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L OCAL G OVERNMENT W EEK : B RIEFING O N L OCAL G OVERNMENT R ECOMMENDATIONS For an Equitable Sharing of National Revenue 2 August 2012.

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Presentation on theme: "L OCAL G OVERNMENT W EEK : B RIEFING O N L OCAL G OVERNMENT R ECOMMENDATIONS For an Equitable Sharing of National Revenue 2 August 2012."— Presentation transcript:

1 L OCAL G OVERNMENT W EEK : B RIEFING O N L OCAL G OVERNMENT R ECOMMENDATIONS For an Equitable Sharing of National Revenue 2 August 2012

2 L OCAL G OVERNMENT I SSUES Inadequate service delivery Backlogs Under-spending, poor planning Inadequate human, organisational or institutional capacity Inadequate repair maintenance Poverty, unemployment Governance challenges Recent Events – Ongoing Local Equitable Share Formula Review of LES formula – FFC public hearings on sustaining municipal finance Briefing on Recommendations Relating to Local Government 2

3 LGES R ECOMMENDATIONS 3 Briefing on Recommendations Relating to Local Government YearRecommendat ions Government response 2011/12 Use the institutional component of Local Equitable Share to assist poor municipalities Government agreed that changes are required to improve the way the local government equitable share is allocated between municipalities. To assess whether the local government equitable share formula results in an equitable division among individual municipalities (horizontal division) as stipulated in sections 214 and 227 of the Constitution, the formula should be analysed as a whole – rather than subcomponents in isolation. 2011/12 Develop alternative methods of revenue prediction for the RRC The institutional component has been changed in 2011, adjusting the amount allocated to municipalities in terms of their poverty rate. This means that poorer municipalities will receive increased allocations.

4 LGES R ECOMMENDATIONS 4 Briefing on Recommendations Relating to Local Government YearRecommendationsGovernment response 2011/12 Remove the step structure of the differentiated tax mechanism of the Revenue Raising Component and develop a flat gradient structure so that municipalities on the outer ends of bands are not treated unfairly In the absence of accurate property valuation rolls for all municipalities and with no official data on economic activity at municipal level, it is very difficult to construct a model that would provide fair estimates of municipalities’ capacity to raise their own revenues. Government agreed to remove the stepped structure from the revenue- raising correction and a smooth curve has been used instead to calculate the differentiated “revenue correction” rate applied to each municipality.

5 R URAL D EVELOPMENT AND U NFUNDED M ANDATES 5 Briefing on Recommendations Relating to Local Government YearRecommendationsGovernmen t response 2012/13 The governance and institutional arrangements for rural development across the three spheres of government needs to be clarified urgently. The Commission recommended that a functional mapping of all rural development activities be undertaken, with specific responsibilities assigned to each sphere of government. 2012/13 The organ of state initiating a general assignment must provide the financial and fiscal implications of a function shift to the Commission for its recommendations to the Minister of Finance in line with Section 3 of the FFC Act 2003 as amended and the Minister of Finance. The Commission tabled a compliance check list for this specific purpose in All resources associated with delivering a service associated with a function to be shifted are transferred.

6 F INANCIAL M ANAGEMENT I SSUES (R EVENUE E NHANCEMENT, M UNICIPAL D EBT, O VERSIGHT ) 6 Briefing on Recommendations Relating to Local Government YearRecommendationsGovernment response 2011/12 Adopt standard early warning systems to detect fiscal stress in municipalities and reach consensus on them. National government has an early warning system that monitors municipal finances. This system is anchored by the budget formats prescribed in terms of the municipal budget and reporting regulations, the associated funding compliance assessment (see MFMA Circular 42) and monthly financial reports required in terms of section 71 of the MFMA. 2011/12 Legislate, through S43 of the LGMS Act of 2000, revenue collection as one of the key performance areas against which to assess overall municipal performance. National government supported the recommendation that each municipality should have a broad revenue improvement programme in place. National government believes that at this stage there is far more to be gained from improving the accuracy and completeness of municipal billing systems, and putting in place proper customer relations capacity.

