ALAN 55 th CONGRESS

1. ALAN 55th CONGRESS Best Practices on Sustainable and Effective Local Government Financing 1

2. Best Practices on Sustainable and Effective Local Government Financing • Introduction • Intergovernmental transfers • Own revenue • Borrowing • Development contributions and charges • Public private Partnerships

3. Best Practices on Sustainable and Effective Local Government Financing Introduction • Section 153 of the Constitution of the Republic of South Africa, 1996 Municipalities requires municipalities to structure its budgeting process to give priority to the basic needs of the community and promote economic development of the community • Also required to provide services in a sustainable manner • Due to the importance of the sustainability certain functions may not be delegated by the council: • approval of budget • imposition of rates and other taxes, levies and duties • raising of loans

4. Best Practices on Sustainable and Effective Local Government Financing Inter-governmental transfers • Section 214 of Constitution requires national legislation to address the division of revenue raised nationally between all three spheres of government and other allocations to local government and municipalities • Division of Revenue Act annually determines the equitable share of income to be paid to each municipality from the national fiscus • Equitable share is unconditional and based on a formula • Challenges with formula • Conditional grants include Municipal Infrastructure Grants (MIG funding) and Municipal Institutional Systems Grant (MISG) • Municipalities need to apply for and if granted, report on their spending of the conditional grants • Funding can be discontinued in case of non-spending or non-reporting

5. Best Practices on Sustainable and Effective Local Government Financing Own revenue • Consist of rates and taxes, service charges and fees and surcharges • Levying and recovery of fees, charges and tariffs are done in terms of the Local Government: Municipal Systems Act, 2000 • Fees, charges and tariffs are based on the cost of provision incurred by the municipality • Increases in fees for electricity to be approved by NERSA • Rates and taxes charges in terms of the Local Government: Municipal Propoerty Rates Act, 2004 • Properties rated in terms of market value for land and improvements • Rates based on the value of the property • Ratios and rates determined for various categories of property uses • Certain exemptions and rebates

6. Best Practices on Sustainable and Effective Local Government Financing Own revenue (Cont.) • Municipalities required to have rates policy and by-laws, tariff policy and by-laws and credit control policy and by-laws to formalise the process of levying and recovery of own income • Certain problems experienced in municipalities such as incorrect and late billing, incomplete billing, payments not reconciled and unallocated payments, non-payment • March 2011 R40 billion un[paid municipal debt, 63% household consumers • Also illegal water and electricity connections

7. Best Practices on Sustainable and Effective Local Government Financing Borrowing • Local Government Municipal Finance Management Act,2003 provides for borrowing by municipalities • Loans from public and private sector financial institutions • Certain metros starting to introduce access to capital market by the issuing of bonds, 2% of total borrowing • Long term loans contribute to74% of the total amount of debt incurred by municipalities for infrastructure delivery • 75% of external loans by metros, 16% by secondary cities and large towns and 3% for smaller municipalities • Secondary cities and smaller municipalities affected by credit ratings

8. Best Practices on Sustainable and Effective Local Government Financing Borrowing (Cont.) Benefits of bonds: • large amounts can be borrowed • borrowing from a spread of lenders • pricing more competitive than loans • diversification of funding options

9. Best Practices on Sustainable and Effective Local Government Financing Development contributions and charges • National Treasury views development contributions and charges as an important component of a sustainable system of municipal infrastructure financing • Urban growth, development and expansion creates the need for additional infrastructure • Contributions or payment thereof by developers will limit the burden on municipalities • Currently varying pieces of legislation on planning in the various provinces, but examples of allowable charges include contributions to specified services outside new developments but serving those developments (external services), contributions towards parks and open spaces, and contributions for improvements of current services necessitated by the development (endowments) • Lack of uniformity makes it difficult to implement

10. Best Practices on Sustainable and Effective Local Government Financing Public Private Partnerships • Can include simple service agreements as well as long term franchise and concession agreements • Three pre-1995 water PPPs • Public Private Partnership Regulations currently requires lengthy and complicated viability investigation as well as a procurement process which discourages PPPs • Ongoing management also a challenge

11. Best Practices on Sustainable and Effective Local Government Financing Thank you Lorette Tredoux ltredoux@salga.org.za