Financial and Fiscal Commission Recommendations and Research on Local Government Issues

Financial and Fiscal Commission Recommendations and Research on

Local Government Issues

Portfolio Committee on Co-operative Governance and Traditional Affairs

09th November 2010

Outline of the SubmissionOutline of the Submission

1. Role and Function of the FFC

2. Past FFC Local Government Recommendations

3. FFC Recommendations for the Division of Revenue 2011/12

4. Current Local Government Working Programme of the FFC

5. Concluding Remarks

Portfolio Committees on Co-Operative Governance and Traditional Affairs 2

3Portfolio Committee on Co-operative Governance and Traditional Affairs

1. Role and Function of the FFC1. Role and Function of the FFC

Role and Function of the FFCRole and Function of the FFC

• What?– A permanent statutory body established in terms of Section 220 of the Constitution– Independent and subject only to the Constitution and the law, and– Must function in terms of an act of parliament

• Mandate of Commission – Makes recommendations, envisage in Chapter 13 of the Constitution or in national

legislation to Parliament, Provincial Legislatures, and any other authorities determined by national legislation

• Enabling legislation • Section 214 (2), 218(2), 228 (2), 229(5), 230(2) 230A(2) of the Constitution

– Financial and Fiscal Commission Act (No 99. of 1997) IGFR Act (No. 97 of 1997)– Provincial Tax Regulation Process Act, Municipal Fiscal Powers and Functions Act,

Borrowing Powers of Provincial Government Act

• FFC in IGFR system– Various Municipal Finance Management Act, Municipal Systems Act, Money Bill

Amendment Procedure and Related Matters Act 4Select Committee on Co-operative Governance and Traditional Affairs

Role and Function of the FFCRole and Function of the FFC

• FFC’s primary outputs/reports in terms of Section 221 of the Consitution:– Annual Submission on the DoR:

• Submitted 10 months prior to Tabling of the DoR Bill by Minister• Contains recommendations/proposals for the following fiscal year and

MTEF– Submission on the DoR Bill:

• Submitted to Parliament in February and outlines the Commission’s response to the DoR Bill and relevant annexure.

– Submission on the MTBPS• Contains the Commission’s response the MTBPS and adjustments to

the division of revenue – Annual Report– Any other special reports made at own initiative or request by organs of

state.

5Select Committee on Co-operative Governance and Traditional Affairs

The CommissionThe Commission

• In terms of Section 221(1) of the Constitution– Chairperson and Deputy Chairperson– Seven other members– 2 National nominees, 3 provincial nominees and 2 local

government nominees

• Currently three vacancies• All appointed by President in consultation with

Premiers, and Organised local government• Minister of Finance coordinates the process through

Budget Council and Budget Forum

Joint Meeting of the Standing and Select Committees on Appropriations2 November 2010

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General Principles

• Commission is concerned with IGFR– Legislative provisions or executive decisions that affect

either provincial or local government from a financial and/or fiscal perspective

– Includes regulations associated with legislation that may amend or extend such legislation

• Important stakeholders for consultation in IGFR– Ministry of Finance, The Presidency, Organised Local

Government Ministry of Cooperative Governance and Traditional Affairs, Parliament, Provinces, National Planning Commission


3. Past FFC Local Government 3. Past FFC Local Government RecommendationsRecommendations

The LES and the FFCThe LES and the FFC

• The local government equitable share (LES) is the portion of nationally raised revenue that is constitutionally afforded to the local government sphere in accordance with sections 227 (1) and 214 (1) (a) of the Constitution

• Since its inception in 1998, the LES has undergone several reviews, including a major review in 2005/06 financial year that saw the introduction of the current formula, replacing several versions of a previous formula

• FFC has evaluated, commented and made several inputs to changes in the LES

• FFC has made several recommendations to government on the current LES formula from 2005 to date. These are summarised below with the responses from government, where available:

Joint Meeting of the Standing and Select Committees on Appropriations2 November 2010

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Local Government RecommendationsLocal Government Recommendations

