Keynote address by National Treasury to the Cities Network

23 February 2007

Budget Dialogue:

Fiscal Space for Municipal Action

Key question to be addressed –

Does the current local government fiscal system create sufficient

fiscal space for municipal action?

3

Outline• Snapshot of national transfers to provinces• The evolvement of the local government fiscal

system– Key funding responsibilities of local government– Role of grant funding– Optimising own revenues– Role of borrowing

• Future reforms to the local government fiscal system– Draft Municipal Fiscal Powers and Functions Bill – Issues to be taken into account in possible permanent

sources to replace RSC levies– Municipal Property Rates Act– Other reforms impacting on local government

• Fiscal space for municipal action – way ahead

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Snap shot of transfers to LGTable 8.7 National transfers to local government, 2003/04 – 2009/10

2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10

R million

Outcome Revised estimate

Medium-term estimates

Equitable share 6,350 7,678 9,643 18,058 20,676 23,775 29,444

of which

RSC/JSB replacement grant – – – 7,000 8,045 9,045 10,107

Water and sanitation operating subsidy: direct transfer

273 133 165 300 550 600 462

Equitable share and related 6,623 7,811 9,808 18,358 21,226 24,375 29,906

Infrastructure transfers 5,715 6,936 8,053 9,265 14,303 19,550 18,266

Capacity building transfers 856 768 654 844 749 400 400

Total 13,194 15,515 18,515 28,466 36,278 44,325 48,572

Growth rates

Equitable share and related (excl RSC Levies)

20.9% 25.6% 14.7% 14.2% 16.6% 31.3%

Infrastructure transfers 21.4% 16.1% 15.0% 54.4% 36.7% -6.6%

Capacity building transfers -10.2% -14.9% 29.1% -11.3% -46.6% 0.0%

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Evolvement of LG fiscal system since 1994

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Delivery of basic services

• Local government (LG) has substantially reformed since 1994

• LG needs to prioritise the provision of basic services and promote the social and economic development of the community (s153 of Constitution)

• Although much progress has been made, substantial backlogs remain– Government set a target of addressing all service

backlogs by 2013– 33% or 15 million people do not have access to proper

sanitation– 8% or 3,5 million people do not have access to safe,

potable water– 8% do not have access to electricity

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Municipal revenue sources

• Size of equitable share to a sphere based on expenditure (service delivery) responsibilities and fiscal capacity and efficiency (s214)

• Transfers are intended to supplement own revenues and borrowing to enable municipalities to achieve its service delivery and developmental responsibilities

• Ability of municipalities to raise revenues from own sources influenced by income levels, affordability criteria and consumption patterns– Municipalities with a large proportion of poor

households will struggle to raise own revenues as poor households should receive basic services for free

– Municipalities with a large economic base would be able to cross-subsidise between services and consumer groups

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Location of poverty

Household Income Distribution by Settlement type - Census 2001

0%

10%

20%

30%

40%

50%

60%

70%

80%

Urban formal Urban informal Tribal area Rural formal

0-800 800-1600 3200+ 3200+

High levels of poverty – limited ability to cross-

subsidise

Better mix between rich and poor – able to cross-subsidise

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% poor HHs and their access to services

Province Average no of poor HHs

per municipality

% poor HHs % poor HHs with

services

Average income per municipality

Eastern Cape 24 097 62% 34% R566

Free State 21 252 56% 64% R686

Gauteng 262 698 22% 74% R1 973

KwaZulu-Natal 22 794 52% 39% R720

Limpopo 29 787 62% 34% R438

Mpumalanga 24 673 53% 24% R601

Northern Cape 4 378 46% 60% R819

North West 20 987 49% 48% R701

Western Cape 11 729 24% 78% R1 651

Total 46 933 49% 51% R906

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Municipal budget size (05/06) – A provincial perspective

Province Overall budget

Rm

Average budget size

per municipality

% Category

A

% Category

B

% Category

C

Eastern Cape 10 780 234 34% 46% 20%

Free State 5 480 219 0% 94% 6%

Gauteng 41 230 2 425 90% 9% 1%

KwaZulu-Natal 20 433 330 59% 30% 11%

Limpopo 5 828 194 0% 67% 33%

Mpumalanga 5 395 257 0% 83% 17%

Northern Cape 2 314 72 0% 84% 16%

North West 6 513 261 0% 86% 14%

Western Cape 21 670 699 72% 24% 4%

Total 119 642 521 57% 34% 9%

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Levels of service access (6 metros)

0

20

40

60

80

100

Water Sanitation Electricity Refuse

%

Levels of service access (High capacity B)

