1. LOCAL GOVERNMENT INFRASTRUCTURE GRANTS REVIEW Presented by IGR | MIG Quarterly Workshop | September 2013

2. Reasons for the Review LG Infrastructure Grants review was announced in 2013 Budget Speech based on the following factors: –Proliferation of LG grants and the ad-hoc changes to the grant system (i.e. MWIG) in recent years, as raised by the FFC –Concern over the low spending on many LG infrastructure grants, as raised by parliamentary committees –Gaps in funding, i.e. disaster mitigation (LMs and sector departments) –Suggestions from the FFC and elsewhere to build more incentives into LG infrastructure funding to help improve performance –Responding to the varying levels of municipal capacity and growth in secondary cities – formalising policy of differentiation –Last wholesale review was 2003/04 SECRET

3. Background: Fiscal expansion vs enduring backlogs SECRET Households Without Access to Services in 2001 then 2011 Local Government Infrastructure Grants 2000-2012 (adjusted for inflation)

4. Purpose To assess whether the current local government infrastructure grant system is optimally structured to facilitate the efficient rollout of municipal infrastructure. Two parts to this: 1)Does it fund the right things? e.g. Target historical backlogs vs. growth? Is every sector covered? A review of the grant system’s principles and if these meet policy goals 2) Does it fund the things right? e.g. Direct vs. indirect grants? Urban/rural differentiation? Analysis of the grants to see how efficiently these goals are met Based on 1) and 2), the review will conclude with recommended changes to the grant system for the 2015 Budget. SECRET

5. Current grants (1): Number, scale and variety Grant name2013/142014/152015/16 Relevant National Department Direct grants (in thousand rands) Municipal infrastructure grant 14,352,060 14,683,835 15,448,070 DCOG Urban settlement development grant 9,076,906 10,334,684 10,699,773 Human Settlements Public transport infrastructure grant 4,668,676 5,126,029 5,278,881 DoT Integrated national electrification programme grant 1,634,772 1,564,658 2,056,090 DoE Municipal water infrastructure grant 602,965 1,058,976 2,671,934 DWA Neighbourhood development partnership grant 598,041 591,179 600,000 National Treasury Rural roads asset management grant 52,205 75,223 97,763 DoT Rural households infrastructure grant 106,721 113,124 118,328 Human Settlements Integrated cities development grant 40,000 150,000 National Treasury Direct grants total 31,132,346 33,697,709 37,120,840 Indirect Grants (000 rands) Regional bulk infrastructure grant 3,203,397 4,482,896 4,871,654 DWA Integrated national electrification programme (Eskom) grant 2,141,027 2,488,037 3,680,043 DoE Neighbourhood development partnership grant 55,000 58,300 65,000 National Treasury Indirect grants total 5,399,424 7,029,233 8,616,696 GRAND TOTAL 36,531,77040,726,942 45,737,536

6. Current grants (2): Share of grants by sector, as allocated by national government 24% 19% 13% 7%

7. Current grants (3): Evolution of grant system SECRET Water Serv. Proj.

8. Stakeholders and Consultation IGR to coordinate internal consultation within National Treasury Five current transferring departments  DCoG, DoT, DoE, DoHS, DWA Other relevant national departments  Environment, Rural, Sports etc 278 Municipalities (and PPMUs) SALGA, FFC, MISA, DPME SECRET

9. Method – based on LG equitable share review Collaborative and consultative cooperation at every stage: Stage 1 – (Objectively) identify problems Extensive data analysis Literature and policy review to identify principles of the grant system Working group to include DCOG, SALGA and FFC; plus sector departments when relevant and required Similar representation on a Steering Committee Stage 2 – Verify and discuss problems (esp. implementation) Extensive consultation –Within Treasury (IGR, Public Finance, ALM) –External with affected departments, SALGA, FFC, MISA and more Stage 3 – Build consensus around solutions Higher level consultation led by Steering Committee SECRET

10. Timelines A medium-term review aiming for 2015 Budget implementation Now – October 2013: –Confirmation and distribution of TORS; –Early engagements with stakeholders to make aware of process; –Data analysis of grants –Literature and policy reviews October 2013: Update at Budget Forum with circulation of discussion papers referring to data analysis and literature reviews February 2014: 2014 Budget primarily for minor adjustments to allow for following year implementation (phasing-out grants etc) March – September 2014: consultations and negotiations October 2014: New grant system fully announced at BF and in MTBPS February 2015: Full implementation of recommendations in 2015 Budget SECRET

11. Areas of research interest (1 of 2) Efficiency: Spending vs. outcomes, improving implementation of non- performing grants vs. shifting funds to other grants Differentiation: Urban vs. rural, immediate vs. long-term Implementation: Innovative methodologies, improving admin, clarifying roles&responsibilities, bottom-up process via stakeholder inputs Evolution: Can the system be dynamic and adapt over time? Principles that remain steadfast? Performance based grants? Sustainability: Maintenance, depreciation of assets, capacity, financial Service delivery chain: How to optimise bulk vs. reticulation? Is funding coherent and suitable from source to tap, from power station to plug etc.? Capacity and institutional reality: This review treats such challenges as exogenous but must still take them into account, how? SECRET

12. Areas of research interest (2 of 2) and areas to follow up after the review Areas of Research Interest (Continued) Target: Historical backlogs, ‘new’ backlogs, local economic development – how to find a balance between all three? Funding splits and sector gaps: Grants, own revenues, borrowing, private investment? Are all sectors sufficiently/appropriately funded? Issues for engagement and follow-up after the review Significant changes can’t be assumed to be adopted and implemented in full without challenges – communication and follow-up will be needed Ensure monitoring and evaluation procedures align with grant system Assess capacity-building initiatives and support mechanisms, ensure suitability and sufficiency for the new grant system to operate fully SECRET

13. Summary SECRET Aim Review the effectiveness (do we fund the right things?) and then the efficiency (do we fund the things right?) of the LG infrastructure grants system. Make evidence-based recommendations to improve the above. Method Extensive data analysis to reveal where the system structure can be improved, coupled with stakeholder consultation to hear how implementation can be improved (similar to LGES review) Proposed Outcome System meets current municipal infrastructure needs – Effectiveness System does so without additional cost to fiscus – Efficiency System is sufficiently differentiated, dynamic and responsive to change in short- and long-term – Sustainability

14. Way Forward Be aware of the process – we welcome written inputs to working group (DCOG key member) as work commences Expect formal municipal and provincial engagement in late 2013 and early 2014 TORs and update papers at October Budget Forum THANK YOU SECRET