmental needs of local government” through the formula, its inclusion should remain a possibility; It is also the dplg’s view that the explicit separation of 214(2)(f) from basic services and institutional needs of LG expressly requires government to explicitly address “developmental needs” within the formula. dplg 24 May 200619 Review of the Development Component of the LG Equitable Share (cont)

20. It is recommended that the Select Committee takes note of the comments made herein which may affect future financial years, particularly those relating to the LG Equitable Share and the replacement of RSC levies THANK YOU dplg 24 May 200620 Conclusion