-

20

40

60

80

100

Water Sanitation Electricity Refuse

%

Levels of service access (Low capacity B

-2040

6080

100

Water Sanitation Electricity Refuse

%

Service level access

• 2001 Census results reflect high service access levels in metros

• Although service access levels are lower in high capacity B munies than in As, still high

• Service levels lowest in poorer resourced municipalities, mainly in rural areas of the country

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Income levels

• Although metros have a substantial % of HHs earning less than R800pm, they are have a sizeable proportion of “non-poor”

• Metros therefore able to cross-subsidise

• Poorer munies have a much larger % of HHs earning less than R800pm and a limited proportion of “non-poor”

• Ability to cross-subsidise small

Income levels of households (6 Metros)

0

20

40

60

80

100

Below R800 Between

R800 - R1600

Between

R1600 -

R3200

Between

R3200 -

R6400

Above R6400

%

Income levels of households (low capacity B municipalities)

0

20

40

60

80

100

Below R800 BetweenR800 -R1600

BetweenR1600 -R3200

BetweenR3200 -R6400

Above R6400

%

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Reliance on grants

• There are substantial differences in budget sizes and reliance on transfers between municipalities

• Transfers make up a very small proportion of overall budget size of metros

• Grants make up a larger proportion of overall budget than own revenues in smaller rural municipalities– large infrastructure backlogs

to be addressed– Large proportion of HHs are

poor and to receive FBS – Ability to cross-subsidise

between customers limited– Transfers to be targeted to

these munies

Split of own revenue and grants

(6 metros)

0

10,000

20,000

30,000

40,000

50,000

Subsidies/Grants Own revenue

Split of own revenue and grants (low capacity B municipalities)

0

10,000

20,000

30,000

40,000

50,000

Subsidies/Grants Own revenue

R'M

illio

n

Split of own revenue and grants

(largest 21 local municipalities)

0

10,000

20,000

30,000

40,000

50,000

Subsidies/Grants Own revenueR'million

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Municipal Budgets: Snap shot• The aggregate size of municipal budgets have doubled

over the past five years, from R64b in 01/02 to R132b in 06/07 (provisional figure)

• Large variances in budgets of the 283 municipalities– Metro

• Average size of metro budget is R11b, ranging between R3b (Nelson Mandela) and R18b (Joburg)

• Average of 2,4 million people (715 367 HHs)• A third of the population resides in metros (which increases to

half the population if Top 21 municipalities are included)– Local municipalities

• Budgets range between R7m (Molopo NW) and R1,8b (Msunduzi), with an average or R158m

• Average of R117m population (32 311 HHd) per municipality, ranging from 1 945 HHs to 192 161 HHs

– District municipalities• Budgets range between R9m (Xhariep) and R392m (Ugu), with

an average of R158m

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• Municipal budgets for the 2006/07 financial year –– Capital budget:

• NG infra grants form a large proportion (R9b or 30%) of the overall capital budget of R31b, followed by internal advances (R7b or 23%) and external loans (R5b or 17%)

• Infra expenditure focuses mainly on water, stormwater and sewerage (R13b or 40%), housing (R4b or 14%), electricity (R3b or 11%) and community services (R3b or 11%)

– Operating budget:• Primary sources of operating income of R101b are

electricity (R26b or 26%), operating grants (R20b or 20%), property rates (R19b or 19%), followed by water and sanitation (R16b or 16%)

• Salaries (R31b or 27%) and other (R33b or 29%) forms the largest part of the operating expenditure budget of R113b, followed by bulk purchases (R21b or 18%), repairs and maintenance (R7b or 6%) and working capital provision (R4b or 4%)

Municipal Budgets: Snap shot

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Own revenue generation: Challenges

• There are various indicators pointing to municipalities not optimising own revenues –– Outstanding consumer accounts for longer than 90 days

• Metros more than trebled from R5,6b in 02/03 to R19b in 04/05 (82% of total outstanding consumer accounts in 04/05)

• Local municipalities increased by 20% from R5,7b in 01/02 to R9,9b in 04/05 (74% of the total in 04/05)

• District municipalities increased by 42% from R166m in 01/02 to R472m in 04/05 (65% of total in 04/05)

• Outstanding payments to be assessed against municipal practices to budget for 100% payments on all billings

– Realistic budgeting required where a differentiation is made between poor HHs (indigents support) and poor collection systems (credit control)

– Unaccounted for losses between purchased and billed water and electricity often above industry norms

• Municipalities need to reduce technical and other losses in water and electricity distribution and water

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Municipal Borrowing• External borrowing as an untapped source

– In economic active areas, a large portion of municipal infrastructure has the potential to generate revenue

