financial and fiscal commission review of the local government fiscal framework

Financial and Fiscal Commission Review of the Local Government

Fiscal Framework

Presentation to the Select Committee of Appropriations

22 May 2013

IntroductionIntroduction• Section 3(1) of the FFC Act empowers the Commission

to act as a consultative body for and make recommendations and give advise to organs of state in the national, provincial and local spheres of government on financial and fiscal matters

• Section 3(2) emphasises that this function be performed to the extent that it is envisaged in the Constitution or required by national legislation and undertaken:– On the Commission’s own initiative; or– On request of an organ of state

• The Commission resolved to review the LGFF in terms of this provision of the Act

Presentation to the Select Committee on Appropriations Outcomes of the FFC Review of the Local Government Fiscal Framework 2

The Review ProcessThe Review Process• FFC undertook the LGFF in terms of the Act

– Two sets of public hearings were held• First public hearing outlined the problem statements within funding

system

• Second public hearing explored options to solve problems raised

• The Commission prepared a problem statement which was then used as a basis for the first Public Hearings– A technical report was developed for discussion before the second

Public Hearings• Stakeholder inputs were processed

– Report was finalised and tabled in Parliament on 19 April 2013.

Presentation to the Select Committee on Appropriations Outcomes of the FFC Review of the Local Government Fiscal Framework

3

Key AreasKey Areas• The principle of differentiation

• Attaining equity in vertical and horizontal DOR

• Data constraints

• Challenges with conditional grants

• Incentives

• Review of own revenue sources

• IGR coordination

• Social contract between LG and communities


4

DifferentiationDifferentiation


5

Type of MunicipalityTotal

populationTotal

households

Total gross value added

per capita

% of people

employed

% of households

earning below R3200pm

Average population

density

Operating expenditure

per capita

Revenues from local taxes per

capitaMetropolitan municipalties 16,974,424 4,714,021 75.67 34% 46% 1388 3,789.48 3,279.51Secondary cities 8,233,208 2,207,004 50.80 29% 59% 221 2,242.55 1,940.00Larger towns 3,985,216 1,074,513 40.83 27% 62% 87 1,843.08 1,513.82Smaller towns 6,906,926 1,808,666 29.16 22% 69% 19 1,466.46 988.70Rural municipalities 12,331,695 2,673,914 9.44 13% 80% 81 370.49 120.77Total/average 48,431,469 12,478,118 41.18 25% 63% 359 1,942.41 1,568.56

Context of DifferentiationContext of Differentiation

Presentation to CoGTA Technical MinMec on FFC Review of the Local Government Fiscal Framework

6

Recommendations for Recommendations for DifferentiationDifferentiation

• The LGFF should account for the differences in the minimum efficient expenditure needs and fiscal capacities of municipalities in the country.– It is recommended that government should explicitly adopt a

methodology to differentiate municipalities in the LGFF• Based on performance and context. • Inform funding and capacity support

– The Commission proposes the following factors that should inform such a differentiation:

• Context (exogenous variables): poverty; economic activity within a municipality, spatial factors such as topography and population density; powers and functions assigned; population dynamics (migration).

• Performance (endogenous variables): debt collection, expenditure efficiency, vacancy rates; ability to plan and execute budgets (using past budget surpluses/deficits as an example).


7

EXPE

ND

ITU

RE

REVE

NU

E

actual costs

Vertical and Horizontal EquityVertical and Horizontal Equity

8Presentation to the Select Committee on Appropriations Outcomes of the FFC Review of the Local Government Fiscal Framework

costs incurred in providing

services at a reasonable

level of expenditure

for a properly managed

service

maximum own

revenue

gap

actual costs

gap

actual own

revenue

Structural gap Actual gap

gap

fiscal capacityfiscal effort

inefficiency

EXPE

ND

ITU

RE

REVE

NU

E

8

Vertical and Horizontal EquityVertical and Horizontal Equity• Vertical division adequate for operating expenditure

– Estimated to be R21 Billion in 2009/10 without grants– Total LES package was R23.7 billion

• LES formula was R20.2 billion• Replacement grant and Councillor support was R3.5 billion

– The quantum of resources allocated to local government for operating expenditure is sufficient but there are inequities in its distribution across municipalities

• Commission notes that new LES formula addresses horizontal concerns

• Commission estimates shortfall in vertical division on capital expenditure– Estimated at R42 billion without grants– Total shortfall of R25 billion with infrastructure grants at R16.8 bn


9

Vertical and Horizontal DOR (OPEX) (1)Vertical and Horizontal DOR (OPEX) (1)


10

-10 000

-9 000

-8 000

-7 000

-6 000

-5 000

-4 000

-3 000

-2 000

-1 000

0A B1 B2 B3 B4

Am

ou

nt

in R

bill

ion

(2

00

9/1

0)

Fiscal gap largest in rural municipalities – Need for greater distribution of LES to these municipalities

The New Formula and Horizontal DoR The New Formula and Horizontal DoR (Opex 2)(Opex 2)

11

Distribution of funds better reflect demographics and expenditure need

Share of funds follow share of hh and poor

The New Formula and Horizontal DoR The New Formula and Horizontal DoR (Opex (3)(Opex (3)

12

Funds better reflect revenue ability

Vertical and Horizontal DOR for Vertical and Horizontal DOR for CapexCapex


13

-20 000

-15 000

-10 000

-5 000

0A B1 B2 B3 B4

Am

ount

in R

bill

ions

(2

009/

10)

Recommendations for Vertical and Recommendations for Vertical and Horizontal DORHorizontal DOR

• The Commission recommends a review of the funding for capital expenditure in local government given the identified vertical fiscal gap on municipal capital budgets, which is driven by increasing infrastructure needs and constraints on municipal capital revenues (operating surpluses and borrowing powers).


