1. Background

2. Previous Formula

3. Review Framework

4. The New Formula

5.Further Considerations

6.Impact of Revised Formula

7.Conceptualising the Development Component

8.Items for Noting

BACKGROUND

• In 2004, the review of the local government equitable share formula was undertaken to address the critical aspect of municipalities with low fiscal capacity.

Constitution [214(2)]

• Equitable share allocations of revenue should be made after taking into account:

- the need to ensure that municipalities are able to provide basic services and perform functions allocated to them (d)

- the fiscal capacity and efficiency of municipalities (e)

• developmental and other needs of local government & municipalities (f)

Principles that guided the new framework

• transparency, equity, efficiency, simplicity

2.Previous Formula

• Structure, lack of transparency, unstable, "windows", inadequate revenue raising measure

• Clear guide on prioritising of funds, does attempt to address revenue raising mechanism

• Adequate, appropriate costing of services (cost parameter, L);

• Multiplicative formula, calculating absolute allocations that have to be manipulated with (scaling parameter) to fit budget envelope

• Facilitated by scaling parameter to keep in budget

• Revenue raising component captured here, floor parameter rationale reduces transparency

• No urban/rural differentiation for municipal capacity

Previous Formula (cont)

• FBS, FBE, nodal allocations, R293 towns

• R1100 cut-off point for affordability

• Use of per HH allocations v.s. per capita allocations

• Nodal funding a political decision funded through unconditional grant

• R293 town allocations also a political decision

3. Review Framework

• Per capita allocations for targeting

• Costing basic services combined with expert opinion

• Free basic services (electricity, water, refuse, sanitation) included, based on number of poor HH receiving services

• Appropriate revenue raising capacity measure, universally applied to formula (proxy) where insufficient data-FFC recommendations

• Phasing out of funding "windows"

• Incorporate FBS & FBE

• Alternative funding framework for nodal allocations, phase out R293

• Simple, transparent and additive formula

• Caution on timing of implementation (FFC)-phased implementation

Structure

• components based formula

• Grant = BS + D + I—R + C
• Where:

- BS is the basic services component

- D is the development component

- I is the institutional support component

- R is the Revenue Raising Capacity Correction and

- C are corrections applied to ensure that various stabilisation constraints can be met

Basic Services Component

• Grant intended to support the recurring cost of providing basic services

• Compliments MIG grant

- Supports services to poor only (based on number of poor households per municipality)

- Differentiates between poor households receiving services and poor households not receiving services, giving full subsidy to poor (R800 income) receiving services and 1/3 of subsidy to poor not receiving services

- Service costs based on costing exercise study done by the dplg in 2004 (Municipal Infrastructure Investment Framework)

- Recognises core functions (water, electricity, sanitation and refuse removal), with room for inclusion of "other functions"

• BS formula simple, transparent and additive in nature

Institutional Component

• This component is aimed to make a contribution to assist municipalities to operate functioning municipalities, support is twofold

• Administrative capacity and electoral accountability

• I = Basic Allocation + AdminSupport * Population + CouncilSupport * Seats

• Basic allocation goes to all municipalities except DMAs

• Administrative support allocation takes account of population recognising the correlation between population and cost of administration

- Council support is a contribution towards the administrative cost of electoral oversight and is based on the number of council seats suggested by the dplg formula

Revenue Raising Capacity Correction

• An explicit revenue raising correction is included in the formula to take into account the fiscal disparities between municipalities

• Component should be updated as the fiscal framework is revised and as implementation of property rates legislation is implemented (e.g. as valuation rolls become available)

• Measurement complexities

• Uses predicted rates income and RSC levy income

- Based on population, income distribution and number of employed population

• Method: effective "tax" on total predicted income to use as revenue raising capacity correction within the equitable share formula

• A percentage" tax", e.g. 5% is then "charged" on the total predicted income of municipalities with significant revenue raising capacities

Way forward

• Committee Meetings: August-October

• Report available before next Session

• Fourth Ordinary Session: 21 Nov-2 Dec

• Challenges:

- Communication/feedback to bureau

• Links with other AU organs and Regional Bodies

• Internal Challenges: South African Parliament

- Reports and Feedback

Stabilisation Constraints

• Included because the share going to local government is determined to a large extent by the vertical division of revenue-pre-determined amount

• Overall equitable share calculated through the formula MUST add up to amount available

• Necessary adjustments made to "balance the budget"

5. Further Considerations

- 2005/06 to full implementation in 2007/08

• Refinement of formula

• Specification of Development component

• Further measurement considerations

- The phasing out of RSC levies will bring about new measurement requirements

- The implementation of the Municipal Property Rates Act and concomitant valuation methodology should be considered

• Other fiscal framework review eventualities

• Impact of formula revision on municipalities especially those that have high dependency on intergovernmental transfers

6. Impact Of Revised Formula

• With any revision of policy tools, an impact assessment assists in providing insights into costs and benefits of policy shifts

• Assessment reveals that no municipality was "negatively" affected (through reduced allocations over the MTEF) as a result of the revision of the formula

• All municipalities' allocations were either higher or they remained unchanged as a result of the first phase of the implementation of the new formula

• While there were gains, some gains were more pronounced than others

6. Impact Of Revised Formula (A Synopsis)

• The differences in gains as a result of the implementation of the formula can be attributed to:

- Migratory patterns towards regional urban centres which reduces the population in non-urban centres;

- The treatment of poor households receiving services in the services component-greater weight given to households receiving services;

- The impact of the revenue raising capacity correction which essentially shifts resources away from municipalities with high fiscal capacity to those with limited fiscal capacity.

• Of concern is whether certain low fiscal capacity municipalities are impeded structurally to provide services to poor households

• Some of these structural concerns are developmental in nature and provide insights into areas that should be given priority in conceptualising the inactivated Development component of the formula

7. Conceptualism9 The Development Component

• How to specify "development"

• Component set at zero/inactivated for 2005/06

• Decisions on indices, parameters to use for measurement

- Poverty i.e extent/concentration thereof;

- Extent of infrastructure backlogs;

- Economic activity

In old formula, "nodal allocations" brought concept of development into the transfers system

• It has been argued to be inequitable due to allocations made to selected nodal areas only

• Nodal areas do represent pockets of concentrated poverty, however a more equitable funding method that takes into account the extent of poverty in all municipalities must be identified

8. For Noting

• Formula has been largely simplified to promote transparency and accountability in the intergovernmental transfers system

• Formula has been revised to ensure that those municipalities with low fiscal capacity are recognised

• Formula will be phased in over a period of three years

• An explicit revenue raising capacity correction has been included into the new formula

• Formula rewards those municipalities that have invested in basic infrastructure necessary for the delivery of basic services

• Development component should address areas of a structural nature that impact on municipalities' developmental mandate

THANK You