Select Committees on Co-operative Governance and Traditional Affairs 10

Area Year RecommendationGovt. Response

LES

2006/07 DoR

The LES should fully account for the full expenditure needs of local government

FFC proposed a total of 8 municipal services that should be deemed as basic, relative to the needs of constituents and the its links to schedules 4B and 5B of the Constitution. These services included: Water, Sanitation, Electricity, Refuse Removal, Municipal (environmental) Health Services, Fire Fighting, Storm Water Management, Municipal Roads

`FFC recognises that to fully engage in stimulating LED, there is need to provide funding for additional services covering a wide array of public services such as all-weather road, street lights, and environmental health care, public transport, housing, et

Accepted

Rejected 3 of the services: Fire Fighting, Storm Water Management, Municipal Roads

2007/08 DoR

Efficiency of the LES formula in addressing its stated principles and objectives will be enhanced if a comprehensive review/assessment of the cost of providing basic services is urgently undertaken.

Accepted, noted that review of LES under-way



Area Year RecommendationGovt.

Response

Transport 2006/07 DoR

Government should consider the devolution of bus and taxi subsidies to municipalities where the capacity exists to manage these services

Accepted (noted in MTBPS)

Housing2006/07 DoR

Accreditation of municipalities where capacity exists (reiterated again in Recommendations for 2009/10 DOR) Accepted, but

no progress (noted in MTBPS)

New housing subsidies should be linked to MIG and LES to ensure that municipalities can deliver basic services to poor households

Accepted. Concerns around potential regressive effects noted




Response

Electricity 2009/10 DoR

Restructuring process slow, need to finalise legislation Accepted but little progress to date

Capacity2010/11DoR

Government must establish an intergovernmental wide framework for understanding whatconstitutes a lack of capacity within the context of local government

Each capacity-building programme must have a clear outline of measurable objectives, targetsand timelines.

Accepted

Replication of poorly defined roles and responsibilities between national, provincial and district municipalities in the policy framework should be eliminated. This is necessary tocreate clear lines of responsibility and accountability for spheres of government or sector departments over their capacity-building roles for local government

Accepted




Response

Capacity2010/11DoR

A variety of grant instruments should be used to address different capacity challenges within differentfunctional areas

Appropriations for Siyenza Manje should be allocated through the Division of Revenue like other capacity grants. This will promote order, transparency andaccountability

Accepted

Rejected – funds for Siyenza Manje allocated to the DBSA

Other Areas of RecommendationsOther Areas of Recommendations

• Input on Municipal Fiscal Powers and Functions Act (MFPFA)– Currently no framework to evaluate the appropriateness of municipal taxes and to inform the

authorisation process as part of the MFPFA.– Would have been better if taxes were analysed collectively and assigned to groups of

municipalities – Key issue to be raised is tendency to enforce earmarking of locally collected resources by

National Treasury. Legislation does not include a requirement that for a tax to be approved they must have been earmarked for a particular function

• Input on Local Government Turnaround Strategy (LGTAS)– FFC welcomed the strategy and noted the following:

• there is a need for clarity on resource availability, time frames, sequencing of processes, existence of capacity to monitor and evaluate the strategy, and risks and constraints.

• The success of this strategy will also depend on proper consultations being undertaken with other stakeholders, including communities at large

• Input on Property Rates Amendment Bill– FFC stance is that DCoG conduct a thorough cost benefit analysis of the financial and fiscal

implications prior to implementing proposed changes


Recommendations on Data IssuesRecommendations on Data Issues

• National and provincial government departments, agencies and other organs of state should eliminate duplicate data requests submitted to municipalities.– Establishment of uniform definitions based on purpose

– A national coordinating body should be established to coordinate and rationalize the data collection activities of local governments

– The national body should recommend and implement data collection standards according to the South African Statistical Quality Assessment Framework principles

• Government response– Coordinating body already exists in the form of the Local Government Data Collection

Forum.