14

Data and Impact of Infrequent Data and Impact of Infrequent Updates on AllocationsUpdates on Allocations

15

• Phasing-in of allocations required due to infrequent updating of grant formulae. In terms of LES:– Some municipalities experience dramatic

increases ranging from 73% to 83%– Others experience significant decreases ranging

from -41% to -49%

• Funds have NOT been following expenditure need and demand for services!


Recommendations on Data Recommendations on Data ConstraintsConstraints

• Reiterates previous data recommendations for improvement in collection and frequency of LG data

• Role of the Local Government Data Forum is strengthened to ensure that its mandate of rationalising data requests to local government is fulfilled.

• Recommend extension of LGDF mandate:– Collating and updating local government data collected by

departments – Exploring methods to fill the between-census data gaps.

• The Commission also recommends that StatsSA conduct a census every five years, in accordance with the Statistics Act of 1999


16

Conditional Grants - ProliferationConditional Grants - Proliferation


17

Consolidation of CG in 2004/05 – 2003 FFC Recommendation

Conditional Grants - TargetingConditional Grants - Targeting


18

-

50

100

150

200

250

300

350

A B1 B2 B3 B4 C1 C2

R/h

h (2

012/

13)

Capacity building grants per poor hh by municpal category

Are CG allocations reflective of need?

Recommendations on Conditional Recommendations on Conditional Grants (1)Grants (1)

• Rationalise LG CG system– Consolidate grants where possible to minimise administrative burdens

• Government should generally refrain from introducing or fragmenting new and existing grants unless they have clear objectives and value-add to the LGFF.

– Attempt to use existing grant mechanism to distribute the funds if possible.

• Where the introduction of a new grant is necessary it should have explicit objectives, performance targets, monitoring mechanisms, required capacity building (to ensure expenditure absorption) and criteria for its phasing out and exit strategy.

• The Commission further recommends that the Commission be consulted directly before a new conditional grant is introduced to local government as per Section 214(2) of the Constitution


19

Recommendations on Conditional Recommendations on Conditional Grants (2)Grants (2)

• Implement existing legislation to withhold CG funds for perennial under spenders – Use such instances as an indicator for capacity building

– Should not shift grant administration as an attempt to solve problem

• The transferring officers need to ensure that a comprehensive analysis of the outcomes of retrospective and current grant allocations is undertaken– In accordance with the DORA.

– Accounting and tracking outcomes of conditional grants need to be improved

– appropriate risk mitigation measures put in place to account for potential over or under-spending


20

Municipal Revenues –Grant Municipal Revenues –Grant DependencyDependency


21

Municipal Revenues – Consumer Municipal Revenues – Consumer DebtDebt


22

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

2004 2005 2006 2007 2008 2009

Municipal Debt (R'000)

Recommendations on Own Recommendations on Own Revenues(1)Revenues(1)

• The Commission recommends that municipalities should explore new and innovative methods to generate revenue and collect outstanding debt, including taking advantage of new technologies

• Municipalities need to ensure that their tariffs are cost reflective and sensitive to the indigent profile of municipalities in order to minimise municipal consumer debt levels– This practice will ultimately result in poor households not getting billed

for services they cannot afford

• The Commission supports the devolution of additional taxation powers to metros and other urban areas to support their greater economic growth mandate in the urban built environment– Should not compromise the greater macroeconomic policies and stability

of the country


23

Municipal Revenues - Fuel levyMunicipal Revenues - Fuel levy

• Own revenue or transfer?• No control over

generation or allocation• If transfer, then use of

fuel sales as a proxy is unclear

• What incentives does it create, if any?

24

-

100

200

300

400

500

600

2009/10 2010/11 2011/12 2012/13

R pe

r cap

ita

Fuel levy allocation to Metros per capita

Joburg

Cape Town

eThekwini

Ekurhuleni

Tshwane

Nelson Mandela

Buffalo City

Mangaung

-

5

10

15

20

25

2009/10 2010/11 2011/12 2012/13

R pe

r R'0

00 G

VA

Fuel levy allocation to Metros per GVA

Joburg

Cape Town

eThekwini

Ekurhuleni

Tshwane

Nelson Mandela

Buffalo City

Mangaung

24

Recommendations on Own Recommendations on Own Revenues(2)Revenues(2)

• Review the sharing of the General Fuel Levy with metros

• Government needs to find a permanent replacement for the RSC levies for district municipalities

• Municipalities are constitutionally assigned the electricity distribution function and are also legislatively entitled to apply a surcharge on the electricity tariff charged. In instances where Eskom is the service provider on behalf of the municipality, the municipality should be allowed to impose a surcharge on Eskom’s tariff.


