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Local Government Fiscal Reforms 1998 to date

Local Government Fiscal Reforms 1998 to date. INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012. 8-10 October 2012. Presentation Outline. Introduction LG Fiscal Reforms-Overview Despite Reforms: Local Government Still faces many challenges

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Local Government Fiscal Reforms 1998 to date

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  1. Local Government Fiscal Reforms1998 to date INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012. 8-10 October 2012

  2. Presentation Outline • Introduction • LG Fiscal Reforms-Overview • Despite Reforms: Local Government Still faces many challenges • Role of FFC in Local Government Fiscal Reforms • Some Convergence on Key Reform Areas • Current Thinking & New Developments on Local Government Fiscal Reforms PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  3. Introduction • Local government sphere established with implementation of final of Constitution in 1998 • Initially 843 municipalities • Several demarcations processes • 2000 – 284 municipalities • 2005 – 283 municipalities • 2011 – 278 municipalities – 8 metros • 3 local government elections since 2000s • Funding framework also established in 1998 PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  4. LG Fiscal Reforms-Overview PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  5. Legislative Reforms • Municipal Structures Act in 1998 • Establishment and clarification of municipal powers and functions • Several amendments – 2000 amendment clarified roles of district municipalities • Municipal Systems Act in 2000 • Guides municipalities to perform its social and economic mandates • Municipal Finance Management Act in 2003 • Regulate financial aspects of municipalities and provides accounting norms and standards • Municipal Property Rates Act in 2004 • Regulate municipal imposition of property rates • Municipal Fiscal Powers and Functions Act • Regulate all other municipal taxes (except property rates) and surcharges • Allows for the imposition of new taxes PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  6. Improvements in Municipal Financial Management • Municipal Finance Management Act (MFMA) • modernise budget, accounting and financial management practices of municipalities • Promotes transparency and accountability • Secures sound and sustainable management of the financial affairs of municipalities • Ensures proper planning of municipal budgets • Attempts to ensure budget sustainability and credibility • Guides municipal financial compliance • Improvements in National Treasury reporting standards PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  7. Important Policy Reforms • Introduction of Free Basic Services policies in 2001 • Clarification of municipal health services as environmental health services in 2006 • Definition of electricity distribution in 2006 • Devolution of housing function to cities in 2013 • Devolution of greater transport functions to cities PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  8. Significant Fiscal Reforms • Introduction of LES formula in 1998/99 • Consolidation of several infrastructure grants into MIG in 2005/06 • INEP excluded due to restructuring of the EDI • Introduction of current LES formula in 2005/06 • Abolition of the RSC levies in 2005 • Foregone revenues replaced with an interim grant • Introduction of the sharing of the general fuel levy with metros in 2009/10 • Replacement for the RSC levy for metros (with VAT zero rating) • MIG cities and subsequently USDG introduced to foster the development of built environment • LES review in 2012 PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  9. Reforms to the LGES • Formula mechanism used to distribute LES effected in 1998 • Review of old formula initiated in 2004 with the current formula effected in 2005 • Municipal health services introduced to formula in 2007/08 • Changes to measurement and application of RRC component in 2009/10 • Adjustment to electricity subsidy on basic services component • Changes to I component in 2010/11 PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  10. Despite Reforms: Local Government Still faces many challenges PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  11. (a) Local government context Remaining service delivery challenges Poor state of existing infrastructure Uncertainty around powers and functions and structure of local government Highly varied contexts and challenges Unstable governance and management arrangements Lack of universal data sets for benchmarking and comparison PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012 11

  12. (b) Local government financial context Revenue patterns and efficiency varies by municipal type Heavy reliance on capital grants, but also varies Capital underspending is a problem Operating cost increases driven by bulk purchases and unfunded mandates Own revenue varies considerably based on a combination of ‘fiscal capacity’ and ‘fiscal effort’ Debt financing increasing in larger municipalities, but still limited in smaller municipalities PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012 12

