Keynote address by National Treasury to the Cities Network 23 February 2007

1. Budget Dialogue:Fiscal Space for Municipal Action Keynote address by National Treasury to the Cities Network23 February 2007

2. Key question to be addressed –Does the current local government fiscal system create sufficient fiscal space for municipal action?

3. Outline • Snapshot of national transfers to provinces • The evolvement of the local government fiscal system • Key funding responsibilities of local government • Role of grant funding • Optimising own revenues • Role of borrowing • Future reforms to the local government fiscal system • Draft Municipal Fiscal Powers and Functions Bill • Issues to be taken into account in possible permanent sources to replace RSC levies • Municipal Property Rates Act • Other reforms impacting on local government • Fiscal space for municipal action – way ahead

4. Snap shot of transfers to LG

5. Evolvement of LG fiscal system since 1994

6. Delivery of basic services • Local government (LG) has substantially reformed since 1994 • LG needs to prioritise the provision of basic services and promote the social and economic development of the community (s153 of Constitution) • Although much progress has been made, substantial backlogs remain • Government set a target of addressing all service backlogs by 2013 • 33% or 15 million people do not have access to proper sanitation • 8% or 3,5 million people do not have access to safe, potable water • 8% do not have access to electricity

7. Municipal revenue sources • Size of equitable share to a sphere based on expenditure (service delivery) responsibilities and fiscal capacity and efficiency (s214) • Transfers are intended to supplement own revenues and borrowing to enable municipalities to achieve its service delivery and developmental responsibilities • Ability of municipalities to raise revenues from own sources influenced by income levels, affordability criteria and consumption patterns • Municipalities with a large proportion of poor households will struggle to raise own revenues as poor households should receive basic services for free • Municipalities with a large economic base would be able to cross-subsidise between services and consumer groups

8. High levels of poverty – limited ability to cross-subsidise Location of poverty Better mix between rich and poor – able to cross-subsidise

9. % poor HHs and their access to services

10. Municipal budget size (05/06) – A provincial perspective

11. Levels of service access (High capacity B) Levels of service access (6 metros) Levels of service access (Low capacity B 100 100 100 80 80 80 60 60 % % 60 % 40 40 40 20 20 20 - 0 - Water Sanitation Electricity Refuse Water Sanitation Electricity Refuse Water Sanitation Electricity Refuse • Service level access • 2001 Census results reflect high service access levels in metros • Although service access levels are lower in high capacity B munies than in As, still high • Service levels lowest in poorer resourced municipalities, mainly in rural areas of the country

12. Income levels of households (6 Metros) Income levels of households (low capacity B municipalities) 100 100 80 80 60 % 60 % 40 40 20 20 0 0 Below R800 Between Between Between Above R6400 Below R800 Between Between Between Above R6400 R800 - R1600 R1600 - R3200 - R800 - R1600 - R3200 - R3200 R6400 R1600 R3200 R6400 • Income levels • Although metros have a substantial % of HHs earning less than R800pm, they are have a sizeable proportion of “non-poor” • Metros therefore able to cross-subsidise • Poorer munies have a much larger % of HHs earning less than R800pm and a limited proportion of “non-poor” • Ability to cross-subsidise small

13. Split of own revenue and grants (low Split of own revenue and grants (largest 21 local municipalities) Split of own revenue and grants (6 metros) capacity B municipalities) R'Million R'million 50,000 50,000 50,000 40,000 40,000 40,000 30,000 30,000 30,000 20,000 20,000 20,000 10,000 10,000 10,000 0 0 0 Subsidies/Grants Own revenue Subsidies/Grants Own revenue Subsidies/Grants Own revenue • Reliance on grants • There are substantial differences in budget sizes and reliance on transfers between municipalities • Transfers make up a very small proportion of overall budget size of metros • Grants make up a larger proportion of overall budget than own revenues in smaller rural municipalities • large infrastructure backlogs to be addressed • Large proportion of HHs are poor and to receive FBS • Ability to cross-subsidise between customers limited • Transfers to be targeted to these munies

14. Municipal Budgets: Snap shot • The aggregate size of municipal budgets have doubled over the past five years, from R64b in 01/02 to R132b in 06/07 (provisional figure) • Large variances in budgets of the 283 municipalities • Metro • Average size of metro budget is R11b, ranging between R3b (Nelson Mandela) and R18b (Joburg) • Average of 2,4 million people (715 367 HHs) • A third of the population resides in metros (which increases to half the population if Top 21 municipalities are included) • Local municipalities • Budgets range between R7m (Molopo NW) and R1,8b (Msunduzi), with an average or R158m • Average of R117m population (32 311 HHd) per municipality, ranging from 1 945 HHs to 192 161 HHs • District municipalities • Budgets range between R9m (Xhariep) and R392m (Ugu), with an average of R158m

15. Municipal Budgets: Snap shot • Municipal budgets for the 2006/07 financial year – • Capital budget: • NG infra grants form a large proportion (R9b or 30%) of the overall capital budget of R31b, followed by internal advances (R7b or 23%) and external loans (R5b or 17%) • Infra expenditure focuses mainly on water, stormwater and sewerage (R13b or 40%), housing (R4b or 14%), electricity (R3b or 11%) and community services (R3b or 11%) • Operating budget: • Primary sources of operating income of R101b are electricity (R26b or 26%), operating grants (R20b or 20%), property rates (R19b or 19%), followed by water and sanitation (R16b or 16%) • Salaries (R31b or 27%) and other (R33b or 29%) forms the largest part of the operating expenditure budget of R113b, followed by bulk purchases (R21b or 18%), repairs and maintenance (R7b or 6%) and working capital provision (R4b or 4%)

