Financial and Fiscal Commission Review of the Local Government
Fiscal Framework
Presentation to the Select Committee of Appropriations
22 May 2013
IntroductionIntroduction• Section 3(1) of the FFC Act empowers the Commission
to act as a consultative body for and make recommendations and give advise to organs of state in the national, provincial and local spheres of government on financial and fiscal matters
• Section 3(2) emphasises that this function be performed to the extent that it is envisaged in the Constitution or required by national legislation and undertaken:– On the Commission’s own initiative; or– On request of an organ of state
• The Commission resolved to review the LGFF in terms of this provision of the Act
Presentation to the Select Committee on Appropriations Outcomes of the FFC Review of the Local Government Fiscal Framework 2
The Review ProcessThe Review Process• FFC undertook the LGFF in terms of the Act
– Two sets of public hearings were held• First public hearing outlined the problem statements within funding
system
• Second public hearing explored options to solve problems raised
• The Commission prepared a problem statement which was then used as a basis for the first Public Hearings– A technical report was developed for discussion before the second
Public Hearings• Stakeholder inputs were processed
– Report was finalised and tabled in Parliament on 19 April 2013.
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Key AreasKey Areas• The principle of differentiation
• Attaining equity in vertical and horizontal DOR
• Data constraints
• Challenges with conditional grants
• Incentives
• Review of own revenue sources
• IGR coordination
• Social contract between LG and communities
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DifferentiationDifferentiation
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Type of MunicipalityTotal
populationTotal
households
Total gross value added
per capita
% of people
employed
% of households
earning below R3200pm
Average population
density
Operating expenditure
per capita
Revenues from local taxes per
capitaMetropolitan municipalties 16,974,424 4,714,021 75.67 34% 46% 1388 3,789.48 3,279.51Secondary cities 8,233,208 2,207,004 50.80 29% 59% 221 2,242.55 1,940.00Larger towns 3,985,216 1,074,513 40.83 27% 62% 87 1,843.08 1,513.82Smaller towns 6,906,926 1,808,666 29.16 22% 69% 19 1,466.46 988.70Rural municipalities 12,331,695 2,673,914 9.44 13% 80% 81 370.49 120.77Total/average 48,431,469 12,478,118 41.18 25% 63% 359 1,942.41 1,568.56
Context of DifferentiationContext of Differentiation
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Recommendations for Recommendations for DifferentiationDifferentiation
• The LGFF should account for the differences in the minimum efficient expenditure needs and fiscal capacities of municipalities in the country.– It is recommended that government should explicitly adopt a
methodology to differentiate municipalities in the LGFF• Based on performance and context. • Inform funding and capacity support
– The Commission proposes the following factors that should inform such a differentiation:
• Context (exogenous variables): poverty; economic activity within a municipality, spatial factors such as topography and population density; powers and functions assigned; population dynamics (migration).
• Performance (endogenous variables): debt collection, expenditure efficiency, vacancy rates; ability to plan and execute budgets (using past budget surpluses/deficits as an example).
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EXPE
ND
ITU
RE
REVE
NU
E
actual costs
Vertical and Horizontal EquityVertical and Horizontal Equity
8Presentation to the Select Committee on Appropriations Outcomes of the FFC Review of the Local Government Fiscal Framework
costs incurred in providing
services at a reasonable
level of expenditure
for a properly managed
service
maximum own
revenue
gap
actual costs
gap
actual own
revenue
Structural gap Actual gap
gap
fiscal capacityfiscal effort
inefficiency
EXPE
ND
ITU
RE
REVE
NU
E
8
Vertical and Horizontal EquityVertical and Horizontal Equity• Vertical division adequate for operating expenditure
– Estimated to be R21 Billion in 2009/10 without grants– Total LES package was R23.7 billion
• LES formula was R20.2 billion• Replacement grant and Councillor support was R3.5 billion
– The quantum of resources allocated to local government for operating expenditure is sufficient but there are inequities in its distribution across municipalities
• Commission notes that new LES formula addresses horizontal concerns
• Commission estimates shortfall in vertical division on capital expenditure– Estimated at R42 billion without grants– Total shortfall of R25 billion with infrastructure grants at R16.8 bn
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Vertical and Horizontal DOR (OPEX) (1)Vertical and Horizontal DOR (OPEX) (1)
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-10 000
-9 000
-8 000
-7 000
-6 000
-5 000
-4 000
-3 000
-2 000
-1 000
0A B1 B2 B3 B4
Am
ou
nt
in R
bill
ion
(2
00
9/1
0)
Fiscal gap largest in rural municipalities – Need for greater distribution of LES to these municipalities
The New Formula and Horizontal DoR The New Formula and Horizontal DoR (Opex 2)(Opex 2)
11
Distribution of funds better reflect demographics and expenditure need
Share of funds follow share of hh and poor
The New Formula and Horizontal DoR The New Formula and Horizontal DoR (Opex (3)(Opex (3)
12
Funds better reflect revenue ability
Vertical and Horizontal DOR for Vertical and Horizontal DOR for CapexCapex
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-20 000
-15 000
-10 000
-5 000
0A B1 B2 B3 B4
Am
ount
in R
bill
ions
(2
009/
10)
Recommendations for Vertical and Recommendations for Vertical and Horizontal DORHorizontal DOR
• The Commission recommends a review of the funding for capital expenditure in local government given the identified vertical fiscal gap on municipal capital budgets, which is driven by increasing infrastructure needs and constraints on municipal capital revenues (operating surpluses and borrowing powers).
