Potential financial implications of re-demarcation of provinces and municipalities

1. Potential financial implications of re-demarcation of provinces and municipalities Presentation by the National Treasury 9 February 2009

2. Outline • Budget process • Implications of re-demarcation of boundaries on provincial fiscal framework • Implications of re-demarcation of boundaries on LG fiscal framework • Way forward • 2009 Budget • 2010 Budget

3. Budget process • Provincial budget process • Process at very advanced stage • National transfers and own revenue aligned to current boundaries • Municipal budget process • Process at an advanced stage • Municipalities consult with their communities during Jan to March for budget commencing 1 July • Draft municipal budget for next MTEF submitted to council by March • Financial aspects of new boundaries can only be implemented in 2010/11

4. Possible financial implications for provinces

5. Implications for provinces • Re-demarcation of provincial boundaries impact on • provincial equitable share allocations • Main funding source of provinces • conditional grants • provincial own revenue • expenditure baselines

6. Provincial equitable share formula ES = Education + Health + Institutional + Poverty + Economic activity Where • An education share (51 per cent) • size of the school-age population (ages 5-17) • number of learners (Grade R to 12) in public ordinary schools • A health share (26 per cent) • proportion of the population with and without access to medical aid • A basic share (14 per cent) • each province’s share of the national population • An institutional component (5 per cent) • divided equally between the provinces • A poverty component (3 per cent) • population in Quintiles 1 and 2 • An economic output component (1 per cent) • GDP by region (GDP-R)

7. Re-demarcation impact on ES • All components, with exception of Institutional Component, need to be updated to take into account population shifts of re-demarcation • Merafong = ±210 500 people • Education component • how many of 210 500 population are school going? • Snap survey of Schools done by DoE done on 10th day after schools open • Merafong shift will only be implemented in 2010 Budget • Health component • With/without medical aid is based on population surveys will not necessarily capture Merafong • Basic share component • Same as health as population is based on mid-year estimates • Poverty component • Quintiles 1 and 2 obtained from IES – next IES scheduled for 2010 • Economic component • GDP-R based on sample

8. Re-demarcation impact on ES • 2009 Budget • DoRB provisions • 2010 Budget onwards • Merafong shifts based on estimates until 2011 Census results available • Previous demarcation resulted in a 15% population loss • Implications of Merafong shift on NW Province? • Other possible re-demarcations?

9. Provincial distribution of ES 100 000 households in Merafong All provincial shares will change with largest impact on Gauteng (INCREASE) and NW (DECREASE)

10. Implications for provinces (cont) • Similar implications for conditional grants to provinces • Large number of conditional grants underpinned by population figures (housing, NSNP, HIV and Aids, etc) • Own revenues • Motor vehicle licensing, health patient fees, etc of Merafong to shift to Gauteng • Budget preparation implications • Expenditure baseline amounts of each vote to be adjusted by provinces and national departments responsible for concurrent functions

11. Possible financial implications for local government

12. Implications for local government • Re-demarcation of municipal boundaries impact on • LG equitable share allocations • LG conditional grants • municipal own revenue • expenditure baselines

13. LG equitable share formula ES = Basic Services + Development + Institutional – Revenue Raising ± Correction Where • Basic Services (94 per cent) • Allocated to authorised municipality (either category B or C) • poor HHs with and without access to water, sanitation, electricity and refuse • Municipal health (district municipalities) • Development • not yet activated • Institutional capacity (6 per cent) I = Base allocation + [Admin support * Population] + [Council support * No of seats] where I = R350 000 + [R1*population] + [R36 000* councillors] • Revenue-raising capacity • each municipality’s ability to raise own revenue (property rates + general fuel levy/RSC/JSB levy replacement grant) • Correction and stabilisation • Factor to balance to available resources (envelope of ES)

14. Implications for LG (cont) • RSC levies replacement grant • To be adjusted to account for population shift of Merafong • Municipal infrastructure grant (MIG) and other infrastructure grants to LG • Impact only if authorised for water, sanitation, electricity and refuse • Merafong Local Municipality will retain MIG as Dr Kenneth Kaunda and West Rand District Municipalities not authorised for these functions • Capacity building and other grants • Grant allocation criteria to determine impact • Own revenues • Impact only if authorisation for water and sanitation shift • Budget preparation implications • Large impact only if authorisation for water and sanitation shift

15. Implications for Budget preparations • 2009 Budget • Adjustments to provincial and LG fiscal frameworks not possible due to constraints highlighted • 2009 DoRB/A provisions to deal with grant allocations • Service delivery agreements to be put in place by provinces and municipalities affected by re-demarcation • 2010 Budget • Provincial and LG fiscal frameworks to take into account all boundary re-demarcations • Adjustments to provincial and LG fiscal frameworks to be done within data availability/constraints • Other limitations such as transferability of contracts, etc.

16. Thank you