16. Own revenue generation: Challenges • There are various indicators pointing to municipalities not optimising own revenues – • Outstanding consumer accounts for longer than 90 days • Metros more than trebled from R5,6b in 02/03 to R19b in 04/05 (82% of total outstanding consumer accounts in 04/05) • Local municipalities increased by 20% from R5,7b in 01/02 to R9,9b in 04/05 (74% of the total in 04/05) • District municipalities increased by 42% from R166m in 01/02 to R472m in 04/05 (65% of total in 04/05) • Outstanding payments to be assessed against municipal practices to budget for 100% payments on all billings • Realistic budgeting required where a differentiation is made between poor HHs (indigents support) and poor collection systems (credit control) • Unaccounted for losses between purchased and billed water and electricity often above industry norms • Municipalities need to reduce technical and other losses in water and electricity distribution and water

17. Municipal Borrowing • External borrowing as an untapped source • In economic active areas, a large portion of municipal infrastructure has the potential to generate revenue • There is a strong argument that such infrastructure should be financed through long-term borrowing • This will accelerate the pace of delivery • Total municipal loan book of municipalities = R20b • Indications are that this could be increased between R56b and R128b • Steps have been taken by Govt to stimulate market - • Introduction of the Municipal Finance Management Act clarifying municipal responsibilities i.t.o. debt • Introducing reforms to modernise budgeting and financial management (including multi-year budgeting) • Early publication of all national and provincial allocations for a three-year period

18. Variation in municipal finances CURRENT POSITION • Metros adequately resourced at this stage, cognisant of reforms to RSC levies, EDI restructuring and infrastructure/borrowing (built environment) • Strong capacitated municipalities more reliant on transfers than metros (did not have access to RSC levies mostly collected in their areas but spent elsewhere in district) • Weak municipalities suffer from large-scale service delivery responsibilities and limited fiscal capacity • Anomalies in the funding of district municipalities (RSC levies disproportionally accrued to district municipalities with limited service delivery responsibilities) • Capacity of municipalities need to be addressed in conjunction to any reforms of the local government fiscal framework so as to ensure that any additional resources are directed towards the actual expansion of services (and not inappropriate resource use)

19. Future reforms to the LG fiscal system

20. Draft Municipal Fiscal Powers and Functions Bill • The Bill deals with outstanding section 229 legislation by: • defining the manner in which the national government, through the Minister of Finance, will exercise its policy oversight role, regulatory role and authorisation role in respect of municipal surcharges and taxes, other than property rates and municipal user charges • regulating the process by which the Minister of Finance, or a municipality, group of municipalities or organised local government may initiate a municipal tax or taxes • permanently abolish RSC and JSB levies in LG legislation (in addition to current abolishment in tax legislation) • NT had pre-consultations with various institutions (FFC, SALGA/municipalities and dplg) on the Bill, where most comments have been incorporated • The updated draft Bill will shortly be submitted for approval to publish for public comments

21. Replacement funding for RSC levies • In the 2007 MTEF, an amount of R27,1b is made available to provide funds as interim replacement of RSC levies (R8b in 06/07, R9b in 07/08 and R10,1b in 08/09) • Municipalities have up to June 2008 to collect any arrear RSC and JSB levies that were due on or before June 2006 • A discussion document was made available by NT during December 2005 where various permanent replacement options was discussed • The VAT zero-rating of property tax already introduced since July 2006 • An announcement on permanent options to replace RSC levies to be made in 2008 (or possibly 2009) Budget

22. Municipal Property Rates Act • The MPRA enhances certainty, uniformity and simplicity in property valuation and rating systems • Act took effect on 2 July 2005, but municipalities have up to 1 July 2009 for introducing new valuation rolls and rating in terms of the Act • Most municipalities are targeting 1 July 2008 or 1 July 2009 • The rates base will be expanded by including categories that were previously excluded, such as PSI, agriculture and many properties in rural areas • Implementation of Act will require all municipalities to properly manage the transition from its old rating practice to the new system based on the Act • Municipalities that have not been rating on the market value of land and buildings combined, should reduce Cent amount in Rand drastically to ensure that there are no major shocks to ratepayers and economic sectors

23. Other reforms impacting on LG • Proposed reforms to water and electricity distribution industries intended to address fragmentation where economies of scale, skills and specialisation could not be captured by many of the smaller municipal distributors • EDI restructuring legislation currently being drafted by DME • Important that the following principles underpin restructuring: • Restructuring must be in accordance with the Constitution • Financial state of municipalities currently performing the function(s) must not be adversely affected • Aggregate personnel costs must not increase in a way that undermines the objective of one public service • No additional funds or taxes to fund restructuring (fiscus and/or local government) without the approval of Cabinet

24. Fiscal space for municipal action – way ahead

25. Does the current LG fiscal system create sufficient fiscal space for municipal action? • Whilst many municipalities have made great strides, others have not despite substantial increased transfers to LG over the last few years • NG will continue to align LG fiscal system to target poorer resourced municipalities with limited own revenue base • But are some failures to deliver not a manifestation of lack of capacity rather than funding shortfalls as proven in large under-spending in capital transfers? • Differentiated approach to financing municipalities • Municipalities to optimise collection of own revenues and borrowing, particularly larger well resourced municipalities • Do some municipalities rely mainly on transfers without placing sufficient focus on optimising their own revenues? • Realistic budgets linked to IDPs required • Many municipal budgets and IDPs no more than “wish lists”?

26. ….. The end …… Thank you