2. FFC Recommendations for the 2. FFC Recommendations for the DoR 2011/12DoR 2011/12

Outline of 2010 Annual SubmissionOutline of 2010 Annual Submission

Covers four interrelated areas:• Global Economic Crisis, Fiscal Frameworks and Coping with

Vulnerabilities

• Options for Social Assistance Reform During a Period of Fiscal Stress

• Towards an Effective, Efficient and Transparent Intergovernmental System

― The Performance of Conditional Fiscal Transfers in the South African Fiscal Relations System

― Local Government Revenue Enhancement Programs and Fiscal Stress

― The Review of the Local Government Equitable Share Formula

― Regionalising Municipal Services: The Case of EDI

• Intergovernmental Fiscal Issues in Urban Public Transport17Portfolio Committee on Co-operative Governance and Traditional Affairs

I. Reforming Conditional Fiscal TransfersI. Reforming Conditional Fiscal Transfers

• When introducing and terminating conditional grants, national departments must:– Introduce mandatory, systematic process for designing and planning

individual conditional grants

– Ensure there is an independent evaluation of grant performance at entry, midterm and end of grant

• Government should – Make the criteria for dividing grant allocations transparent

– Continue to emphasise importance of non-financial data reporting

• National departments must make accounting for delivery a prerequisite for most conditional grants

• Budget allocation process must follow grant frameworks specifically


II. Local Government Revenue II. Local Government Revenue Enhancement Programs and Fiscal StressEnhancement Programs and Fiscal Stress

• Revenue challenges originate from (a) local economic, social and demographic circumstances which lead to structural fiscal stress, (b) the design of the intergovernmental fiscal system, and (c) poor service delivery which influences willingness of consumers to pay.– Small rural municipalities mainly face structural fiscal stress, whilst

urban municipalities encounter cyclical fiscal stress.

• Municipal capacity to generate own revenue being eroded by (a) inability and unwillingness by municipalities to collect revenues (b) inability or unwillingness by residents to pay.

• Revenue enhancement programs appear not to be producing the desired results.


II. RecommendationsII. Recommendations

• Government should: – Adopt standard early warning systems to detect fiscal stress in

municipalities and reach consensus on them

– Legislate, through S43 of the LGMS Act of 2000, revenue collection as one of the key performance areas against which to assess overall municipal performance

– Support efforts to estimate the fiscal capacity and fiscal effort of municipalities to dispel the perception that certain municipalities will never be financially viable

– Subject revenue enhancement programmes to empirical tests that cover changes in (a) effective tax rates (b) tax burdens (c) yield, efficiency and overall fairness


III. Local Government FormulaIII. Local Government Formula

• Government should:

– Use institutional component of Local Equitable Share to assist poor municipalities

– Remove step structure of the differentiated tax mechanism of the Revenue Raising Component and develop a flat gradient structure so that municipalities on outer ends of bands are not treated unfairly

– Develop alternative methods of revenue prediction for the Revenue Raising Component.


IV. Regionalising Municipal ServicesIV. Regionalising Municipal Services

• In efforts to universalize access to electricity and improve efficiency in the EDI, government has, since the mid 1990s, attempted to create six Regional Electricity Distributors (REDs).

• In 2009, government tabled the Constitution 17th Amendment Bill which allows national government to regionalize municipal functions listed in Part B of Schedules 4 and 5 of the Constitution. FFC submitted its submission on this bill, which opposed this approach, to the Department of Justice in March 2010.

• The Commission prefers a differentiated approach to reform which recognises cases of good performance so as to identify appropriate incentives and knowledge to regulate the industry.


IV. RecommendationsIV. Recommendations

• A blanket regionalisation approach, as proposed in the 17th amendment to the Constitution, is not supported. Current legislative provisions allow for alternative service delivery arrangements that do not dilute municipal authority

• Government should – Revisit the Blue Print assumptions initially made to restructure the EDI. Clarify

whether it is necessary to change ownership and structure in order to ensure efficiency, economies of scale, robust regulations and to deal with management challenges in the sector

– Conduct an up-to-date re-evaluation and analysis of the benefits of restructuring the EDI.

