1. FFC SUBMISSION: DIVISION OF REVENUE 2002/2003
PORTFOLIO COMMITTEE ON FINANCE
19 June 2001
4 August 2019
For an Equitable Sharing of National Revenue

2. BACKGROUND TO THE SUBMISSION FOR 2002/03
FFC Constitutional mandate
Recommendations for MTEF cycle
Response from the Minister of Finance (Budget review Annexure E, Feb 2001)
Stakeholder consultations during 2001
The issue of constitutionally mandated basic services(CMBS)
Local Government issues
4 August 2019
For an Equitable Sharing of National Revenue

3. TOWARDS AN EQUITABLE SHARING OF NATIONAL REVENUE
FFC PROPOSAL FOR STUDY OF:
Defining CMBS
Institutional Element
Norms and Standards
Other Obligations
Infrastructure Funding
4 August 2019
For an Equitable Sharing of National Revenue

4. PROGRAMME ANALYSIS FRAMEWORK
The FFC believes that a programme analysis framework could complement and guide the decisions on the equitable division of national revenue
The matrices indicate the use of Equitable Share and Sources of Revenue
May be used as a basis for progamme analysis framework
4 August 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
4 August 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
4 August 2019
For an Equitable Sharing of National Revenue

7. For an Equitable Sharing of National Revenue
NATIONAL GOVERNMENT
PRINCIPLES
CMBS
Progressive Realization of CMBS
STUDY ON CONTINGENCY RESERVE
4 August 2019
For an Equitable Sharing of National Revenue

8. PROVINCIAL GOVERNMENT
DEVELOPMENT OF MTEF RECOMMENDATIONS
Provincial Equitable Share formula
Review of the formula to account for Section 228 (Provincial Tax Powers) and capital grant scheme.
Provincial Own Revenue
Allow provincial access to taxes that raise significant tax revenue. The Commission reaffirms its previous position
Allow provinces flexibility to determine own rates
Creation of tax room in order to maintain national targets on tax burden.
Capital Grants Model
FFC capital grants model be applied in allocation of infrastructure grants
4 August 2019
For an Equitable Sharing of National Revenue

9. A Framework for the Local Government Equitable Share
4 August 2019
For an Equitable Sharing of National Revenue

10. CONSTITUTIONAL PROVISIONS FOR THE EQUITABLE SHARE
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
4 August 2019
For an Equitable Sharing of National Revenue

11. 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
4 August 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, storm water drainage, refuse removal, municipal roads, electricity
4 August 2019
For an Equitable Sharing of National Revenue

13. 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
4 August 2019
For an Equitable Sharing of National Revenue

14. 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 channeled 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
4 August 2019
For an Equitable Sharing of National Revenue

15. 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)
4 August 2019
For an Equitable Sharing of National Revenue

16. Infrastructure and Borrowing
LOCAL GOVERNMENT:
Infrastructure and Borrowing
4 August 2019
For an Equitable Sharing of National Revenue

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

18. 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
4 August 2019
For an Equitable Sharing of National Revenue

19. TRENDS IN LOCAL GOVERNMENT BORROWING
General holding back by lenders
Uncertainty accompanying restructuring process
Uncertainty surrounding the actual amount of outstanding municipal debt
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
4 August 2019
For an Equitable Sharing of National Revenue

20. 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
4 August 2019
For an Equitable Sharing of National Revenue