Financial and Fiscal Commission Submission for the Division of Revenue 2009/10

1. Financial and Fiscal Commission Submission for the Division of Revenue 2009/10 Comments to Select Committee On Finance Cape Town Tuesday, 17 June 2008

2. dplg 1 • Introduction • Areas Commented Upon • dplg Comments on specific areas of the Financial and Fiscal Commission's Submission on the Division of Revenue 2008/09 Outline

3. Introduction dplg 2. • The dplg’s comments focus on matters in the FFC Submission that affect the provincial and local government spheres • The dplg notes that a number issues in the FFC’s Submission do not necessarily amount to recommendations but are research findings that recommend that further work on certain matters be undertaken before substantive recommendations are made

4. Areas Commented Upon: dplg 3. • World Cup 2010 Transport Infrastructure • Intergovernmental Data Issues • Transport: Road Classification Framework • Augmenting Local Government Revenue • Electricity Pricing, Generation and Distribution • Bottlenecks Hampering Housing Delivery • Financing of Health Care

5. The dplg Agrees with the Following Recommendations: dplg 4. • World Cup 2010 Transport Infrastructure • Intergovernmental Data Issues There is no need for any specific comment on these matters.

6. Transport: Road Classification Framework dplg 5. FFC Recommendations: That the process of classifying roads amongst the national, provincial and municipal spheres of government should be accelerated in line with the classification framework already established. dplg Comments: • The dplg agrees with the recommendation. • This is one of the stumbling blocks regarding the quantification of road backlogs for new infrastructure as well as maintenance and the funding thereof.

7. Augmenting Local Government Revenue (1) dplg 6. FFC Recommendations: That the replacement revenue source regarding the RSC levies for municipalities be a tax that enhances fiscal autonomy, strengthens accountability, yields an adequate, buoyant revenue stream and does not disturb macroeconomic balance dplg Comments: • Although the dplg agrees with the principles underpinned in the recommendations, it must be noted that: • In practice, in rural municipalities, there is little economic activity and large concentrations of poverty and unemployment, and hence very little scope for own revenue generation hence little scope for accessing the yields of even a relatively ‘bouyant’ revenue instrument • Therefore, any replacement revenue instrument that is purely in the form of a tax is unlikely to achieve the desired goal of enhancing LG fiscal autonomy; it may in reality compromise the funding of rural municipalities or at best mirror the existing inequalities in local government funding in terms of own revenue generation.

8. Augmenting Local Government Revenue (2) dplg 7. Findings from survey undertaken Municipalities favouring further enhancement of user charges, property rates on various property categories, property transactions, business turnover dplg Comments: • Although the dplg is of the view that there is scope to make use of existing revenue bases to arrive at better use of revenue instruments by municipalities, it is important to cite the following caution: • That the notion of “enhancing” certain revenue instruments such as property rates revenues and tariffs should be explained as this should not translate into over rating that places undue pressure on rate payers’ affordability for rates and tariffs just to meet LG revenue requirements. • The notion of tapping into taxes on property transactions and business turnover should not be hastily recommended as these already form bases for national taxes which are redistributed to LG through transfers; tapping into these may not yield favourable revenues for all municipalities

9. Augmenting Local Government Revenue (3) dplg 8. dplg Comments • Such a proposal should be reflected upon in context. Some district municipalities do not have direct service delivery responsibilities (e.g. water, sanitation & electricity) to communities, nor do communities directly elect district municipal representatives (councillors) • Thus, for some districts, the assignment of a local business tax to them would firstly violate the principle of revenue assignment/ expenditure responsibility matching; • It may introduce avoidable and undesirable intergovernmental challenges in terms of transferring and distributing such funds to local municipalities that have direct service delivery responsibilities; • There is no direct accountability (no service delivery responsibility) on the part of DMs to those businesses that would be liable for such a tax Findings from survey undertaken: That a new local business tax should accrue to district municipalities

10. Electricity Pricing, Generation and Distribution (1) dplg 9. dplg Comments • the dplg agrees that the financial viability of municipal electricity distributors should be addressed before going ahead with the REDs establishment process, given the important role that electricity revenue plays in LG funding, namely: • It is a cross subsidisation instrument • It is a credit control instrument • It plays a critical role in in the credit rating of LG (and as government, we trying to broaden the scope for LG to borrow to accelerate service delivery) FFC Recommendations: That Government should address the potential loss of a crucial revenue source for LG as a result of the establishment of REDs

11. Electricity Pricing, Generation and Distribution (2) dplg 10. dplg Comments • The dplg agrees and accepts in principle that higher electricity prices should translate into an adjustment of the electricity subsidy for poor households in the local government equitable share • In this regard, it should be noted that although it is agreed that the subsidy would have to be increased, that this amount is not likely to cover the full cost of providing electricity, thus, remaining a mere subsidy as it has always been the case. FFC Recommendations: That given the adverse impact that higher electricity prices will have on poor h/holds, government will need to increase annual funding for the rollout of services under the free basic electricity programme

12. Electricity Pricing, Generation and Distribution (3) dplg 11. The dplg would like to make the following general input regarding the impact of electricity pricing on local government • Government should move towards an electricity price determination process that is aligned to the municipal budgeting process; this is not currently the case as has been the case with the Eskom multi year price determination and the most recent application by Eskom to increase prices • Municipalities have determined tariffs in their budgets and increases cannot be accommodated in-year as per the MFMA • Municipalities can only factor these price increases in the next budget while they must contend with increased electricity costs in the current budget • Energy saving initiatives that have been imposed on municipalities to curb demand will constitute additional costs to municipalities, which is expected to be sourced from municipal own revenue; this will put further pressure on municipal budgets

13. Bottlenecks Hampering Housing Service Delivery dplg 12. dplg Comments • The dplg agrees with this recommendation. • In addition, the dplg is aware of the misalignment between the housing grant and MIG and the impact of this on service delivery. The review of the White Paper on local government is taking this into account as far as the possibility of devolving the housing function to local government to ensure proper planning and budgeting alignment is concerned. FFC Recommendations: That the accreditation of municipalities with adequate capacity should be accelerated

14. The Financing of Health Care dplg 13. FFC Statement: There is a process underway to fully shift the function of Primary Health Care to provinces. This shifting of the function will constitute further work from the Commission’s perspective. dplg Comments: • The intention to do further work is welcome, especially if this will address the current state of affairs where although the National Health Act (2003) assigns Primary Health Care to provinces, metropolitan municipalities still perform the function making use of their own revenue, given that provinces do not receive the requisite funding from national government to perform the function

15. Conclusion dplg 14. In conclusion, the dplg would like the Select Committee on Finance to note that: • The dplg appreciates the work of the FFC and in this regardthe FFC should in the long term consider assisting government with arriving at a correct approach for funding poorer municipalities going forward, as it has been found that regardless of the revenue instruments assigned to them, some municipalities are not likely to realise fiscal autonomy from own revenue sources for the foreseeable future THANK YOU