1. PROPOSED FRAMEWORK FOR LOCAL GOVERNMENT FINANCE
Presentation to the Portfolio Committee on
Provincial and Local Government and the
Select Committee on Local Government and Administration
12 June 2001
19 February 2019
For an Equitable Sharing of National Revenue

2. DEVELOPING A FRAMEWORK FOR LOCAL GOVERNMENT FINANCE
Building blocks necessary for developing a framework:
Understanding of constitutional requirements
Identification of basic municipal services
Articulation of principles for funding municipal functions, and implications of principles for:
Equitable share formula
Funding of district and local municipal functions
Funding of local government infrastructure
Local government borrowing
19 February 2019
For an Equitable Sharing of National Revenue

3. CONSTITUTIONAL PROVISIONS
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
19 February 2019
For an Equitable Sharing of National Revenue

4. 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
19 February 2019
For an Equitable Sharing of National Revenue

5. 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, stormwater drainage, refuse removal, municipal roads, electricity
19 February 2019
For an Equitable Sharing of National Revenue

6. 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
19 February 2019
For an Equitable Sharing of National Revenue

7. 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 channelled 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
19 February 2019
For an Equitable Sharing of National Revenue

8. 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)
19 February 2019
For an Equitable Sharing of National Revenue

9. COMPARISON OF FFC FORMULA WITH CURRENT FORMULA
FFC: LES = S + m + T + I + B
Gov’t: LES = S + m + T + I
Similarities:
Both long-term formulas include S, m, T, and I elements
Differences:
FFC long-term formula includes “B” element
FFC “T” element intended to equalise differences in fiscal capacity amongst all municipalities, not just within metropolitan municipalities
“S” in current government formula calculated according to number of poor households x estimated cost of four services
19 February 2019
For an Equitable Sharing of National Revenue

10. IMPLEMENTATION OF THE FORMULA
Measurement of the cost of service responsibilities (CSR)
Requires the specification of different standards within each basic level of service
Measurement of revenue-raising capacity (RRC)
Should be based upon property rates, and LG electricity levy (when introduced)
Cost and revenue-raising components should be introduced simultaneously
Until data available, MTEF allocations act as proxy for CSR, and current formula still applies
19 February 2019
For an Equitable Sharing of National Revenue

11. FISCAL POWERS AND FUNCTIONS: DISTRICT AND LOCAL MUNICIPALITIES
Allocation of powers and functions to Category C (district) and Category B (local) municipalities stipulated in legislation, but can still vary according to circumstances
Key principle: service authority should have jurisdiction over funding source
19 February 2019
For an Equitable Sharing of National Revenue

12. DISTRICT AND LOCAL CONT’D
Source of funding: water and electricity
National grant for lifeline tariffs assigned to municipality delivering the service
If electricity transferred to Regional Electricity Distributors in future, the electricity subsidy would be paid to the relevant RED
Surpluses / deficits: under the jurisdiction of service authority
Service authority may enter into agreement with service provider regarding retention of surplus
19 February 2019
For an Equitable Sharing of National Revenue

13. For an Equitable Sharing of National Revenue
REGIONAL LEVIES
Problems with RSC levies: compliance difficult, turnover tax is regressive and causes economic distortions
Options for reform: improve, reform, or replace
Suggested principles:
Revenue should be retained in the local government sphere
Revenue instrument should be subject to local control
Until reform is effected, equalisation is necessary to address varying tax capacity
19 February 2019
For an Equitable Sharing of National Revenue

14. DISTRICT AND LOCAL CONT’D
Source of funding for other basic municipal services: two options
Regional levies still ear-marked primarily for infrastructure, BMS funded through revenue-sharing
Regional levies converted into general revenue source, infrastructure funding from national government
Functions assigned by legislation (e.g. water, sanitation, health) funded through levies
Any additional functions assigned by provinces funded through revenue-sharing
FFC supports the second option
19 February 2019
For an Equitable Sharing of National Revenue

15. FUNDING OF DISTRICT AND LOCAL HEALTH SERVICES
Funding trends:
Extent of “own revenue” contribution of local municipalities varies between 0% and 100%, and contribution of metros varies between 12% and 50%
District health services mostly funded through provincial agency agreements / contracts
Expenditure trends:
Significant differences in expenditure per capita between urban and rural districts, with higher expenditure in urban areas
19 February 2019
For an Equitable Sharing of National Revenue

16. FUNDING OF DISTRICT AND LOCAL HEALTH SERVICES CONT’D
Long-term solution:
Determine basic level of primary health care services, given national norms and standards
Currently being addressed by Government, and FFC conducting research on utilisation rates
Determine the proportion of primary health care to be funded by municipalities and how it will be funded
No reason to exclude primary health care from local government equitable share, but should only occur in the long term
19 February 2019
For an Equitable Sharing of National Revenue

17. FUNDING OF DISTRICT AND LOCAL HEALTH SERVICES CONT’D
Interim solution: health funding
Calculate provincial health care subsidy to local government as a whole
This amount is then subdivided amongst districts using FFC health formula
These amounts will provide a guideline to provinces with respect to equitable allocations
District allocations are then calculated for each local municipal area, and can be allocated to district or local municipalities
Local municipalities can “top up” their local allocation to achieve or maintain a higher level of service
19 February 2019
For an Equitable Sharing of National Revenue

18. MUNICIPAL INFRASTRUCTURE TRANSFERS
Current infrastructure grants: CMIP, CWSS, LED, Urban Transport Fund, SA Housing Fund, Electrification Fund
Evaluation of current system
Fragmentation:
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
Project based process
Funding ad hoc, based on one-year horizon
No consistent criteria to assessing applications
Sustainability
Investment decision and operating responsibility are not always held by same organisation
19 February 2019
For an Equitable Sharing of National Revenue

19. 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
19 February 2019
For an Equitable Sharing of National Revenue

20. INFRASTRUCTURE PROPOSALS CONT’D
Advantages of formula-based, three-year allocations
Municipalities responsible for prioritising and designing infrastructure projects, facilitating greater demand responsiveness.
A formula-based system likely to speed up the disbursement process.
A study should be undertaken to determine the mechanisms for grant disbursement to non-metropolitan municipalities.
19 February 2019
For an Equitable Sharing of National Revenue

21. LOCAL GOVERNMENT BORROWING
Challenges for local government borrowing:
Investor uncertainty generated by the new municipal boundaries
Intergovernmental reforms in the finance system which directly impact on the flow of municipal revenues
Capacity issues (financial, planning, accounting, investment)
Expanding service delivery responsibilities
19 February 2019
For an Equitable Sharing of National Revenue

22. TRENDS IN LOCAL GOVERNMENT BORROWING
General holding back by lenders
Uncertainty accompanying restructuring process
Uncertainty surrounding the actual amount of outstanding municipal debt
Private lenders playing a less significant role
DBSA largest player in the market, followed by INCA
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
19 February 2019
For an Equitable Sharing of National Revenue

23. 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
19 February 2019
For an Equitable Sharing of National Revenue