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Data and Impact of Infrequent Data and Impact of Infrequent Updates on AllocationsUpdates on Allocations
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• Phasing-in of allocations required due to infrequent updating of grant formulae. In terms of LES:– Some municipalities experience dramatic
increases ranging from 73% to 83%– Others experience significant decreases ranging
from -41% to -49%
• Funds have NOT been following expenditure need and demand for services!
Presentation to the Select Committee on Appropriations Outcomes of the FFC Review of the Local Government Fiscal Framework
Recommendations on Data Recommendations on Data ConstraintsConstraints
• Reiterates previous data recommendations for improvement in collection and frequency of LG data
• Role of the Local Government Data Forum is strengthened to ensure that its mandate of rationalising data requests to local government is fulfilled.
• Recommend extension of LGDF mandate:– Collating and updating local government data collected by
departments – Exploring methods to fill the between-census data gaps.
• The Commission also recommends that StatsSA conduct a census every five years, in accordance with the Statistics Act of 1999
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Conditional Grants - ProliferationConditional Grants - Proliferation
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Consolidation of CG in 2004/05 – 2003 FFC Recommendation
Conditional Grants - TargetingConditional Grants - Targeting
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-
50
100
150
200
250
300
350
A B1 B2 B3 B4 C1 C2
R/h
h (2
012/
13)
Capacity building grants per poor hh by municpal category
Are CG allocations reflective of need?
Recommendations on Conditional Recommendations on Conditional Grants (1)Grants (1)
• Rationalise LG CG system– Consolidate grants where possible to minimise administrative burdens
• Government should generally refrain from introducing or fragmenting new and existing grants unless they have clear objectives and value-add to the LGFF.
– Attempt to use existing grant mechanism to distribute the funds if possible.
• Where the introduction of a new grant is necessary it should have explicit objectives, performance targets, monitoring mechanisms, required capacity building (to ensure expenditure absorption) and criteria for its phasing out and exit strategy.
• The Commission further recommends that the Commission be consulted directly before a new conditional grant is introduced to local government as per Section 214(2) of the Constitution
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Recommendations on Conditional Recommendations on Conditional Grants (2)Grants (2)
• Implement existing legislation to withhold CG funds for perennial under spenders – Use such instances as an indicator for capacity building
– Should not shift grant administration as an attempt to solve problem
• The transferring officers need to ensure that a comprehensive analysis of the outcomes of retrospective and current grant allocations is undertaken– In accordance with the DORA.
– Accounting and tracking outcomes of conditional grants need to be improved
– appropriate risk mitigation measures put in place to account for potential over or under-spending
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Municipal Revenues –Grant Municipal Revenues –Grant DependencyDependency
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Municipal Revenues – Consumer Municipal Revenues – Consumer DebtDebt
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0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
45,000,000
50,000,000
2004 2005 2006 2007 2008 2009
Municipal Debt (R'000)
Recommendations on Own Recommendations on Own Revenues(1)Revenues(1)
• The Commission recommends that municipalities should explore new and innovative methods to generate revenue and collect outstanding debt, including taking advantage of new technologies
• Municipalities need to ensure that their tariffs are cost reflective and sensitive to the indigent profile of municipalities in order to minimise municipal consumer debt levels– This practice will ultimately result in poor households not getting billed
for services they cannot afford
• The Commission supports the devolution of additional taxation powers to metros and other urban areas to support their greater economic growth mandate in the urban built environment– Should not compromise the greater macroeconomic policies and stability
of the country
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Municipal Revenues - Fuel levyMunicipal Revenues - Fuel levy
• Own revenue or transfer?• No control over
generation or allocation• If transfer, then use of
fuel sales as a proxy is unclear
• What incentives does it create, if any?
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-
100
200
300
400
500
600
2009/10 2010/11 2011/12 2012/13
R pe
r cap
ita
Fuel levy allocation to Metros per capita
Joburg
Cape Town
eThekwini
Ekurhuleni
Tshwane
Nelson Mandela
Buffalo City
Mangaung
-
5
10
15
20
25
2009/10 2010/11 2011/12 2012/13
R pe
r R'0
00 G
VA
Fuel levy allocation to Metros per GVA
Joburg
Cape Town
eThekwini
Ekurhuleni
Tshwane
Nelson Mandela
Buffalo City
Mangaung
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Recommendations on Own Recommendations on Own Revenues(2)Revenues(2)
• Review the sharing of the General Fuel Levy with metros
• Government needs to find a permanent replacement for the RSC levies for district municipalities
• Municipalities are constitutionally assigned the electricity distribution function and are also legislatively entitled to apply a surcharge on the electricity tariff charged. In instances where Eskom is the service provider on behalf of the municipality, the municipality should be allowed to impose a surcharge on Eskom’s tariff.
