South Africa’s Intergovernmental Fiscal system

1. South Africa’s Intergovernmental Fiscal system 22 June 2007

2. South Africa:Are these really perceptions??? • Federal/Central View: Giving money and power to sub-national governments is like giving whiskey and car keys to teenagers. • Provincial and LocalView: We need more grant monies to demonstrate that “money does not buy anything”. • Citizens: The magical art of passing money from one government to another and seeing it vanish in thin air.

3. The Legal Framework (1) • The Constitution, 1996 • Establishes three spheres • National, 9 provinces and 283 municipalities & assigns functions (Schedules 4 &5) • some functions are concurrent, others are exclusive • Although spheres are distinctive Constitution prescribes • cooperative governance S(40 & 41) • sharing of revenue raised nationally • There is provision for different forms of intervention • Sections (100 for provinces & 139 for Local Gov)

4. The Legal Framework (2) • Intergovernmental Fiscal relations Act, 1997 • Establishes Budget Council • Comprising Min of Fin and 9 MECs for Finance • Also establishes Budget Forum • Which is the BC extended to include organised LG • The two are used for consultation on • financial & fiscal matters • legislation &/or policy with financial implications • matters pertaining to financial mgt & monitoring

5. The Legal Framework (3) • The Financial & Fiscal Commission Act, 1997 • sets out functions of the FFC, which include • acting as a consultative body for, and making recommendations and giving advice to, organs of state on financial & fiscal matters • Also assess fiscal impact of changes in powers and functions • The Public Finance Management Act, 1999 • Financial management • Procedures relating to budgeting, budget formats & financial management & reporting • The Municipal Finance Management Act, 2003 • Sets the legal framework for financial management, budgeting, expenditure management, procurement, reporting, roles of administrators led by accounting officer vs roles of political office bearers led by mayor

6. The Legal Framework (4) • The DOR Act • Required by the Constitution • Divides nationally raised revenues • Municipal Structures Act • Provides for categorisation of municipalities • Broad framework for the assignment of powers and functions • Municipal Systems Act • Framework for core processes of planning …. • Intergovernmental Relations Framework Act • Regulates intergovernmental institutions • Municipal Property Rates Act

7. Key institutions • Legislatures - national & provincial, Councils • Cabinet & Excos • Ministers’ Committee on the Budget • Budget Council/Budget Forum • Technical Committees • national & provincial • intergovernmental

8. Financial & fiscal matters • Features of SA system • fiscal imbalance & inequity (historical) • Revenue raising power rest with national gov. • Provinces raise only 4% of total revenue • Local Government about 92% • bulk of public services delivery by provinces • education, health, welfare & housing • but there are moves to expand fiscal capacity of provinces • Provincial Tax Regulations Process Act

9. Division of nationally raised revenue

10. The Provincial Equitable Share Formula

11. Background • Joint effort between Treasury & FFC • Has explicit components for social services which make the bulk of provincial expenditure • Reviewed annually by Budget Council, and based on FFC’s recommendations • Formula is redistributive

12. Structure and weights of the provincial formula

13. Data used in the Formula

14. Conditional grants

15. Conditional grants

16. Provinces and the MTEF • Get baseline allocations • 3 year allocations • equitable share • conditional grants • Revisions to baselines made annually • informed by policy changes • health,education,social development,housing etc • changes in macroeconomic environment • wage agreements/personnel bargaining chamber • Allocation letters • three years • adjustments to budgets during the year

17. Provinces and the MTEF • Provinces submit their budgets to NT • credibility checks done • try and influence provinces where there are risks • Budgets tabled within 2 weeks after tabling of national budget • legislatures • table strategic plans as well • one year operational plan • hearings which lead to approval of budget • first year voted for

18. Provinces and the MTEF • Implementation of budget • budget loaded onto system before expenditure commences • Reporting • monitoring during the year • prov. depart. report to provincial treasury monthly • provincial treasuries report to national treasury • State of provincial finances reported on quarterly • financial statements compiled within 2 months after the end of financial year • annual reports within 5 months after the end of financial year

19. Overview of LG in SA • There are 3 categories of municipalities • Category A - Big cities/metropolitan areas • Category B - Local municipalities • Category C – Combinations of Bs • Powers and functions

20. Service delivery responsibilities of LG

21. Categorisation of municipalities • Local Government consist of • Category A municipality has exclusive municipal executive and legislative authority in its areas (x6) • densely populated (ave 2.5m people), economic hubs, self reliant, large budgets up to R20b • Category B municipality shares municipal executive and legislative authority in its area with a category C municipality within whose area it falls (x231) • Varying population sizes and budgets • Category C municipality has municipal executive and legislative authority in an area that includes more than one municipality (x46) • Approx. 5 locals in each district A C B C B B B B B B

22. Division of powers and functions • Allocation of own resources • Property taxes allocated to categories A and B • User charges i.t.o municipality authorised for services • Equitable Share and conditional grants (incl infrastructure) • Aligned to functional division i.r.o water, sanitation, electricity, refuse removal, municipal roads and environmental health • Some mismatches remain between services and fiscal division • Category B munies allocated limited functions receive property rates • Category C munies with substantial functional responsibilities mainly reliant on grant financing

23. Progress in service delivery • Population of 44,8m (2001 Census) • Population grew by 10,4% from 1996 to 2001 • Highest population growths in urban areas • Municipalities responsible to address historical backlogs as well as service delivery needs due to an increasing population • Access to services • 70% of households had access to electricity in 2001 (58% in ‘96 Census) • 72% of HHs had access to water in 2001 (70% in ‘96 Census) • 54% of HHs had access to flush or chemical toilet (50% in ‘96 Census) • 55% of HHs had access to refuse removal (51% in ‘96 Census) • Target is to address water backlogs by 2008, electricity by 2010, sanitation by 2013, and remainder by 2013 • Poor households to receive Free Basic Services • Varying progress by municipalities