25

Municipal Performance – Efficient Municipal Performance – Efficient and Effective Use of Resourcesand Effective Use of Resources


26

Poor performance in LG manifests in poor service delivery, under spending, poor audit outcomes, violent protests etc

Municipal Performance Issues - FBSMunicipal Performance Issues - FBS


27

Portion of identified indigents NOT receiving FBS

Recommendations on Municipal Recommendations on Municipal Performance IssuesPerformance Issues

• Formula-based grant mechanisms should implicitly or explicitly reward good municipal performance and not reward poor performance– Commission undertaking research on this issue

– Commission supports measures to incentivise good performance and penalise poor performance

• When determining current year allocations, all conditional grant allocations should explicitly account for past spending (and outcomes) performance

• The Commission supports the withholding of unspent grants but notes that such measures are ultimately futile if capacity-building support is not given to the poorly performing municipality


28

Context of Capacity Support and Context of Capacity Support and Incentives in the LGFFIncentives in the LGFF

29Presentation to the Select Committee on Appropriations

Outcomes of the FFC Review of the Local Government Fiscal Framework

Poorly performing municipality

Well performing municipality

Amount of transfer per household

Capacity building transfers

Performance based transfers

29

Context for Improving Municipal Context for Improving Municipal Performance Performance

• LG performance needs to improve to ensure objectives of LGFF are achieved– Internal controls– Act on AG’s concerns

• Greater support for LG from other spheres– As per Section 154 of the Constitution– Improved monitoring and evaluation – Improved capacity support – Direct and structured intervention

• Appropriate implementation of Sections 139 and 216(2) of the Constitution


30

Context for Oversight and SupportContext for Oversight and Support


31

CitiesTowns & FarmsMostly Rural

Legal InterventionsInsti

tuti

onal

Perfo

rm

ance

Inadequate

Adequate

Excellent

Proble

matic

Spatial & Socio-Economic Context

Differentiated Remedial Support

Hands-on Support

Support and Advise

Regulatory Oversight and Co-ordination

Recommendations on Improving Recommendations on Improving IGRIGR

• Review of the capacity and performance of national, provincial departments and provincial treasuries in supporting municipalities as required by the Constitution.

• Commission recommends stricter implementation of regulations to establish intergovernmental forums, at both political and administrative level, that ensure support, communication and policy implementation by all parties within a province/district, including improved interactions with national government departments and public entities such as Eskom and water boards.

• Greater efforts should be made to promote the sharing of information and learning-by-doing across the local government sphere.

• As per Section 105 of MSA, national and provincial government ensures that a financial impact analysis is undertaken when new laws and regulations are enacted to quantify the impact of such legislation in the function of municipalities.


32

Recommendations on Improving Recommendations on Improving Social ContractSocial Contract

• The implementation of laws and regulations that support and impose the need for community consultation can only be improved by sound political and administrative support from other spheres of government

• Municipalities need to ensure community consultation is not undertaken as a matter of legal compliance but that communities are actively involved in the budget process

• Ward councillors need to strengthen their roles in the consultation processes

• Council needs to improve its oversight role within municipal governance structures

• Government needs to review the mechanisms available to promote and strengthen social accountability – This can include improved and formal channels for public grievances such as

community grievance forums


33

Conclusion (1)Conclusion (1)

• In framing a long term fiscal framework, a differentiated approach responsive to both context and performance is required– Recognise huge variation in the distribution of economic activity and socio

political profiles of municipalities

– Rewards good performance and sanctions underperformance

• Vertical DOR for operational expenditure is adequate but needed to be targeted better.– The Commission supports the LES formula review and is confident that it will

address the previous problems. In particular rural municipalities will receive allocations more commensurate with their fiscal needs

• There is a vertical fiscal gap in relation to capital expenditure and rehabilitation which must be addressed


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Conclusion (2)Conclusion (2)

• Commission is concerned about the revenue situation in municipalities– increased dependence on grants even in metros

– lack of own revenue instruments

• Commission reiterates its previous concerns about conditional grants– Inadequate planning

– Poor monitoring, and evaluation

– Proliferation

– Poor targeting

• Transitional and implementation arrangements– Effectively and efficiently spending of funds – particularly rural municipalities

– Improve capacity buildings initiatives and monitoring and evaluation procedures

– Ensure MFMA and MSA provisions for competent municipal officials are enforced


35

THANK YOU.

Financial and Fiscal CommissionMontrose Place (2nd Floor), Bekker Street,Waterfall Park, Vorna Valley, Midrand,Private Bag X69, Halfway House 1685

www.ffc.co.zaTel: +27 11 207 2300Fax: +27 86 589 1038

financial and fiscal commission review of the local government fiscal framework

Documents

ffc review

fiscal commission review

local spheres of government

cogta technical minmec

ffc act

fiscal matters section

appropriations outcomes

committee of appropriations22