Portfolio Committee Orientation Workshop Andrew Donaldson National Treasury July 2009

1. The Budget Process and Financial Oversight Water and Environmental Affairs Portfolio Committee Orientation WorkshopAndrew DonaldsonNational TreasuryJuly 2009

2. Budgeting & resource economics • Resource management is about much more than government spending: • Regulation of ownership, use and disposal • Pricing of access and use or resources • Regulation and charges for pollution or environmental damage • Long term infrastructure development and rehabilitation and inter-generational equity • Balancing of local, regional, national, international needs • Diverse economic, social and sectoral requirements • Budget reflects revenue and spending by government entities – • This is just part of the overall “resource accounting” for the environment or the water sector

3. Planning, budgeting, reporting… • Water and environmental planning begins with science – • Understanding long-term linkages between human activity and resource sustainability • The science underlies engineering plans and designs – • Which frequently involve technological options or alternative investment paths… • There is a high degree of ‘path dependence’ in the choices we make • Resource economics is about understanding those choices • Analysing the long term ‘costs’ and ‘benefits’ of alternative investments • Setting tariffs and managing infrastructure finance sustainably • So our reporting on water & environmental finances needs to be strongly focused on the long term…

4. Strategic plans and MTEF budgets 3-year Budget (MTEF) Including project and programme plans and budgets, aligned with spatial development plans 5-year Strategic Plan (MTSF) 20+ year Infrastructure Investment Programme (Growth and Development Strategy) Set out in policy papers, departmental plans, municipal development plans, details of energy, water, transport, industrial projects…

5. Expenditure Outcomes (May) Rollovers (June) MTEC (July – September) Adjusted Estimates (September – October) In-year budget processes …further virements and shifts subject to PMFA limits

6. Auditor-General Chain of accountability Voters General elections Parliament or Legislature Executive Responsibilities and accountability largely governed by PFMA Mandate and powers limited by law and given effect through delegations and performance contracts Departments and public entities Headed by Accounting Officers

7. Finance legislation and oversight • The Public Finance Management Act 1999 (PFMA) • Provides an accountability framework which seeks to ensure that all stakeholders utilise government resources to maximise service delivery through the effective and efficient use of the limited resources • set out reporting requirements of departments and other state entities • The Municipal Finance Management Act 2003 (MFMA) • sets out framework for financing and financial management by local authorities • Appropriation Act sets out what funding will be used by whom for what specific intended purposes • Division of Revenue Act specifies transfers to provinces & municipalities, and • set out the reporting requirements of national departments (transferring departments), provinces (transferring and receiving departments) and municipalities (receiving departments) • sets tabling dates for reports

8. Primary fiscal flows to water sector National: • Water Trading Entity Water related transfers through DWA Local government: • Water services operating subsidy • Regional infrastructure grant • Schools and clinics Water related transfers through CGTA Local government: • Local government equitable share • Municipal infrastructure grant National: Appropriation Bill NT role in transfers LG: Division of Revenue Bill

9. National: • SANSParks • Marine Living resource fund • South African Weather Service • SANational Biodiversity Institute Environment related transfers Local government: • National Parks • Biodiversity areas National: Appropriation Bill NT role in transfers LG: Division of Revenue Bill Primary flows to Environmental Affairs

10. Sources of water funding • Recurrent spending • User charges: • National: Water Trading Entity Revenue (sale of bulk raw water); • Municipal: local water tariffs • Water Boards, irrigation projects (sale of bulk treated water) • Parliamentary appropriation - national (Appropriation Act); • Parliamentary appropriation – to provinces and municipalities (Division of Revenue Act); • Provincial and municipal funding out of own revenue • Capital project funding • Earmarked appropriations (eg social infrastructure; MIG) • Market loans: Water boards/TCTA/Water resource utility; • DBSA loan funding, negotiated bank lending, PPPs • Return on past investments: Water trading entity & water boards • Donor funding

11. Sources of funding of environmental investment and services • Taxes are both about raising funding and imposing costs on environmental externalities • Eg fuel tax, electricity levy, waste discharge levy, plastic bag charge • Earmarking is sometimes appropriate, sometimes not • Regulatory standards have effect of passing costs onto industry or users • Generally aimed at making polluter pay • Eg Mining rehabilitation reserve funding requirements • ‘Cap and trade’ regulations • Parliamentary appropriations – Research, infrastructure investment, rehabilitation • User charges and fees • Tourism related (SANParks) • Resource use related (mining royalties; Fishing levies) • EPWP funding: environmental services and investment can have added benefit of job creation • Working for Water, Land Care, Forest Management • International funding • Donor support • Clean Development Mechanism credits

12. Water and related funding sources

13. Main sources of funding: Environmental Affairs

14. Funding of municipalities • Total budget requirements of a municipality is linked to its service delivery and developmental responsibilities funded through a combination of • user charges (tariffs) + surcharges + property tax + transfers • Metros raise revenue from • Property rates, user-charges such as electricity, water, refuse removal • Category B can raise all of the above • Category C mostly reliant on transfers • Borrowing is allowed • Regulated and no bail out/guarantees from national • 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 (mostly reliant on transfers from fiscus) • Municipalities with a large economic base would be able to cross-subsidise between services and consumer groups (largely self financed)

15. Schedule 4 (B) of Constitution Municipal Finances: • Expenditure • Service delivery and developmental responsibilities • Cost of governance, admin, planning and regulation MINUS • Revenues • Own revenues • Transfers equals • Borrowing = financing requirement • Water and sanitation • Electricity (Category B) • Roads and stormwater • Municipal solid waste/refuse removal • Municipal public services (environmental health, community services, security services, public safety, parks and recreation) • Agency services (libraries) Section 229 of the Constitution • Property tax (Categories A and B) • User charges for water, sanitation, electricity (authorised municipalities) • Surcharges on municipal services (authorised municipalities) • Other (donations, etc.) Section 214 of the Constitution • LGES, Infrastructure Grants, Capacity Building Grants, Grants-in-kind, Transfers from provinces

16. Examples of the heterogeneity of Municipal Revenue Sources eThekwini Operating Budget 2008/09 = R17.5 Billion Albert Luthuli Operating Budget 2008/09 = R130 million

17. Transfers to Local Government

18. Water & environmental functions are key elements in national funding of municipalities Equitable share formula: BS + D + I - R ± C Correction and stabilisation factor Development (not activated) Institutional Capacity Basic Services Revenue Raising Capacity Correction THE BASIC SERVICES COMPONENT • Is the largest component in formula (92%) • Enable municipalities to provide basic services and free basic services to poor households (provides for bulk, operational costs and maintenance) • Recognises water reticulation, sanitation, refuse removal, electricity reticulation and environmental health • Water & sanitation makes up 44% of this component • Complements the MIG

19. MIG Formula (incl water & sanitation) MIG (F) = B + P + E + N + M • B = Basic residential infrastructure • P= Public municipal facilities • E= Other institutions and micro-enterprises • N = Nodal municipalities - urban and rural • M= Performance related adjustments (not activated) (similar to equitable share, information is based on Census/Community Survey) The B component makes up 75% of formula

20. Further information • Budgets and plans: Budget Review, Estimates of National Expenditure, Municipal budgets, Local Government Budgets and Expenditure Review • Departmental strategic plans • In-year monitoring of expenditure: • Section 32 (PFMA) reports (Monthly) • Section 71 (MFMA) reports – local government • Section 10 (DORA) reports – local government conditional grants • Reporting on programmes and projects – requires key non-financial indicators; needs to recognise diverse funding and financial sources • www.treasury.gov.za