24. Evolvement of LG fiscal system • Various reforms to LG fiscal system • Reforms to both equitable share and infrastructure grants • Substantial increases made to transfers in acknowledgement of local government’s large service delivery responsibilities • Reforms to own resources • The aggregate size of municipal budgets have doubled over the past five years, from R64b in 01/02 to R132b in 06/07 • Large variances in budgets of the 283 municipalities • Metro • Size of metro budgets range between R3b and R18b • Average of 2,4 million people per metro (715 367 HHs) • A third of population resides in metros (which increases to half the population if Top 21 municipalities are included) • Limited reliance on transfers • Local municipalities • Budgets range from very small (below R10m) to substantial (R2b) • Populations also vary substantially from just below 2 000 households per municipality to 200 000 households per municipality • Reliance on transfers vary • District municipalities • Budgets range between just below R10m to approx. R400m • Reliance on transfers vary

25. Trends in transfers to LG

26. Transfers vs total mun budgets Note: NT LG Budget Database (transfers include rollovers from previous years)

27. Municipal financial mngt and reforms • Municipal budget reforms introduced under the Municipal Finance Management Act from 1 July 2004, based on following principles • Promoting sound financial governance by clarifying roles and responsibilities of council and officials • Ensuring a strategic approach to budgeting • Modernisation of financial management • Promoting co-operative and consultative governance • Promoting sustainable local government • MFMA’s financial and fiscal reforms include • New budget standards and formats (the objective is to achieve qaulity and credible multi-year budgets) • The establishment of audit committees and internal controls • Improvements to procurement and supply chain management processes • Performance measurement and reporting • Staff competency levels • Mechanisms to resolve financial problems • Procedures to determine and manage misconduct

28. Future issues / Way forward • LG fiscal framework to be reviewed and updated to account for • Current financial position and service delivery capabilities of various categories and types of municipalities • Alignment between functional and fiscal division of powers and functions between category A and B municipalities • Permanent replacement options for RSC and JSB levies that were abolished 1 July 2006 • Funding of district municipalities • Continued review of the LG equitable share formula • Capital finance and borrowing issues, including role of MIG • Proper alignment between cross-cutting functions required, including priority setting, resource allocation and implementation of services (housing, public transport, health, libraries, etc) • Sector reforms impacting on municipal finances (electricity and water) • When Municipal Fiscal Powers and Functions legislation is enacted • Setting norms and standards i.r.o. municipal surcharges • Evaluate requests for new municipal taxes

29. Structure of Formula • The LG formula has the following components: • Grant = Basic Services (BS) + Development (D) + Institutional Support (I) - Revenue Raising (RRC) +/- Stabilisation Constraint (C) • D will be set at zero for now

30. Some remaining challenges • IGR system • Coordination in respect of concurrent functions • Tension between cooperative relations vs legislated relations • Division of powers and functions may require minor adjustments • Very wide variations among our municipalities pose challenges for policy development and resource allocation • Implementation of certain programmes is slow, often due to inadequate capacity • Output or performance information is not readily available, thus affecting: • Policy making, planning and resource allocation • Assessment of progress with policy implementation and the impact of policies

31. Reduce poverty and unemployment Skills development Better national health Economic priorities: Growth Second economy Welfare services +EPWP+ housing GET+FET Strengthening of health sector Planning + Public investment + execution Roads + other projects EPWP + BBBEE Key priorities under provincial sphere

32. What is at issue here? • The debate on coordination/cooperative relations is about: • what the law prescribes and allows • Legal authority to make decisions • Boundaries and limitations • what amount of choices are allowed to provinces • what choices do they make • what effect do provincial choices have on attainment of national objectives/priorities • what tools can national use to influence provincial choices

33. Types of decisions and degree of provincial choice and discretion • National decides policies and funding mechanism • The nature of decision and funding mechanism determine degree of provincial choice/discretion • Statutory expenditure and CG funding leave little choice/discretion for provinces • ES and non-statutory expenditure leaves lot of room for provincial choices, discretion and risk of deviation from national goals

34. The nature of the problem • National government makes the ff charges: • Provincial budgets fail to give effect to national priorities that inform the DOR • Consequently: • Insistence on CGs • Calls for broader curtailment of provincial choices and discretion • Assertions that cooperative governance does not work • Etc

35. Provincial counterarguments • National priorities: • Ignore province-specific circumstances • Do not accommodate non-social services • Policy disagreement • Past funding levels and expenditure trends • Capacity constraints and readiness to spend • Do not provide for full cost of policies • Disagreements on appropriate funding level

36. Where can things go wrong? • Within the sector • Poor policy processes • Between line departments and treasuries • Within provincial executives • Between national and provinces • Vertical division of revenue • Inadequate resources for non-social service • Insufficient funds for a given priority

37. Possible solutions • Deepening of policy making process • Including coordination between Cabinet and EXCOs • Protocol for communicating national policies with funding implications for provinces • Formal discussion of policies at PCC and Makgotla preceded by in-depth discussion in provinces • Strengthening of budget processes • Costing of policies must be mandatory • Creation of space for bottom up identification of priorities • Adherence to spirit of cooperative governance • Reviewing the intergovernmental system • Less provinces • Greater implementation role for national government? • Municipalities