1. LG EQUITABLE SHARE Presentation to Portfolio Committee 5 June 2002

2. BACKGROUND  3 types of transfers to LG will facilitate implementation of Free/ Basic Services: –Infrastructure –capacity building –equitable share transfers  FBS can only be provided if infrastructure is in place  Backlogs higher in rural areas than in urban areas –Key constraint not lack of commitment, but multiple pressures faced by municipalities –Various smaller municipalities will follow a more phased-in approach

3. BACKGROUND (cont)  Equitable share to LG introduced due to: –Problems with previous systems admin by provinces –Constitutional requirements (sections 214 and 227)  Consistent and transparent basis for allocation –Formula-driven (no need to apply)  Poverty focused –Assists municipalities to provide basic services to low-income HH –Assists selected municipalities to maintain basic admin  Equity  Predictability –3-year allocations –Drops limited to 70% from previous year

4. LG EQUITABLE SHARE ALLOCATIONS FINANCIAL YEAR AMOUNT R million 1998/99 1 024 1999/2000 1 673 (R447m for R293 functions) 2000/01 1 867 2001/02 2 618 2002/03 3 852 2003/04 5 021 2004/05 5 461 (amounts up to 2000/01 exclude “R293 town personnel grant”) (ES & other related transfers, % increase in 2001/02 = 11%)

5. ANALYSIS 2002/03 (excl R293) 03/0404/05 Prov SI TOP-UP NODALTOTALTOTALTOTAL EC25%29%46%26%26%27% FS13%7%5%12%12%11% G14%1%6%13%12%11% KZN17%29%61%18%18%18%18% MP5%2%18%0%5%5%5% NC3%11%5%4%4%4% NP10%12%21%13%10%11%11% NW8%6%0%7%8%8% WC5%3%8%5%5%5%

6. ANALYSIS (cont). CatS(Rm)I(Rm) Top- up (Rm)Nodal(Rm)R293(Rm) Total (without R293) (Rm)% A72300525177521% B2 185286718283249666% C2708401305648413%

7. COMPONENTS  Current formula approved by Cabinet during 1998 –BASIC SERVICES (S) GRANT to ensure access to basic municipal services –INSTITUTIONAL CAPACITY (I) GRANT to enable selected municipalities to maintain basic admin –TAX BASE EQUALISATION (T) GRANT not introduced as two-tier metro system replaced with one-tier system –MATCHING (M) GRANT not introduced (to address spillovers between municipalities)  Improvements to formula being reviewed –Data availability limits certain improvements, such as revenue raising ability of individual municipalities

8. OUTPUTS: LG EQUITABLE SHARE  Responsibilities of spheres - LG equitable share: National government: –Size of LG equitable share (vertical split) takes into account LG service delivery and developmental responsibilities –Allocations to individual municipalities are equitably distributed among municipalities i.t.o. fiscal capacity and service responsibilities (horizontal split) –Assisting municipalities in implementing “free basic services” (NG and PG) Local government: –Progressive use of the equitable share for its intended purposes as stipulated in section 227 of the Constitution

9. IMPROVEMENTS/ADJUSTMENTS  Prior improvements introduced: –Improved method of measuring poverty (exp) introduced from 2001/02 fy –Poverty line for poverty increased from R800 to R1 100 from 2001/02 fy  Equitable share allocations for 2002 MTEF: –Allocations released on 15 April 2002 –Budget i.t.o. municipal financial year

10. IMPROVEMENTS/ADJUSTMENTS (cont)  Equitable share allocations for 2002 MTEF be made: –selected district municipalities will receive I grants to maintain basic administrations –selected district municipalities, incl. DMAs, will receive a basic service (S) grant i.t.o. ‘status quo’ provision current –Equitable share provision through S grant for the current approved nodes –Future activities: allocations from 2003/04 be linked to the division of powers and functions between Categories B and C

11. TARGETING OF LG EQUIT SHARE  Enablement, not prescriptive –NG encourages municipalities to use ES for intended purpose –NG issues guidelines on targeting low-income HHs  Municipalities are accountable to their communities and are responsible for developing appropriate targeting mechanisms  Some municipalities struggle to target ES due to insufficient info on low-income HHs within their areas –In future, STATS SA will provide data on web re infra provision, number of poor households, etc. per municipality

12. UTILISATION OF EQUITABLE SHARE  Basic services” consist of the following basket of services: –Electricity/energy(free) –Water(free) –Refuse –Sanitation  Also: municipalities define access to roads and public transport, protection from flooding and facilitation of community facilities as basic services

13. INCORP DWAF OPER SUBSIDIES  Equitable share funds be linked to Service Authority (not Service Provider)  Equitable share not transferred to non-municipal entities  Water Operating Transfer will be incorporated into equitable share as part of “guaranteed amount”  Amount incorporated as follows: –Year one (70% of amount received under Water Transfer Subsidy) –Year two (70% of amount received in Year one (or 49%) –Year three (70% of amount received in Year two (or 34%) –Etc.

14. REVIEW OF LG FUNDING  Review local government funding –Inter-Ministerial Committee appointed to review LG funding requirements i.t.o. developmental mandate –Review for short and medium-term finalised (2001/02 and 2002/03 fys) Resulted in increased funding to LG: R328 million allocated through 2001/02 Adjust Budget Equitable share allocation to LG were increased from R2,6b in 2001/02 to R3,8b in 2002/03 –Longer-term review to be undertaken during 2002+ (2003/04 financial year) Proposals to July 2002 Cabinet Lekgotla Follow-up submissions to Budget Forum etc

15. LG FINANCE REFORMS  Equitable share one of the first reforms implemented - part of a “package” of reforms  Other fiscal reforms also required: –Capital grants alignment/consolidation –Improved borrowing –Optimisation of own revenues (property tax reforms, improved credit control, service delivery efficiencies)  Reform of LG will be long-term process

16. THANK YOU The main funding stream for operating subsidies to local government is the equitable share THANK YOU