1. ----------------------------------------------------------------
FFC SUBMISSION FOR THE
DIVISION OF REVENUE 2002/03
Provincial Hearings
August 2001
7 May 2019
For an Equitable Sharing of National Revenue

2. Background: Financial and Fiscal Commission
The FFC was established in terms of Section 220 of the Constitution
Advisory body, required to be independent and impartial
Role of the Commission:
Annual recommendations on the division of revenue between the national, provincial and local spheres of government (vertical division)
Annual recommendations on the distribution of the provincial and local equitable shares (horizontal division)
Recommendations on any legislation relating to fiscal powers of provinces or municipalities
7 May 2019
For an Equitable Sharing of National Revenue

3. For an Equitable Sharing of National Revenue
FFC Submission for 2002/03
Recommendations for MTEF Cycle
Consideration of all three spheres of government
Central theme: constitutionally mandated basic service obligations
Focus on local government
7 May 2019
For an Equitable Sharing of National Revenue

4. Equitable Sharing of Nationally Collected Revenue
The division of total national revenue should ensure that constitutionally mandated basic service obligations have priority claim
FFC study: provide clear definitions of constitutionally mandated basic services and other constitutional obligations
Programme analysis framework could complement and guide the decisions on the equitable division of national revenue
7 May 2019
For an Equitable Sharing of National Revenue

5. 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
7 May 2019
For an Equitable Sharing of National Revenue

6. For an Equitable Sharing of National Revenue
Sources of Revenue
National Sphere
Provincial Sphere
Local Sphere
Total
Taxes
User Charges
Borrowing
7 May 2019
For an Equitable Sharing of National Revenue

7. National Equitable Share
Priority claim: constitutionally mandated basic service obligations
Contingency reserve: study to determine objective criteria for the use of contingency reserves
7 May 2019
For an Equitable Sharing of National Revenue

8. Provincial Equitable Share
Review of current equitable share formula in light of provincial tax bill and capital grants scheme
Most feasible provincial own revenue sources: surcharge on personal income tax, fuel levy, gambling and betting taxes
Provinces should determine own tax rates within bands
Tax room should be created to maintain national targets
7 May 2019
For an Equitable Sharing of National Revenue

9. Provincial Equitable Share Cont’d
Further work has been done on the capital grants model. The model is based on:
Actual capital expenditure for each service and province
Efficient capital expenditure
Actual capital stock for each service and province
Capital backlog relative to international benchmark
Rate of depreciation
Future work: add roads and housing, and take account of capacity to spend
7 May 2019
For an Equitable Sharing of National Revenue

10. For an Equitable Sharing of National Revenue
Local government finance:
A proposed framework
7 May 2019
For an Equitable Sharing of National Revenue

11. Local government equitable share: 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
7 May 2019
For an Equitable Sharing of National Revenue

12. 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
7 May 2019
For an Equitable Sharing of National Revenue

13. Local equitable share cont’d
Formula should be revised by 2004/05 to take full account of costs of basic service delivery and fiscal capacity
Currently, only the I grant measures fiscal capacity, and cost estimates require updating
Primary responsibility for funding free water and electricity to come from national government
7 May 2019
For an Equitable Sharing of National Revenue

14. For an Equitable Sharing of National Revenue
Suggested Formula: 2004/05
ES = CSR – CR – RRC
ES = equitable share
CSR = cost of service responsibilities (basic municipal services)
CR = cost recovery for electricity and water from tariffs, national funding, and consumer cross- subsidy
RRC = revenue-raising capacity (includes tax capacity and user charges from other basic municipal services)
7 May 2019
For an Equitable Sharing of National Revenue

15. 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
7 May 2019
For an Equitable Sharing of National Revenue

16. MUNICIPAL INFRASTRUCTURE TRANSFERS
Current infrastructure grants: CMIP, CWSS, LED, Urban Transport Fund, SA Housing Fund, Electrification Fund
Evaluation of current system: fragmentation, duplication, administrative costs
Sustainability
Investment decision and operating responsibility are not always held by same organisation
7 May 2019
For an Equitable Sharing of National Revenue

17. 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
7 May 2019
For an Equitable Sharing of National Revenue

18. 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
7 May 2019
For an Equitable Sharing of National Revenue

19. 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
7 May 2019
For an Equitable Sharing of National Revenue

20. 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
Reform of RSC levies:
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
7 May 2019
For an Equitable Sharing of National Revenue

21. DISTRICT AND LOCAL CONT’D
Source of funding for 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
7 May 2019
For an Equitable Sharing of National Revenue

22. 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
7 May 2019
For an Equitable Sharing of National Revenue

23. FUNDING OF DISTRICT AND LOCAL HEALTH SERVICES CONT’D
Long-term solution:
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
7 May 2019
For an Equitable Sharing of National Revenue

24. 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 by 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
7 May 2019
For an Equitable Sharing of National Revenue