Financial and Fiscal Commission Recommendations and Research on Local Government Issues

1. Financial and Fiscal Commission Recommendations and Research on Local Government Issues Select Committee on Co-operative Governance and Traditional Affairs 23rd November 2010

2. Outline of the Submission • Role and Function of the FFC • Past FFC Local Government Recommendations • FFC Recommendations for the Division of Revenue 2011/12 • Current Local Government Working Programme of the FFC • Concluding Remarks Portfolio Committees on Co-Operative Governance and Traditional Affairs

3. 1. Role and Function of the FFC Portfolio Committee on Co-operative Governance and Traditional Affairs

4. Role 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 Select Committee on Co-operative Governance and Traditional Affairs

5. Role 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. Select Committee on Co-operative Governance and Traditional Affairs

6. The 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 Appropriations 2 November 2010

7. 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

8. 3. Past FFC Local Government Recommendations Portfolio Committee on Co-operative Governance and Traditional Affairs

9. The 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 Appropriations 2 November 2010

10. Local Government Recommendations Select Committees on Co-operative Governance and Traditional Affairs

11. Local Government Recommendations Select Committees on Co-operative Governance and Traditional Affairs

12. Local Government Recommendations Select Committees on Co-operative Governance and Traditional Affairs

13. Local Government Recommendations Select Committees on Co-operative Governance and Traditional Affairs

14. Other 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 Portfolio Committee on Co-operative Governance and Traditional Affairs

15. Recommendations 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. Portfolio Committee on Co-operative Governance and Traditional Affairs

16. 2. FFC Recommendations for the DoR 2011/12 Portfolio Committee on Co-operative Governance and Traditional Affairs

17. Outline 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 Transport Portfolio Committee on Co-operative Governance and Traditional Affairs

18. I. 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 Portfolio Committee on Co-operative Governance and Traditional Affairs

19. II. Local Government Revenue Enhancement 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. Portfolio Committee on Co-operative Governance and Traditional Affairs

20. II. 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 Portfolio Committee on Co-operative Governance and Traditional Affairs

21. III. 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. Portfolio Committee on Co-operative Governance and Traditional Affairs

22. IV. 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. Portfolio Committee on Co-operative Governance and Traditional Affairs

23. IV. 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 Portfolio Committee on Co-operative Governance and Traditional Affairs

24. V. Intergovernmental Fiscal Issues in Urban Public 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. Portfolio Committee on Co-operative Governance and Traditional Affairs

25. V. 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 Portfolio Committee on Co-operative Governance and Traditional Affairs

26. 4. Current Local Government Research Projects within the FFC Portfolio Committee on Co-operative Governance and Traditional Affairs

27. LG 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

28. LG Research Projects • 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

29. LG Research Projects • 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 Portfolio Committee on Co-operative Governance and Traditional Affairs

30. 5. 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 Portfolio Committee on Co-operative Governance and Traditional Affairs