MINISTRY FOR PROVINCIAL AND LOCAL GOVERNMENT REPUBLIC OF SOUTH AFRICA

Intergovernmental Fiscal Review Hearings – 07 October 2004

Overview of Trends in Local Government Finance, Challenges and Progress

Local government, by virtue of its Constitutional Mandate, plays a pivotal role in the delivery of basic services to the poor and in the social and economic development of communities. Various pieces of legislation have been developed to give effect to this; and which seek to facilitate the mandate of Local Government to deliver basic services; and to promote their developmental role. These include:

A review of municipal expenditure and revenue trends provides some indication on the progress made against the mandate of municipalities; service delivery to all, especially the poor.

Expenditure Trends

An examination of expenditure trends as captured in the publication on "Trends in Intergovernmental Finances 2000/01-2006/07 reveals that operating expenditure makes up a significant proportion of total expenditure of municipalities. Of great concern is the proportion of the operating expenditure that is made up of personnel expenditure.

A significant 33 percent of municipalities operating expenditure constitute personnel expenditure. An important concern is that the salaries and benefits of municipal employees are significantly high. In 2002/03 personnel expenditure grew by 15 percent. While it is important to highlight this, a point must be made that increases in personnel costs may in fact; mirror the impact of amalgamation and our new system of local government

24 percent of the operating budget of municipalities goes to bulk services, while 43 percent is on other expenditure, which includes repairs and maintenance of infrastructure, provisions for under-collection of revenue and other.

The capital budget of municipalities has in the last two years grown faster than the operating budget. This is significant, given that capital investments in municipal infrastructure are essential for the delivery of basic services. The bulk of the budgeted capital expenditure (81 percent) is attributed o general infrastructure, which includes roads, bridges, storm water drainage systems, water reservoirs and electricity reticulation.

Revenue Trends

The most significant source of revenue for municipalities is user charges for providing water, sanitation; refuse removal and electricity, basic municipal services. Property rates make up 20 percent of local government revenue, mainly for metropolitan and local municipalities.

Regional Services Council (RSC) Levies are an important source of revenue for metropolitan and district municipalities, making up 7 percent of total municipal revenue in 2003/04. However, the RSC levy has been found to be an inequitable and poorly administered tax that is currently under review.

National transfers have increased significantly, albeit from a low base, as a source of revenue for local government. The local government equitable share has, over the years, progressively formed a greater proportion of overall transfers to the local sphere. The equitable share is currently under review to make it more simple and transparent, but particularly to ensure that there is equalization between municipalities with a revenue base and those that are solely dependent on national transfers, hence a limited revenue raising capacity.

The Municipal Infrastructure Grant (MIG) is an important instrument in the acceleration of the delivery of basic services. The grant will assist in ensuring investment in infrastructure for basic services thereby accelerating access to these services. Other grants are the capacity building grant and the restructuring grant.

Progress

There has been progress in

The above issues are dealt with in more detail below;

Municipal Infrastructure Grant and the Expanded Public Works Programme

 

The implementation of the MIG pilot projects overlapped with the full implementation of MIG programme, which was brought forward by two years, therefore implementation started on 1 April 2004. This earlier implementation required the dplg and other key National Departments to fast track the commencement of the MIG rollout processes. This state of affairs might place considerable pressure on municipalities to deliver, as the MIG programme requires a number of business processes and procedures to be put in place.

Readiness and assistance required

The assistance to municipalities currently manifests itself through structures created to strengthen intergovernmental relations between the spheres of government that includes teams established within municipalities to assist with the programme management and the MIG management structure as follows:

    1. The National Municipal Infrastructure Grant (MIG) Unit has been established in dplg. The MIG unit management and the establishment costs are funded from the MIG.
    2. The Provincial Programme Management Units (PPMUs) are established in all nine provinces. The units cooperate with other provincial sector departments including SALGA and the Department of Public Works on the Expanded Public Works Programme to provide the technical support to the PMITT.
    3. The initial 69 Project Management Units are being established in municipalities across the country. (To date 8 have been established)
    4. The dplg unit and Public Works are finalising a plan to develop capacity of the PMUs in municipalities on contract management in line with the Expanded Public Works Programme implementation guidelines.

The oversight of the implementation of the MIG is done through the following structures and provides strategic guidance to the structures mentioned above:

    1. The Municipal Infrastructure Task Team (MITT) consisting of senior officials [e.g. Directors-General or the Deputy Directors-General from key national departments and the Chief Executive Officer of the South African Local Government Association (SALGA)] has been established at the national level. MITT convenes on a regular basis at least quarterly to co-ordinate municipal infrastructure policies.
    2. The technical team; Municipal Infrastructure Technical Task Team (MIT3) supports MITT. The MIT3 convenes on a monthly basis to co-ordinate the implementation of MIG.
    3. The MITT is replicated in all nine provinces as Provincial Municipal Infrastructure Task Team (PMITT) to co-ordinate the provincial MIG implementations.

