LG EQUITABLE SHARELG EQUITABLE SHARE

Presentation to Portfolio Presentation to Portfolio CommitteeCommittee

5 June 20025 June 2002

BACKGROUNDBACKGROUND

3 types of transfers to LG will facilitate implementation of Free/ Basic Services:– Infrastructure– capacity building– equitable share transfers

FBS can only be provided if infrastructure is in place

Backlogs higher in rural areas than in urban areas

– Key constraint not lack of commitment, but multiple pressures faced by municipalities

– Various smaller municipalities will follow a more phased-in approach

BACKGROUND (cont)BACKGROUND (cont)

Equitable share to LG introduced due to:– Problems with previous systems admin by provinces– Constitutional requirements (sections 214 and 227)

Consistent and transparent basis for allocation– Formula-driven (no need to apply)

Poverty focused– Assists municipalities to provide basic services to low-income HH– Assists selected municipalities to maintain basic admin

Equity Predictability

– 3-year allocations– Drops limited to 70% from previous year

LG EQUITABLE SHARE ALLOCATIONS

FINANCIAL YEAR AMOUNT R million

1998/99 1 024 1999/2000 1 673 (R447m for R293 functions)

2000/01 1 867 2001/02 2 618 2002/03 3 852 2003/04 5 021 2004/05 5 461

(amounts up to 2000/01 exclude “R293 town personnel grant”)(ES & other related transfers, % increase in 2001/02 = 11%)

ANALYSISANALYSIS

2002/03 (excl R293) 03/0404/05

Prov S I TOP-UP NODAL TOTAL TOTAL TOTAL

EC25% 29% 46% 26% 26% 27%FS 13% 7% 5% 12% 12% 11%G 14% 1% 6% 13% 12% 11%KZN 17% 29% 61% 18% 18% 18% 18%MP 5% 2% 18% 0% 5% 5% 5%NC 3% 11% 5% 4% 4% 4%NP 10% 12% 21% 13% 10% 11% 11%NW 8% 6% 0% 7% 8% 8%WC 5% 3% 8% 5% 5% 5%

ANALYSIS (cont)ANALYSIS (cont)

.

CatCat SS

(Rm(Rm))

II

(Rm(Rm))

Top-Top-upup

(Rm(Rm))

NodaNodall

(Rm)(Rm)

R293R293

(Rm)(Rm)Total Total (withou(without R293)t R293)

(Rm)(Rm)

%%

AA 723 0 0 52 51 775 21%

BB 2 185

286 7 18 283 2496 66%

CC 270 84 0 130 56 484 13%

COMPONENTSCOMPONENTS

Current formula approved by Cabinet during 1998

– BASIC SERVICES (S) GRANT to ensure access to basic municipal services

– INSTITUTIONAL CAPACITY (I) GRANT to enable selected municipalities to maintain basic admin

– TAX BASE EQUALISATION (T) GRANT not introduced as two-tier metro system replaced with one-tier system

– MATCHING (M) GRANT not introduced (to address spillovers between municipalities)

Improvements to formula being reviewed– Data availability limits certain improvements, such as

revenue raising ability of individual municipalities

OUTPUTS: LG EQUITABLE OUTPUTS: LG EQUITABLE SHARESHARE

Responsibilities of spheres - LG equitable share:

National government:

– Size of LG equitable share (vertical split) takes into account LG service delivery and developmental responsibilities

– Allocations to individual municipalities are equitably distributed among municipalities i.t.o. fiscal capacity and service responsibilities (horizontal split)

– Assisting municipalities in implementing “free basic services” (NG and PG)

Local government:

– Progressive use of the equitable share for its intended purposes as stipulated in section 227 of the Constitution

IMPROVEMENTS/IMPROVEMENTS/ADJUSTMENTSADJUSTMENTS

Prior improvements introduced:

– Improved method of measuring poverty (exp) introduced from 2001/02 fy

– Poverty line for poverty increased from R800 to R1 100 from 2001/02 fy

Equitable share allocations for 2002 MTEF:

– Allocations released on 15 April 2002– Budget i.t.o. municipal financial year

IMPROVEMENTS/ADJUSTMENTS IMPROVEMENTS/ADJUSTMENTS (cont)(cont)

Equitable share allocations for 2002 MTEF be made:

– selected district municipalities will receive I grants to maintain basic administrations

– selected district municipalities, incl. DMAs, will receive a basic service (S) grant i.t.o. ‘status quo’ provision

– Equitable share provision through S grant for the currentcurrent approved nodes

– Future activities: allocations from 2003/04 be linked to the division of powers and functions between Categories B and C

TARGETING OF LG EQUIT SHARE

Enablement, not prescriptive– NG encourages municipalities to use ES for intended

purpose– NG issues guidelines on targeting low-income HHs

Municipalities are accountable to their communities and are responsible for developing appropriate targeting mechanisms

Some municipalities struggle to target ES due to insufficient info on low-income HHs within their areas– In future, STATS SA will provide data on web re infra

provision, number of poor households, etc. per municipality

UTILISATION OF EQUITABLE SHARE

Basic services” consist of the following basket of services:

– Electricity/energy (free)– Water (free)– Refuse– Sanitation

Also: municipalities define access to roads and public transport, protection from flooding and facilitation of community facilities as basic services

INCORP DWAF OPER SUBSIDIESINCORP DWAF OPER SUBSIDIES

Equitable share funds be linked to Service Authority (not Service Provider)

Equitable share not transferred to non-municipal entities

Water Operating Transfer will be incorporated into equitable share as part of “guaranteed amount”

Amount incorporated as follows: – Year one (70% of amount received under Water Transfer

Subsidy)– Year two (70% of amount received in Year one (or 49%)– Year three (70% of amount received in Year two (or 34%)– Etc.

REVIEW OF LG FUNDINGREVIEW OF LG FUNDING

Review local government funding

– Inter-Ministerial Committee appointed to review LG funding requirements i.t.o. developmental mandate

– Review for short and medium-term finalised (2001/02 and 2002/03 fys)

• Resulted in increased funding to LG:• R328 million allocated through 2001/02 Adjust Budget• Equitable share allocation to LG were increased from R2,6b

in 2001/02 to R3,8b in 2002/03

– Longer-term review to be undertaken during 2002+ (2003/04 financial year)

• Proposals to July 2002 Cabinet Lekgotla• Follow-up submissions to Budget Forum etc

LG FINANCE REFORMS LG FINANCE REFORMS

Equitable share one of the first reforms implemented - part of a “package” of reforms

Other fiscal reforms also required:

– Capital grants alignment/consolidation– Improved borrowing– Optimisation of own revenues (property tax

reforms, improved credit control, service delivery efficiencies)

Reform of LG will be long-term process

The main funding stream for operating subsidies to local government is the

equitable share

THANK YOUTHANK YOU