– Finalise EDI Restructuring Bill and practical guidelines (Asset Transfer Guide) related to the shifting of municipal/Eskom distribution assets first before moving towards more advanced stages of restructuring

– Ensure compatibility of operating systems that will underpin REDs activities• Universal access to electricity should not be lost in EDI restructuring process


V. Intergovernmental Fiscal Issues in Urban V. Intergovernmental Fiscal Issues in Urban Public TransportPublic Transport

• Significant increase in public transport capital spending in recent years, but lack of clarity over accountabilities between the three spheres of government - an obstacle to investment in improved public transport.

• National Land Transport Act intends shift of management of bus contracts from provincial to metropolitan and city governments, and provides for the establishment of Municipal Land Transport Fund.

• If public transport responsibilities are shifted to urban municipalities without addressing the concomitant financial implications, municipal finances could be severely affected. Recent experience of running bus rapid transit systems indicates that annual operating subsidies will be required.


V. RecommendationsV. Recommendations

• Conduct a review on costs associated with current urban form in selected cities with a view to improve land use patterns efficiencies

• PRASA and cities should ensure that investment projects on rail and roads infrastructure are aligned and coordinated along A and B corridors of the National Rail Plan.

• Funding streams to the Municipal Land Transport Fund, and the potential financial implications resulting from the promulgation of the National Land Transport Act on municipalities, should be examined by the Department of Transport and the National Treasury.

• Department of Transport should regularly update the South African National Household Travel Survey


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4. Current Local Government 4. Current Local Government Research Projects within the FFCResearch Projects within the FFC

Portfolio Committee on Co-operative Governance and Traditional Affairs

LG Research ProjectsLG Research Projects

• Unfunded Mandates– Define and demonstrate existence of unfunded mandates– Investigate the financial/legal impact of unfunded mandates with respect to

Housing/Health/Library Services and identify issues to be addressed so as to improve assignment of powers/functions

• Housing/Human Settlements– Evaluate challenges in the current urban housing delivery system– Evaluate alternative funding models, delivery strategies and housing

products capable of ensuring more efficient use of land in urban areas

• Public Transport– Aim to (1) evaluate the fiscal implications of the current land use patterns

on public transport, (2) examines transaction cost for poor households and (3) suggest fiscal policy interventions to improve public transport delivery

Portfolio Committee on Co-operative Governance and Traditional Affairs 27


• Estimating Efficiency of Local Government Expenditure– Evaluate expenditure efficiency of a sample of South African municipalities

and assess factors that influence poor performance

• Municipal Consumer Debt– Investigate characteristics of this type of debt – Profile the debt, assess reasons for non-payment and recommend policy

options to assist municipalities in overcoming/minimising this type of debt

• Environmental Sustainability and Climate Change– Examine the possible impacts of climate change in cities with special focus on

water and energy sectors– Identify appropriate fiscal and economic policies/instruments to green cities

and towns

Portfolio Committee on Co-operative Governance and Traditional Affairs 28


• Estimating Factors Influencing Municipal Expenditure– Estimate factors that influence different types of municipal expenditure

(operating, capital, service specific)

– Understanding the impacts specifically of land use patterns, population growth and geographic factors on municipal expenditure

• Local Government Spending and Budget Performance– Evaluate: (1) spending performance (both capital and operational) of

municipalities, (2) revenue performance (own revenues, grants, debt) of municipalities, (3) budget sustainability and credibility, and (4) asset renewal

• The Economic and Fiscal Costs of Inappropriate Land Use – To describe current land use patterns and associated strengths/weaknesses

– To quantify financial/fiscal costs of current land use patterns


5. Conclusion5. Conclusion

• FFC wishes to build strong ties with the Portfolio Committee

• Start of future interactions with the Committee

• Committee can use FFC recommendations for influencing policy and for oversight purposes


Documents

Financial and Fiscal Commission Recommendations and Research on Local Government Issues