NEW LOCAL GOVERNMENT EQUITABLE SHARE FORMULA AND FREE BASIC ENERGY

Presenter: Wendy Fanoe | Intergovernmental Relations, National Treasury | 18 June 2013

Outline

• Increasing access to electricity • Funding Free Basic Energy

– Structure of the local government fiscal framework– Electricity as a revenue source for municipalities– The new local government equitable share formula

• Access to Free Basic Electricity and Free Basic Alternative Energy

• Conclusion

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Access to Electricity

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Increasing access to Electricity – 2011 Census

Municipal Type

2001 2011 Percentage point

reduction Metros 19% 11% 8%

Secondary cities 22% 12% 10%

Large towns 31% 15% 15%Small towns 34% 17% 17%

Rural municipalities 52% 25% 27%National Total 30% 15% 15%

Percentage of all households WITHOUT access to electricity

• Significant improvement across the board with the fastest backlog reduction coming in rural areas (where backlogs are biggest)

• Increases in HHs with access (blue bar in chart above) was largest in metros • R2.6 billion has been added to the Integrated National Electrification

Programme (INEP) Grants over the 2013 MTEF to further accelerate rollout

Number of households with and without access to electricity (000s)

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Funding Free Basic Energy

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General principles for funding services in local government• The local government fiscal framework is made up of own revenues

(including property rates and service charges) and transfers• Municipalities should charge cost-reflective tariffs for the supply of

electricity for all users that can afford to pay• High levels of poverty mean that funds from national revenues are

needed to fund the delivery of services to poor households

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Structure of the Local Government Fiscal Framework

National Transfers

25%

Local Government Own Revenue

75%

HH in informal settlement Poor HH in RDP houseEmployed HH in RDP house with improvements

Middle to upper income HH

Rates and charges

Charges

FBS

Electricity sales as a source of municipal revenue (1 of 2)

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Electricity net surplus by category of municipality2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

R million Medium-term estimates

Category A (Metros) 2 888 3 211 3 350 2 454 2 945 2 166 1 151

Category B (Locals) 1 487 1 473 1 251 795 608 -331 -1 282

Secondary cities 815 618 577 341 339 -87 -785

Large towns 310 406 374 151 214 -92 -285

Small towns 304 372 253 252 37 -80 -205

Mostly rural 58 77 46 50 17 -72 -7

Category C (Districts) -21 -28 -48 -25 4 -4 -7

TOTAL 5 840 6 129 5 803 4 018 4 165 1 500 -1 421

• Historically, municipalities have generated surpluses form the sale of electricity that have been used to fund other services

• The rapid rise in bulk costs and a desire by municipalities and NERSA to keep electricity affordable to consumers has resulted in reducing the size of surpluses

• In some cases municipalities are now generating losses from electricity sales

Note: figures are calculated from consolidated 2010 municipal budgets. Municipalities may have adjusted their budgets in subsequent years

Electricity sales as a source of municipal revenue (2 of 2)

• Reductions in surpluses limit the ability of municipalities to cross-subsidise• However, low use consumers (including most poor households) are protected

by Inclining Block Tariff (IBT) structures that ensure some cross-subsidisation in tariff structures

• National Treasury is working with municipalities to improve tariff setting practices to ensure that tariffs are cost reflective so that municipalities do not loose money on services to non-poor households. Progress to date includes:

– Pilot study at uMhlathuze on costing;– Compilation of costing guidelines;– Assisted various municipalities with costing and tariff setting;– Various training sessions to CFO forums & Provincial Treasuries; and– Inclusion of an additional segment (Management Accounting) in SCOA

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The role of the equitable share

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• Section 227 of the Constitution says, “Local government and each province is entitled to an equitable share of revenue raised nationally to enable it to provide basic services and perform the functions allocated to it.”

• The equitable share is unconditional, but it is intended to fund the delivery of basic services

• The equitable share funds the operating and maintenance costs municipalities need to provide basic services to poor households (infrastructure is funded through conditional grants)

• Most of the funding in the LGES is intended to fund free basic services (sanitation, water, energy and refuse removal) for poor households (non-poor HHs can pay for their own services

• For municipalities with little own revenue, funding is also provided towards the costs of administration and other services

• Infrastructure for poor households is funded through conditional grants

.