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Municipal Performance – Efficient Municipal Performance – Efficient and Effective Use of Resourcesand Effective Use of Resources
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Poor performance in LG manifests in poor service delivery, under spending, poor audit outcomes, violent protests etc
Municipal Performance Issues - FBSMunicipal Performance Issues - FBS
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Portion of identified indigents NOT receiving FBS
Recommendations on Municipal Recommendations on Municipal Performance IssuesPerformance Issues
• Formula-based grant mechanisms should implicitly or explicitly reward good municipal performance and not reward poor performance– Commission undertaking research on this issue
– Commission supports measures to incentivise good performance and penalise poor performance
• When determining current year allocations, all conditional grant allocations should explicitly account for past spending (and outcomes) performance
• The Commission supports the withholding of unspent grants but notes that such measures are ultimately futile if capacity-building support is not given to the poorly performing municipality
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Context of Capacity Support and Context of Capacity Support and Incentives in the LGFFIncentives in the LGFF
29Presentation to the Select Committee on Appropriations
Outcomes of the FFC Review of the Local Government Fiscal Framework
Poorly performing municipality
Well performing municipality
Amount of transfer per household
Capacity building transfers
Performance based transfers
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Context for Improving Municipal Context for Improving Municipal Performance Performance
• LG performance needs to improve to ensure objectives of LGFF are achieved– Internal controls– Act on AG’s concerns
• Greater support for LG from other spheres– As per Section 154 of the Constitution– Improved monitoring and evaluation – Improved capacity support – Direct and structured intervention
• Appropriate implementation of Sections 139 and 216(2) of the Constitution
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Context for Oversight and SupportContext for Oversight and Support
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CitiesTowns & FarmsMostly Rural
Legal InterventionsInsti
tuti
onal
Perfo
rm
ance
Inadequate
Adequate
Excellent
Proble
matic
Spatial & Socio-Economic Context
Differentiated Remedial Support
Hands-on Support
Support and Advise
Regulatory Oversight and Co-ordination
Recommendations on Improving Recommendations on Improving IGRIGR
• Review of the capacity and performance of national, provincial departments and provincial treasuries in supporting municipalities as required by the Constitution.
• Commission recommends stricter implementation of regulations to establish intergovernmental forums, at both political and administrative level, that ensure support, communication and policy implementation by all parties within a province/district, including improved interactions with national government departments and public entities such as Eskom and water boards.
• Greater efforts should be made to promote the sharing of information and learning-by-doing across the local government sphere.
• As per Section 105 of MSA, national and provincial government ensures that a financial impact analysis is undertaken when new laws and regulations are enacted to quantify the impact of such legislation in the function of municipalities.
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Recommendations on Improving Recommendations on Improving Social ContractSocial Contract
• The implementation of laws and regulations that support and impose the need for community consultation can only be improved by sound political and administrative support from other spheres of government
• Municipalities need to ensure community consultation is not undertaken as a matter of legal compliance but that communities are actively involved in the budget process
• Ward councillors need to strengthen their roles in the consultation processes
• Council needs to improve its oversight role within municipal governance structures
• Government needs to review the mechanisms available to promote and strengthen social accountability – This can include improved and formal channels for public grievances such as
community grievance forums
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Conclusion (1)Conclusion (1)
• In framing a long term fiscal framework, a differentiated approach responsive to both context and performance is required– Recognise huge variation in the distribution of economic activity and socio
political profiles of municipalities
– Rewards good performance and sanctions underperformance
• Vertical DOR for operational expenditure is adequate but needed to be targeted better.– The Commission supports the LES formula review and is confident that it will
address the previous problems. In particular rural municipalities will receive allocations more commensurate with their fiscal needs
• There is a vertical fiscal gap in relation to capital expenditure and rehabilitation which must be addressed
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Conclusion (2)Conclusion (2)
• Commission is concerned about the revenue situation in municipalities– increased dependence on grants even in metros
– lack of own revenue instruments
• Commission reiterates its previous concerns about conditional grants– Inadequate planning
– Poor monitoring, and evaluation
– Proliferation
– Poor targeting
• Transitional and implementation arrangements– Effectively and efficiently spending of funds – particularly rural municipalities
– Improve capacity buildings initiatives and monitoring and evaluation procedures
– Ensure MFMA and MSA provisions for competent municipal officials are enforced
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THANK YOU.
Financial and Fiscal CommissionMontrose Place (2nd Floor), Bekker Street,Waterfall Park, Vorna Valley, Midrand,Private Bag X69, Halfway House 1685
www.ffc.co.zaTel: +27 11 207 2300Fax: +27 86 589 1038