Division of Revenue Bill 2005 [B 8B-2005]

1
Division of Revenue Bill 2005B 8B-2005

• Select Committee on Finance
• National Council of Provinces
• Lungisa Fuzile, Malcolm Booysen and Jo-Ann
  Ferreira

2 March 2005
2
Legislative requirements

• Section 214 of Const and IGFR Act
• Require an annual Division of Revenue Bill
• Section 10(5) of the Intergovernmental Fiscal
  Relations Act gives effect to Constitution in
  terms of Consultation processes for allocations
  with Budget Council, Budget Forum (BC, Minister
  of dplg and SALGA) and FFC
• Explanatory memorandum (Annexure E) on formulae
  etc
• Consultations culminate in Extended Cabinet with
  provincial Premiers and chairperson of SALGA

3
DOR Schedules

• Schedules 1 to 7
• Equitable Share allocations (Schedules 1-3)
• Schedule 1 divides eq share between 3 spheres
• Schedule 2 divides provincial equitable share
  between 9 provinces
• Schedule 3 divides local equitable share between
  284 municipalities
• Conditional Grant allocations (Schedules 4-7)
• Schedules 4 and 5 generally or nationally
  assigned functions to provinces/ municipalities
• Schedules 6 on LG grants (no division by muni)
• Allocations by municipality in explanatory
  attachments
• Allocations-in-kind to LG (Schedule 7)

4
The explanatory memorandum

• Explanatory memorandum
• Also attached to 2005 BR as annexure E
• Part 1 deals with how 10 factors in s214(2)(a-j)
  of Constitution were taken into account
• Part 2 Govts response to FFC proposals
• Part 3 deals with fiscal framework,
• Part 4 and 5 provide details on prov/local
  allocations
• Part 6 concludes with fiscal framework issues in
  prov/LG that need further work
• Appendices
• Appendices E1 E2 Frameworks on all conditional
  grants
• Appendices E3 to E6 LG allocations by
  municipality for both national municipal
  financial year
• Appendix E7 MIG (ring-fenced sanitation
  allocations)
• Appendix E8 Demographic data for Local Government
  Equitable share and Municipal Infrastructure Grant

5
Response of National Government to FFC Proposals

• Part 2 of Annexure E

6
Process to consider FFC proposals

• FFC Submission DoR 2005/06
• Focus is on three main sets of issues
• Part 1 deals with the provincial equitable
  sharing system
• Part 2 deals with the LG equitable sharing system
• Part 3 set focus on the intergovernmental system
• Response should be viewed against the review of
  LG and Provincial fiscal review
• Budget Council considered prov proposals
• Budget Forum considered LG proposals
• Premiers invited at Extended Cabinet
• Cabinet finalises div of revenue thereafter

7
FFC Provincial Recommendations

• Equitable share formula
• Regular revision of weights
• Education component
• Early Childhood Development
• Health component
• Welfare component
• Economic activity
• Equity and efficiency aspects
• Review of conditional grants transfer system
• Supplementary January 2005 proposals on social
  grant shift and capital grants model

8
Govt response to FFC provincial proposals

• Weights for components should be in line with
  spending and priorities
• Weights have been reassigned to take into account
  the shifting of the social security grant
  function, and share of education and health
• Health component should include utilisation,
  gender, age data
• Alternative information not available or
  unreliable
• Education component of ES formula
• School-age cohort data is retained
• ECD phase into ES formula by adjusting the age
  cohort to 5-17
• Equal weighting proposed for school age and
  enrolment data
• Welfare component to be removed and funded as
  conditional grant
• Agree, with social grants now funded as a
  conditional grant
• Supplementary proposal also taken into account
• Econ activity to be included/re-designed in light
  of provincial taxes
• Govt supports policy to improve revenue capacity,
  but will take time
• Economic component retained at 1, but now less
  than poverty component to effect redistribution

9
Govt response to FFC provincial proposals

• Equity and efficiency
• Hard to implement, difficulty in reliable cost
  differentials for same service
• Same problems as related to costed-norms proposal
• Financing provincial infrastructure
• Agree with FFC proposal on backlog component
  which is shifted from equitable share to the
  provincial infrastructure grant
• Lack of data for capital grants model means it
  cannot be implemented
• Re-allocation of Cond Grants when underspending,
  and need for review
• Government agrees with new re-allocation clause
  in DoR Bill
• Hospital grants will be prioritised for review
• Other grants will also be reviewed (mainly
  provincial, as LG grants rationalised

10
Govt response to FFC local govt proposals

• Avoid use of funding windows in the Eq share
  formula
• NG agrees, and new formula uses a component based
  approach
• Structure of the formula should be linked to
  constitutional requirements
• NG agrees with structure that includes a basic
  services (S) and institutional (I) grant
• Also agree on revenue-raising component
• Govt believes not practical to implement a spill
  over grant or deal with other legislative
  requirements (formula is indicative)

11
Govt response to FFC local govt proposals

• Assessment of municipal service cost
• Govt agrees on need to take services into
  account, so new formula differentiates between
  full and no services
• Formula is indicative, and getting cost info is
  difficult
• Equitable Share formula should be simple, and not
  too data intensive
• NG agrees to have a simple formula
• For modelling and analysis purposes we require
  more accurate measure of expenditure needs
• Revenue-raising capacity measure should be
  included in formula as a whole
• Rev component is introduced in eq share formula
  as a separate component and not just in I grant