New Local Government Equitable Share Formula

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Review Process – emphasis on consultation

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• May/June 2012• Discussion papers

circulated for comments• Workshops held with

municipalities

• September 2012• Discussion paper

circulated for comments• Workshop held with

over 100 municipalities• Endorsed By Budget

Forum

• December 2012 - January 2013

• Endorsed by:• Budget Forum

(7 February 2013)• Cabinet

(13 February 2013)

Stage 1:Principles and

objectives agreed

Stage 2:New formula

structure agreed

Stage 3:New allocations

determinedIn partnership with:

Review was undertaken by:

• Local government is entitled to an equitable share of nationally raised revenue in terms of Section 227 of the Constitution

• Formula used to allocate these funds was reviewed in 2012 in a process that emphasised consultation

The new LG equitable share formula structure

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Basic Services

Institutional and Community Services

+Allocation for every poor household in the country to enable municipalities to fund the cost of free basic services (including maintenance costs)

Made up of three parts:

Institutional funding

Funding for Community

Services

Revenue Adjustment factorEnsures more funds go to the municipalities with

less own revenue capacity(Factor of between 0% and 100% applied)

Form

ula

How

it w

orks

+

Correct-ion &

Stability

Ensures guarantees are met and smoothes changes in allocations

±

LGES Allocation

1 2 3

The new LGES formula :

LGES = BS + (I + CS)xRA ± C

Where:• LGES is the local

government equitable share

• BS is the basic services component

• I is the institutional component

• CS is the community services component

• RA is the revenue adjustment factor

• C is the correction and stabilisation factor

Schematic of how the formula works

Detail on the basic services component• Formula funds free basic services for every household below an

affordability threshold of R2300 household income per month in 2011– Based on value of 2 state Old Age Pensions (as proposed by municipalities)

during the consultation process

– 59% of all households in SA fall below this threshold

• Cost of services and number of households will be updated annually– Cost of energy updated based on NERSA approved tariff increases

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Subsidy of R275.17 per month for a package of free basic services

Includes 10%

provision for maintenance

FBS funding allocated for each HH through the formula:

Summary of Local Government Equitable Share allocations for energy• Total of R5.7 billion allocated for energy through the LGES

• This amount includes an allocation of R56.29 per household per month for free basic energy (includes 10% allocation for maintenance)

• Per household subsidy for electricity is costed to be higher than the cost of 50kWh of electricity at NERSA approved block 2 municipal tariffs

• Funds could be used for electricity or alternative energy

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Amounts per basic service allocated through the Local Government Equitable Share

Operations Maintenance Total

Energy 50.66 5.63 56.29 5 719

Water 77.80 8.64 86.45 8 783

Sanitation 64.84 7.20 72.04 7 319

Refuse 54.35 6.04 60.39 6 136

Total basic services 247.65 27.52 275.17 27 957

Allocation per household below affordability threshold (Rands)

Total allocation per service(R m illions)

Other components in the formula

Institutional component• Provides funds for administration costs necessary to run a municipality

– Allocation includes a base amount and an amount based on the size of a municipality

Community services component• New component that funds services outside the basic services

– allocated based on number of households in the municipality

Revenue adjustment factor• Some municipalities are able to fund the costs of their administration

and the provision of community services from own revenues (e.g. property rates)

• The LGES therefore applies a revenue adjustment factor to ensure funds from the Institutional and Community Services components only go to municipalities with limited own revenue

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Impact of the new formula (1 of 3)

• The old formula produced allocations per poor household that were lowest for municipalities with the least ability to raise their own revenue

• The new formula corrects this with a much more redistributive structure(figures presented here exclude the impact of the phase-in)

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Metros Secondary cities Large towns Small towns Ruralmunicipalities

Old formula - Allocation per poor household

Metros Secondary cities Large towns Small towns Rural

New formula - Allocation per poor household

Impact of the new formula (2 of 3)

• Many individual municipalities experience large changes in allocations:

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Municipal Type

Number of municipalities

gaining by more than 10%

Number of municipalities losing by more

than 10%

Total number of

municipalities Metros 2 4 8Secondary cities 5 7 19Large towns 5 12 27Small towns 25 49 110Rural 55 0 70Districts (not water authorities) 6 10 23Districts (water authorities) 6 0 21National Total 104 82 278

Phasing-in the new allocations (3 of 3)

• Large changes in allocations of some individual municipalities (due to new formula AND updated data)

• Five year phase-in proposed to cushion this impact– ‘losing’ municipalities only

see their allocations reduced by 20% of the difference between old and new formulas each year

– Funds to pay for this come from gaining municipalities, giving them time to adjust to higher allocations

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Allocations with old formula

Allocations with new formula

Year 1 Year 2 Year 3 Year 4 Year 5

Phase-in path20%

40%

60%

80%

100%

Example of phasing in the shift from the old formula to the new formula over a 5 year phase-in period for a municipality with a lower allocation in the new formula

Advantages of the new formula

• Simpler formula structure is more transparent• Higher affordability threshold (includes 59% of

households)• More realistic cost estimates for basic services• Capability to update data

– Can reflect different cost pressures for each service (e.g. electricity)

– Incorporates estimates of population growth

• More realistic level of institutional funding for those municipalities that need transfers to sustain their administration

• Includes funding for community services• More redistributive formula structure

Challenge is to ensure that once funds reach municipalities they are used to deliver services that benefit poor households 19