– There is a strong argument that such infrastructure should be financed through long-term borrowing

• This will accelerate the pace of delivery– Total municipal loan book of municipalities = R20b

• Indications are that this could be increased between R56b and R128b

– Steps have been taken by Govt to stimulate market -• Introduction of the Municipal Finance Management Act

clarifying municipal responsibilities i.t.o. debt• Introducing reforms to modernise budgeting and financial

management (including multi-year budgeting) • Early publication of all national and provincial allocations

for a three-year period

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Variation in municipal financesCURRENT POSITION

• Metros adequately resourced at this stage, cognisant of reforms to RSC levies, EDI restructuring and infrastructure/borrowing (built environment)

• Strong capacitated municipalities more reliant on transfers than metros (did not have access to RSC levies mostly collected in their areas but spent elsewhere in district)

• Weak municipalities suffer from large-scale service delivery responsibilities and limited fiscal capacity

• Anomalies in the funding of district municipalities (RSC levies disproportionally accrued to district municipalities with limited service delivery responsibilities)

• Capacity of municipalities need to be addressed in conjunction to any reforms of the local government fiscal framework so as to ensure that any additional resources are directed towards the actual expansion of services (and not inappropriate resource use)

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Future reforms to the LG fiscal system

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Draft Municipal Fiscal Powers and Functions Bill

• The Bill deals with outstanding section 229 legislation by:– defining the manner in which the national government,

through the Minister of Finance, will exercise its policy oversight role, regulatory role and authorisation role in respect of municipal surcharges and taxes, other than property rates and municipal user charges

– regulating the process by which the Minister of Finance, or a municipality, group of municipalities or organised local government may initiate a municipal tax or taxes

– permanently abolish RSC and JSB levies in LG legislation (in addition to current abolishment in tax legislation)

• NT had pre-consultations with various institutions (FFC, SALGA/municipalities and dplg) on the Bill, where most comments have been incorporated

• The updated draft Bill will shortly be submitted for approval to publish for public comments

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Replacement funding for RSC levies

• In the 2007 MTEF, an amount of R27,1b is made available to provide funds as interim replacement of RSC levies (R8b in 06/07, R9b in 07/08 and R10,1b in 08/09)

• Municipalities have up to June 2008 to collect any arrear RSC and JSB levies that were due on or before June 2006

• A discussion document was made available by NT during December 2005 where various permanent replacement options was discussed– The VAT zero-rating of property tax already introduced

since July 2006• An announcement on permanent options to replace

RSC levies to be made in 2008 (or possibly 2009) Budget

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Municipal Property Rates Act• The MPRA enhances certainty, uniformity and simplicity

in property valuation and rating systems • Act took effect on 2 July 2005, but municipalities have up

to 1 July 2009 for introducing new valuation rolls and rating in terms of the Act – Most municipalities are targeting 1 July 2008 or 1 July 2009– The rates base will be expanded by including categories that

were previously excluded, such as PSI, agriculture and many properties in rural areas

• Implementation of Act will require all municipalities to properly manage the transition from its old rating practice to the new system based on the Act– Municipalities that have not been rating on the market value of

land and buildings combined, should reduce Cent amount in Rand drastically to ensure that there are no major shocks to ratepayers and economic sectors

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Other reforms impacting on LG• Proposed reforms to water and electricity distribution

industries intended to address fragmentation where economies of scale, skills and specialisation could not be captured by many of the smaller municipal distributors

• EDI restructuring legislation currently being drafted by DME• Important that the following principles underpin

restructuring:– Restructuring must be in accordance with the Constitution – Financial state of municipalities currently performing the

function(s) must not be adversely affected – Aggregate personnel costs must not increase in a way that

undermines the objective of one public service – No additional funds or taxes to fund restructuring (fiscus and/or

local government) without the approval of Cabinet

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Fiscal space for municipal action – way ahead

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Does the current LG fiscal system create sufficient fiscal space for municipal action?

• Whilst many municipalities have made great strides, others have not despite substantial increased transfers to LG over the last few years

• NG will continue to align LG fiscal system to target poorer resourced municipalities with limited own revenue base– But are some failures to deliver not a manifestation of lack of

capacity rather than funding shortfalls as proven in large under-spending in capital transfers?

– Differentiated approach to financing municipalities• Municipalities to optimise collection of own revenues and

borrowing, particularly larger well resourced municipalities– Do some municipalities rely mainly on transfers without

placing sufficient focus on optimising their own revenues?• Realistic budgets linked to IDPs required

– Many municipal budgets and IDPs no more than “wish lists”?

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….. The end

…… Thank you