7 F INANCIAL M ANAGEMENT I SSUES (R EVENUE E NHANCEMENT, M UNICIPAL D EBT, O VERSIGHT ) 7 Briefing on Recommendations Relating to Local Government Year RecommendationsGovernment response 2011/12 Support efforts to estimate the fiscal capacity and fiscal effort of municipalities to dispel the perception that certain municipalities will never be financially viable. The notion that certain municipalities will never be financially viable is a misrepresentation of both the design of the local government fiscal framework and the practical reality of local economies. National government is investigating the issue of developing measures of fiscal capacity – it is by no means a straightforward task given the impact that traditional land and different modes of service delivery have on many municipalities’ rates bases and service revenues. 2011/12 Subject revenue enhancement programmes to empirical tests that cover changes in (a) effective tax rates (b) tax burdens (c) yield, efficiency and overall fairness Government supported these recommendations.

8 F INANCIAL M ANAGEMENT I SSUES (R EVENUE E NHANCEMENT, M UNICIPAL D EBT, O VERSIGHT ) 8 Briefing on Recommendations Relating to Local Government YearRecommendationsGovernment response 2012/13 Municipalities need to improve technical efficiency in utilising existing resources Accepted 2012/13 National and provincial treasuries’ efforts to improve the credibility of municipal budgets through annual benchmarking exercises should continue to be supported. Agrees but disagrees that benchmarking documents be made public 2012/13 National and provincial government should require and assist municipalities to identify the primary cause of poor performance in billing and revenue collection functions and use the information to design appropriate remedial strategies. Government agrees that municipalities should be assisted. NT is training municipalities on revenue management 2012/13 As an interim measure, government should establish and publish guidelines for municipalities on management of municipal consumer debt in terms of, but not exclusive to, interest charges, debt impairment and writing off of bad debts. A legislative framework for this already exists

9 F INANCIAL M ANAGEMENT I SSUES (R EVENUE E NHANCEMENT, M UNICIPAL D EBT, O VERSIGHT ) 9 NCOP:LOCAL GOVERNMENT WEEK 31 JULY TO 3 AUGUST 2012 YearRecommendationsGovernment response 2012/13 S64 of MFMA (No.56 of 2003) should be amended to require regular collation and updating of information on indigent residents of a municipal area, as an integral component of municipal revenue management practices. Guidelines have been issued to help municipalities to implement indigent policies 2012/13 National and provincial government should develop and support peer learning and support programmes that assist poorly performing municipalities to leverage experience and best practices of well-performing municipalities, particularly in relation to spending performance, efficiency in using resources, proper debt management and achievement of desired developmental outcomes. Government agreed. Forums for such exist, eg. CFO’s forums, City Budget Forum

10 E NVIRONMENT (C LIMATE C HANGE AND D ISASTER M ANAGEMENT ) 10 Briefing on Recommendations Relating to Local Government YearRecommendationsGovernment response 2012/13 Government should ensure that municipalities develop their own climate change mitigation and adaptation strategies and plans for climate change as part of the Integrated Development Planning process. Agreed. DCOG, DEA and SALGA developing planning tool for climate change management 2012/13 Government should consider providing municipalities with a performance based conditional grant, which rewards or incentivises actions that are environmentally efficient. More research needs to be done as to how such a grant should be structured.

11 H OUSING AND L AND U SE 11 Briefing on Recommendations Relating to Local Government YearRecommendationsGovernment response 2012/13 Government should conduct a broad-based review of the efficacy of current housing finance arrangements in meeting housing needs within the context of creating sustainable and more compact human settlements. Government accepted recommendation 2012/13 Government should actively and specifically pursue development of a more spatially compact urban form for cities, by developing and adopting appropriate policies and financing instruments. Government agrees with recommendation and has initiated a new cities support programme to assist cities manage built environment

12 I NFRASTRUCTURE /R EPAIRS AND M AINTENANCE 12 Briefing on Recommendations Relating to Local Government YearRecommendationsGovernment response 2012/13 National government should specifically enforce provisions set out in S74(2) of Municipal Systems Act, such that the basis of municipal tariffs accurately reflects the cost of providing the specific service, as well as conforms to National Treasury expenditure guidelines for repairing and maintaining municipal infrastructure. Government supported proposal. But it may take time to implement proposal since data requirements for this are huge

13 C APACITY B UILDING I NITIATIVES 13 Briefing on Recommendations Relating to Local Government Recommendations In future, all capacity building initiatives should be evaluated by an independent and impartial party and identify lessons that could be taken into account when a new programme is designed and implemented. Capacity building initiatives should target poor performing (distressed) municipalities that have limited capacity to compete in the open market for skills and conditions be set for permanent absorption of such capacity and transfer of skills to permanent municipal employees. Each capacity building programme must have a clear outline of measurable objectives, targets and timelines detailing conditions under which a programme can be withdrawn from a respective municipality and after a detailed monitoring and evaluation of the programme is done. DCOG and NT need to strengthen their capacity to manage and monitor new programmes. There must be an intergovernmental wide common understanding of what constitutes “lack of capacity” within the context of local government and that local government should be central to setting the agenda for capacity building programmes intended for their own improvement. Capacity development programmes should be comprehensive and not only focus on training of personnel and deployment of experts within municipalities. They must also focus on other organisational and human resource issues (recruitment and retention of permanent municipal staff).