Formula divides LGES allocation among 278 municipalities (like slicing a R34bn cake)

Formula determines size of each ‘slice’

Municipalities determine how funds are used to deliver services to their

residents

LGES DELIVERY CHAIN: From formula to services

Select Committee on Appropriations recommendations with potential impacts for the LGES and/or FBS

Recommendations on the 2013 Division of Revenue Bill:

•National Treasury should look into some alternatives that will minimise the impact of increased costs due to the uniqueness of some areas (such as the vastness and topography of the area);

•National Treasury, in collaboration with appropriate national departments, should improve the monitoring of the provision of free basic services to poor households;

•National Treasury should monitor whether the municipalities provide proper service delivery and budget implementation plans that channel the increased allocations to poor households;

•National Treasury and the Department of Cooperative Governance and Traditional Affairs should intensify measures towards realizing Operation Clean Audit so that there is value for the money spent. The Department of Cooperative Governance and Traditional Affairs should further report on a quarterly basis to Parliament on progress made in this regard;

These will be taken forward by National Treasury and relevant stakeholders

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Access to Free Basic Energy

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Measuring Access to FBE

• Municipalities report on their provision of FBE in the Non-Financial Census of Municipalities collected by StatsSA

• Municipalities also report on the number of households provided with FBS in the parts of the service delivery budgeting tables when compiling their annual budgets. Currently not all municipalities fill these sheets in credibly, but national and provincial treasuries are working to improve the quality of budgeting and reporting in this area.

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Increase in access provided by municipalities - Non-Financial Census of Municipalities

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• In the data reported by municipalities (to StatsSA) access to electricity shows continuous improvement

• The number of households receiving FBE declines, but this is mainly due to better targeting as municipalities reduce the number of non-poor households receiving FBE

Growth in access to electricity across the country

Increasing access to FBE in rural areas

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Comparing access to services in 2005 and 2011 - Non-Financial Census of Municipalities

• Most of the change in FBE targeting is in the metros• More rural municipalities are expanding access to FBE

      2009 2010 2011

ProvinceTotal Households (Census 2011)

Total Poor Households (Census 2011)

Number of consumer units receiving basic electricity

Number of consumer units receiving free basic electricity

Number of consumer units receiving basic electricity

Number of consumer units receiving free basic electricity

Number of consumer units receiving basic electricity

Number of consumer units receiving free basic electricity

Western Cape 1 634 000 746 836 1 208 413 550 723 1 300 226 605 997 1 281 831 545 282

Eastern Cape 1 687 385 1 157 910 886 759 312 846 898 332 313 348 967 376 352 501

Northern Cape 301 405 170 567 223 443 104 510 237 307 104 041 250 105 96 494

Free State 823 316 510 928 599 639 377 451 628 508 326 357 655 764 305 454

Kwa- Zulu Natal 2 539 429 1 598 973 1 283 813 190 265 1 321 199 189 067 1 402 594 193 589

North West 1 062 015 659 385 588 213 131 973 636 406 144 744 783 711 144 645

Gauteng 3 909 022 1 955 513 1 705 839 724 178 1 825 856 757 602 1 972 984 376 637

Mpumalanga 1 075 488 663 347 598 380 234 183 657 635 272 584 707 477 303 474

Limpopo 1 418 102 1 003 043 1 145 576 314 479 1 185 502 323 219 1 084 341 229 257

Total 14 450 161 8 466 500 8 240 075 2 940 608 8 690 971 3 036 959 9 106 183 2 547 333

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Levels of access to Free Basic Electricity by province – Non-Financial Census of Municipalities

Low provision of Free Basic Alternative Energy - Non-Financial Census of Municipalities

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• Households without connections should receive Free Basic Alternative Energy (FBAE)

• LGES funds can be used to fund these (LGES subsidy provided for all households below R2300, not only those with access to the grid)

• Number of HHs receiving FBAE is small, but increased by 36 000 in 2011

Source 2011Coal 26Gas 1 098Paraffin 47 523Candles 24 115Solar home system 41 635Fire gel 44 817Total 159 214

Number of households receiving FBAE from different sources

Conclusion

The effectiveness of FBE rests on three pillars:

1.Providing access through building infrastructure to connect households to services

– Census 2011 shows good progress in extending access, and additions to INEP will further accelerate this

2.Maintaining access by ensuring infrastructure is properly maintained to prevent breaks in supply

– R320 million was added to INEP to pilot an Approach to distribution Asset Management in 2013/14 and additional requirements to budget for maintenance have been built into municipal budgeting regulations. But this remains an area of concern

3.Subsidising consumption through municipalities’ free basic services policies– The new equitable share formula ensures sufficient funds are available, but

municipalities need to ensure they provide the services– Municipalities should improve targeting of free basic services and FBE 

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