  13. Local government financial context • There is a plethora of conditional grants, which makes capital budgeting unnecessarily complex. • Conditional grant criteria are sometimes not transparent • There are limited incentives to increase performance and own revenue collection. • The RSC levy replacement grant is perceived to be inequitable. • Maintenance and rehabilitation expenditure is inadequate, partly related to tariffs not being cost reflective • LES does not adequately cover the funding of social and community services. • In some cases capacity is not available to spend capital grants. PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  14. Role of FFC in LG Fiscal Reforms PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  15. FFC Public Hearings • FFC has recommended a reform of LGFF • FFC undertook a set of public hearings to understand and propose options for the problems inherent in LGFF • Two set of public hearings took place • First public hearing identified the problem statement and issues hindering sustainable financing of LG • Second public hearing provided a set of options for problem statement identified • Input from process driven largely by stakeholder perspectives • Identified issues from various stakeholders in LG PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  16. Key findings • Overall allocation to LG is insufficient (vertical division) but the gapapplies primarily to capital finance • Horizontal allocation is inequitable because the differentiation of municipalities and analysis of the fiscal ‘gap’ (fiscal capacity) is not correct and transparent. It does not take underlying contextual factors into account e.g. varying powers and functions between municipalities. • Actual fiscal capacity is unknown because it has not been accurately measured. Similarly there is no agreed measure of fiscal effort. There is a lack of data at local government level to: • Assess fiscal capacity; fiscal effort and Monitor performance. PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  17. The ‘fiscal gap’ Structural gap Actual gap actual costs gap inefficiency costs incurred in providing services at a reasonable level of expenditure for a properly managed service gap How do we measure these? actual costs gap REVENUE REVENUE EXPENDITURE EXPENDITURE maximum own revenue fiscal capacity actual own revenue fiscal effort 17 PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  18. Some Convergence on Key Reform Areas PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  19. Differentiation and demarcation • Differentiation • Principle of differentiation agreed upon • Common system of differentiation is required • Context (fiscal capacity, cost efficiency…) vs performance (i.e. fiscal effort, spending efficiency and effectiveness …) • Demarcation • Review demarcation process: regulations, impact of process, Outcomes? • Develop a system that ensures fiscally sustainable municipalities are created PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  20. Debt finance, policy, regulation and support • Need to avoid inappropriate borrowing and borrow as much as it is sustainably possible to close the gap • Should only be used for ‘economic’ infrastructure • But in practice is raised based on overall municipal balance sheet • Need to improve access to debt finance • Possible new debt financing mechanisms (e.g. bond pooling, MIF, etc.) • Role of DBSA is important PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012 20

  21. Current Thinking & New Developments on Local Government Fiscal Reforms PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  22. New Thinking On Grants • Performance based system with emphasis on incentives, which implies a major shift towards expenditure-side interventions, incentivising own source revenue and capital finance, complemented with conditional transfers. PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012 22

  23. Performance based transfers- (Capacity) Well performing municipality Performance based transfers Capacity building transfers Poorly performing municipality Amount of transfer per household PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012 23

  24. Background to the LGES formula review This formula is being reviewed during 2012 by a working group that includes National Treasury, the Department of Cooperative Governance, and the South African Local Government Association and in partnership with the Financial and Fiscal Commission and StatsSA This review only looks at the LGES formula, it does not examine the size of the total amount allocated to the local government equitable share It is also not a review of the RSC levies replacement grant or any conditional grant The review will propose a new formula for use in the 2013 Budget PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  25. Principles of the LGES formula The following are the principles guiding formula: The LGES Formula must: • Be objective and fair • Be dynamic and able to respond to changes • Recognise diversity among municipalities • Only use high quality, verifiable and credible data • Be transparent and simple • Provide for predictability and stability PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  26. Objectives of the LGES formula The following are the objectives of the LGES formula (derived through the consultation process): • Enable municipalities to provide basic services to poor households • Enable municipalities with limited own resources to afford basic administrative and governance capacity and perform core municipal functions PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  27. Proposed LGES formula structure The proposed structure of the new LGES formula is as follows: LGES = BS + (I + NTS) x RA ± C Where: LGES is the local government equitable share BS is the basic services component I is the institutional component NTS is the non-trading services component RA is the revenue adjustment factor C is the correction and stabilisation factor PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  28. Simplified summary of the proposed LGES formula structure

  29. How the formula meets its objectives (1 of 2) Objective 1 - Enable municipalities to provide basic services to poor households: • The basic services component funds the provision of free basic services for poor households • This component provides an allocation for every poor household in a municipality to cover the cost of providing a package of free basic water, sanitation, electricity and refuse removal • The same allocation per poor household is provided to all municipalities • proposed allocation is R277 per household per month, including R27 per month for maintenance • Only poor households are included in the calculation of this component as non-poor consumers should be able to pay for their own basic services

  30. How the formula meets its objectives (2 of 2) Objective 2 - Enable municipalities with limited own resources to afford basic administrative and governance capacity and perform core municipal functions: • The institutional component provides funding for municipalities to assist them with their administration and governance costs (though it is not intended to fully fund these costs). • The non-trading services component provides funding for core municipal services like environmental health, fire fighting, roads and storm water, municipal planning and cemeteries and other services (this component is also not intended to fully fund these services). • To ensure that funds for these two components only go to municipalities with limited ability to raise own revenues a revenue adjustment factor is applied. • Factor is based on an index that estimates the different revenue raising potential of municipalities. The revenue adjustment factor then reduces the allocations to municipalities with large own revenue potential PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO) CONFERENCE 2012: 8-10 OCTOBER 2012

  31. Main advantages of the new LGES formula • Simpler formula structure that is easier to link to objectives • Capability to update data • Reflect different cost pressures for each service (e.g. electricity) • Incorporates estimates of population growth • Updated poverty measure • More realistic cost estimates for basic services • More realistic level of institutional funding for those municipalities that need transfers to sustain their administration • Includes funding for key non-trading services • Accounts for the own revenue potential of municipalities

  32. Thank You

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