14 D ATA I SSUES 14 Briefing on Recommendations Relating to Local Government YearRecommendationsGovernment response 2012 /13 Data available at local government level should be reviewed to ensure appropriate surveys or alternatives are available to account accurately for changes in demographics and other factors at municipal level Agreed: The Local Government Data forum was established in response to the need to rationalise data collection from LG.

15 P ROGRESS ON THE R EVIEW OF THE LES F ORMULA Task team established to review LES formula – National Treasury – DCoG – SALGA – FFC Secretariat – StatsSA Revised principles and objectives of formula – Compiled two discussion documents for comments Principles more focused and objectives more tangible – Opportunity given to all municipalities to comment on process and discussion documents 15 Briefing on Recommendations Relating to Local Government

16 P ROGRESS ON THE R EVIEW OF THE LES F ORMULA All written municipal comments received in June Team currently working on new formula based on principles, objectives and municipal/stakeholder input – Proposed new formula to be taken to department and organisation heads by end August Consultation on proposed new formula to be undertaken with municipalities and other stakeholders in September Final proposed formula will be presented at Budget Forum in October 16 Briefing on Recommendations Relating to Local Government

17 LGES-G ENERAL C OMMENT The LGES review suggested by government has only focussed on the formula What is needed is a broad review of the Local Government Equitable Share or the entire Local Government Fiscal Framework The FFC through the Public hearings is in the process of doing this and will advise Government on this when work is complete 17 Briefing on Recommendations Relating to Local Government

18 FFC P UBLIC H EARINGS ON S USTAINING M UNICIPAL F INANCE FFC undertook a set of public hearings to understand and propose options for the problems inherent in Local Government Fiscal Framework – Two sets of public hearings took place First public hearing identified the problem statement and issues hindering sustainable financing of LG Second public hearing provided a set of options for problem statement identified – Input from process driven largely by stakeholder perspectives Identified issues from various stakeholders in LG 18 Briefing on Recommendations Relating to Local Government

19 E MERGING C ONSENSUS : D IFFERENTIATION AND D EMARCATION Differentiation – Principle of differentiation agreed upon – Common system of differentiation is required – Context (fiscal capacity, cost efficiency…) vs performance (i.e. fiscal effort, spending efficiency and effectiveness …) – Any demarcation framework to conform to constitutional framework Demarcation – Develop a system that ensures fiscally sustainable municipalities are created 19 Briefing on Recommendations Relating to Local Government

20 E MERGING C ONSENSUS : LGFF AND F UNCTION A SSIGNMENT Stakeholders proposed a broader definition and criteria for the LGFF – Should include not only transfers, but also own revenue, borrowing and transfers Cautioned against expecting too much from a redesigned LGFF – A lot of other work (e.g. capacity building and support) is required to improve local government functionality. Future devolution of fiscal powers should be informed by functional assignments – Functions (of, for example, district municipalities) must be clarified before making any changes to grants 20 Briefing on Recommendations Relating to Local Government

21 E MERGING C ONSENSUS : O PTIONS F OR LGFF Three primary options for the LGFF: – Gap-filling: A system based on gap filling with a primary emphasis on transfers, much as exists currently – Performance based system: with emphasis on incentives, which implies a major shift towards expenditure-side interventions, incentivising own source revenue and capital finance, complemented with conditional transfers. – Range of hybrid options in between Approaches were discussed as options for the LGFF structure FFC to finalise a set of recommendations emanating from process and undertake further engagements 21 Briefing on Recommendations Relating to Local Government

22 T HANK Y OU. Financial and Fiscal Commission Montrose Place (2 nd Floor), Bekker Street, Waterfall Park, Vorna Valley, Midrand, Private Bag X69, Halfway House Tel: Fax:


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