The Municipal Infrastructure Policy Framework and the Division of Revenue Act (Act No.5 of 2004) provide that the Municipal Infrastructure Grant Programme should first provide funds for the commitments on the previous Consolidated Municipal Infrastructure (CMIP) and Water Services Projects as at 30 September 2003.

The 2004/05 MIG allocation amounts to R4, 446 billion. The aggregate total amount over the Medium Term Expenditure Framework totals R15, 6 billion. This aggregate budget includes the 2004/05 and 2005/06 Consolidated Municipal Infrastructure Programme (CMIP) and Water Services Projects commitments at R3, 202 billion and R3, 447 billion for the respective years. The CMIP and Water Services projects commitments account to about 72% of the total 2004/5 MIG programme budget.

Municipalities have started registering new MIG projects against the R1, 065 uncommitted funds. The National MIG unit has established that the newly registered projects are running behind schedule in terms of their preparation; a situation which may have a negative effect on the expenditure rate of municipalities, but which is also inevitable considering the consolidation of the various grants in a notably short period of time.

Sector engagement

National and provincial workshops were held with all the key government stakeholders. The Department of Public Works on Expanded Public Works Programme (EPWP) and other sector departments participated in all MIG programme workshops. dplg has participated in the launch of the Expanded Public Works Programme that was held in the 21 nodes.

A multi-sectoral task team has been established to manage and guide the communication on the MIG programme. All sector departments participate in this forum.

The dplg continues to work with the Department of Public Works to develop a programme on training the PMUs on how to manage the contractors in line with the Expanded Public Works Programme guidelines.

 

Municipal Finance Management Act and Property Rates Acts

 

Municipal Finance Management Act

National Treasury is responsible for the implementation of the Municipal Finance Management Act, and it has already rolled out an implementation strategy. The dplg is working with the National Treasury regarding some implementation areas such as:

Municipal Property Rates Act

The President signed the Municipal Property Rates Bill into law on 11 May 2004. The commencement date of the Act has not been provided pending implementation issues that the department is currently working on. The commencement date of the Act will be Gazetted and announced in the near future.

One of the main implementation challenges is the valuation of the public service infrastructure. The department has been engaging with stakeholders such as parastatals and valuers regarding development of a valuation methodology for Public Service Infrastructure. This valuation methodology would be included in both regulations and/or guidelines. The department is working on key regulations and guidelines that should be in place prior to the commencement date of the Act.

In addition, the department intends to launch the Act with national and provincial workshops that will address areas of support to municipalities on the following:

 

Early Warning Mechanisms

National Government has a Constitutional responsibility to monitor and support municipalities. In doing this; National government has to work closely with both provincial and local governments to develop an effective early warning mechanism.

 

The department has just completed an exercise of information gathering through the Municipal Transformation Monitoring Programme (Previously known as Project Viability). An information system has therefore been developed. The information collected centers around the following areas:

Within this system, there is a tool that allows the department: on a Quarterly basis to collect strategic information that will enable us to identify areas requiring support and or intervention at municipal level. The system needs to be constantly updated to cater for the dynamic transformational needs of local government. Some of the key challenges that are experienced include the following:

 

Together with provinces, the department is developing a uniform framework for Early Warning Indicators, in line with Municipal Finance Management Act provisions, and sec 139 of the Constitution, with a view that through the intergovernmental relations framework, we may avert some of the current triggers of distress by collectively supporting municipalities.

 

Challenges and Conclusion

The National Treasury and dplg are jointly in the process of developing the Local Government Fiscal Framework and within this work reviewing the Local Government Equitable Share Formula and reforming the Regional Services Council (RSC) levies. All these developments; including the impeding restructuring of electricity distribution will significantly affect the finances of municipalities. In time, trends in municipal finances will show whether these revenue-raising instruments shall have bolstered the finances of poor municipalities. It might be that some of the municipalities will for the foreseeable future be largely dependent on funding from the national fiscus (Local Government Equitable Share). Lack of economic development in some of our municipalities may not permit the municipalities to exploit any assigned tax instruments to generate sufficient revenue.

Municipal revenue debt collection and poor billing systems continue to limit local governments’ revenue raising capacity and ability to deliver basic services. The large outstanding debts that continue to accumulate need to be addressed. Investment in adequate basic service infrastructure is essential in accelerating access to basic services. There is an increasing need to align MIG and the Local Government Equitable Share so that funding for operations and maintenance is provided for.

It is our firm belief, Chair; that the work that the department is currently doing on Project Consolidate, including the work with National Treasury, as well as the Revenue Enhancement Programmed under dplg, shall begin to address some of the challenges in our Intergovernmental Fiscal Framework. To note also that there have been significant key developments on Local Government Finance, the challenge is to ensure that we implement the various pieces of legislation and programmes so that we stabilize our system.

 

I THANK YOU