18 August 2010

1. SALGA COMMENTS ON THE FFC RECOMMENDATIONS FOR THE 2011/12 DIVISION OF REVENUE byCouncillor Sophie Molokoane-MachikaChairperson of the National Working Group – Municipal Finance and Corporate Administration 18 August 2010

2. Outline • General remarks • Chapter 3 (Towards an effective, efficient and transparent intergovernmental fiscal system) • Improvement of the performance and effectiveness of fiscal transfers • LG revenue improvement strategies and fiscal distress • Reforming the LG Equitable Share formula • Regionalising municipal services • Chapter 4 (Intergovernmental fiscal issues in urban transport)

3. General Remarks • The FFC plays an important role in providing research into LG fiscal matters • Focus of the FFC should however, be on providing practical solutions to current challenges in the fiscal system, e.g. how exactly can the LGES formula must be reconstructed to derive more equitable allocations • There is currently no monitoring of how government has implemented past recommendations of the FFC while new ones are proposed annually

4. Chapter 3 • Improvement of the effectiveness of fiscal transfers (1) • FFC recommendations on the introduction and termination of conditional grants are supported • On an independent evaluation of grant performance • Business plans must be analysed before implementation of a new grant – ie. clear guidelines must be developed for factoring the design and planning of grants into business plans • Emphasis non financial data reporting • Test the readiness of municipal administrative systems before implementation of grants • Fiscal support should take a holistic view to ensure that various grants operate as a system to develop municipalities • Government must consider integration of grants

5. Chapter 3 • Improvement of the effectiveness of fiscal transfers (2) • Incentivising innovation is supported, but: • Municipalities with limited or no capacity needs to be capacitated prior to or in conjunction with incentives based grants • Incentives must be set at a level that actually encourages innovation • SALGA is of the view however, that the current grant frameworks do contain indicators and measures such as the outputs to be achieved. However, there is no reporting on these non-financial measures. • Municipalities report to line departments in terms of the grant requirements, but there is no coordination and consolidating of this non-financial performance reporting at a national level. We do note that NT monitors and reports on spending against budgets.

6. Chapter 3 • LG Revenue improvement strategies and fiscal distress (1) • FFC recommendations on the improvement of the general performance in municipal revenue collection are supported • Establishing early warning systems for financial distress • Set standard indicators to harmonise revenue collection performance • Balance tax collection with improved service delivery • Revenue collection should become one of the most important goals of a municipality (officials and councillors) • Government as a consumer should set an example and pay on time • The recommendation on the issue of garnishee orders on defaulting customers is strongly supported • FFC to share the full results and details of the study on municipal fiscal capacity and fiscal effort

7. Chapter 3 • LG Revenue improvement strategies and fiscal distress (2) • National and provincial treasuries must monitor municipal revenue improvement plans • Guidelines must be provided for the development of municipal revenue improvement plans • Municipal financial systems should be audited to address challenges around: • Billing systems (eg. there around 14 different financial systems are being used across all municipalities in one of the provinces) • Ensure accuracy of development of customer and property databases • Revenue management plans should be accompanied by national and provincial government support, especially so smaller and more rural municipalities.

8. Chapter 3 • Reforming the LG Equitable Share Formula (1) • SALGA agrees with recommendation that improving the institutional support allocations to smaller municipalities will sustain their administrative and governance operations • FFC to provide solutions on how this can be achieved in the formula • SALGA’s own analysis indicates that there are around 40 municipalities that cannot fund salaries and wages with the combination of the Institutional support component and the Special Support for Councillor remuneration grant • No indication of analysis of the arbitrary R350 000 base amount in the institutional support component • The recommendation on the RRC is supported, but the broader principle of differentiation between municipalities within the formula is not addressed • FFC must provide practical solutions on how to replace current RRC

9. Chapter 3 • Reforming the LG Equitable Share Formula (2) • The review of the formula, together with the review of the LG fiscal framework, that is currently underway should focus in the short term on: • allocating additional funding to the institutional support component of the formula; and • to increase the allocation to smaller municipalities who are primarily reliant on the grant. • Over the medium term the review should focus on: • expanding the basket of basic public services that municipalities provide • reviewing the poverty line, currently R800 monthly income per household • SALGA is concerned however, that the FFC recommendations over the last few years have not been followed up, e.g. the 2006 recommendations on the development component and the 2010 recommendations on including road maintenance as part of the formula.

10. Chapter 3 • Regionalising Municipal Services – EDI (1) • EDI Holdings and DoE is best placed to take up this debate about the merits and demerits of regionalisation • FFC report should provide the quantitative financial and fiscal implications of the arguments around the REDs • SALGA comments: • Electricity distribution is a key contributor to municipal revenue • A significant portion of EDI income accrues to a national entity (Eskom), from which LG draws no financial benefit • LG does not receive income from key industrial customers and this has an impact on municipal financial viability

11. Chapter 3 • Regionalising Municipal Services – EDI (2) • On general recommendations: • Recommendation 1 is supported (Blanket regionalisation approach as per the 17th amendment to the constitution) • Recommendation 2: The proposed differentiated approach of the FFC should recognise the poor economic bases of some poor performing distributors that cannot be left on their own • On recommendations, should the EDI restructuring and establishment of REDS go ahead: • Recommendation 1: The interdependence between Electricity Supply Industry and EDI is not convincingly argued in the report • Recommendation 2: It may be prudent to review the appropriateness of the proposed solution to the EDI restructuring, but may prolong uncertainty

12. Chapter 3 • Regionalising Municipal Services – EDI (3) • On recommendations, should the EDI restructuring and establishment of REDS go ahead (continue) : • Recommendation 3: SALGA propose that the process for negotiating the deal issues be urgently finalised before the EDI Restructuring Bill • Recommendation 4: Adequate compensation - SALGA supports this recommendation • Recommendation 5: Compatibility of operating systems - Supported, but is seen as responsibility of EDIH • Recommendation 6: • Social objective of making access universal - First part of recommendation is supported • On the second part of the recommendation, SALGA believes that planning and directing the implementation of the electrification programme is a municipal function

13. Chapter 4 • Fiscal issues in urban public transport (1) • Recommendations are supported as it will address the public transport challenges in major cities (not directed at local government) • There is a need to monitor the roll out of any new transport initiatives (community based or mainstream services such as BRT) • The initiatives should not only be measured against passenger counts and additional vehicle kms, but also against social welfare criteria • Performance criteria of public transport services should be inclusive of: • Equality of access - different income and social groups • Access to key activities and public services within “reasonable” traveling time • Passenger satisfaction with public transport service levels, routing, operating conditions, waiting provision, fear and crime • Contribution to take up of employment, healthcare, education, etc. • Level of community participation in decision making • Degree of integration with housing developments and key public services

14. Thank You