12
Govt response to FFC local govt proposals

• Disbursement of capacity-building funds
• NG planning review of the capacity building
  grants
• Not planning an extensive formula, but criteria
  should be transparent
• Collection of municipal level data
• NG agrees it is necessary to collect such data
• Subsidisation of tariff charges of low-income
  households
• The formula targets poor households but real
  challenge is with regard to implementation

13
Govt response to FFC local govt proposals

• Linking of MIG and Equitable Share
• Formulae already linked in many ways
• Both target poor households with appropriate
  incentives
• MIG has a performance component, taking capacity
  into account
• Ceding of equitable share revenue
• NG will consider guiding municipalities on how to
  cede part of their equitable share
• Not considering amendments to the MFMA at this
  stage

14
FFC proposals on Intergov system

• Welcome contribution to the IGFR system
• Bulk of proposals are work-in-progress
• Proposals related to expenditure assignment,
  costed-norms,performance management,building
  institutional capacity, funding instruments for
  poverty-alleviation, and general improvement of
  management systems
• Expenditure assignment is complex and calls for
  greater cooperation
• Data management is key but not easy to improve
  on information systems to the point they are
  reliable and comparable

15
Fiscal Framework

• Part 3 of Annexure E

16
Division of revenue frameworkTable E.2
17
New Provincial Equitable Share

• Broad ranging review of formula undertaken
• All stakeholders consulted
• FFC recommendations taken into account
• Proposed formula consist of 4 components
• Education, health, institutional and basic
• Two additional components
• Poverty component to make the formula
  redistributive
• Takes into account education and health pro-poor
  policies
• Takes into account pro-poor nature of
  developmental welfare services
• Economic activity component to take into account
  revenue raising capacity of provinces

18
New Provincial Equitable Share

• Provincial equitable share formula
• Education component
• Uses both school enrolment and census data
  (school-age cohort) each weighted equally
• The weight (51 per cent) is based on average
  education spending for the past three years
  (excluding CGs)
• Health component
• Based on people with and without medical aid and
  is weighted at a ratio of 4 to 1
• The weight (26 per cent) is based on average
  health spending for the past three years
  (excluding CGs)
• Institutional component
• Allocated equally across provinces (11,1 per
  cent) and the weight is politically set at 5 per
  cent
• Basic component
• Population share of each province in the
  countrys population
• Weight is the residual of all other weights

19
New Provincial Equitable Share

• Provincial equitable share formula
• Redistribution is effected by using by assigning
  a weight of 3 per cent to poverty and 1 per cent
  to economic activity
• The basic component is assigned a residual weight
  of 14 per cent
• Phasing-in the formula
• New formula results in shifts in provincial
  equitable share baselines
• Social security grant function shift impacts as
  well
• Propose a 3-year phase-in of new equitable shares

20
Summary of new formula
21
3-year phasingTable E.8
22
Local Government Allocations

• Part 5 of Annexure E

23
Local Government priorities

• Bulk of pro-poor spending is in provinces and
  local government
• Accelerate the rollout of free basic services
• Electricity, water and sanitation, refuse removal
  
• Municipal infrastructure development
• MIG to provide the infrastructure to rollout free
  basic services
• Contributing to job creation
• Facilitate better planning and decision making
• Capacity building
• Building in-house capacity in planning, budgeting
  and financial management

24
Local Government Allocations

• National allocations are an important and growing
  source of revenue for municipalities
• Comprise about 12 per cent of total LG budgets,
  but can be as high as 84 per cent in some
  municipalities
• Increases by R5,4 bn over the next 3 years
• R1,7 bn for infrastructure, R3,7 bn for ES
• Total allocations grows to R21,5 billion in
  2007/08 from R14,7 billion in 2004/05
• Equitable share is most significant comprising 56
  per cent of allocations in 2005/06
• allowing greater discretion at local level
• Equitable share increase to R11,4 billion in
  2007/08 from R7,7 billion in 2004/05

25
Background of review

• Old formula had limitations
• The new formula responds to the following
• Section 227(1) provision of basic services
• Policy imperatives such as
• Poverty and free basic services
• The fact some poor people do not have access
• The need to support institutions of governance
• Variations in capacities of municipalities to
  raise their own revenue (The Presidents call)

26
Structure of Formula

• Accordingly the formula has the following
  components
• Grant Basic Services (BS)
• Development (D)
• Institutional Support (I)
• - Revenue Raising (RRC)
• /- Stabilisation Constraint (C)
• D will be set at zero for now

27
Policy choices by component

• Basic services component
• 4 services are recognised
• Water, sanitation, electricity and refuse removal
• Households with services funded at R130 pm while
  those without services are funded at R45 pm
  (about 1/3)
• The R130 figure comes from a dplg study
• Future research will need to improve on the cost
  of providing free services
• Within basic service component the other policy
  decision is the choice of poverty line
• A relatively low poverty line like R800 is more
  redistributive than R1600, which tends to shift
  allocations towards urban municiplaties
• This raises the question of growing urban poverty
  
• For the model now, R800 is proposed

28
Revenue raising capacity component

• New innovation of the new model
• It uses imputed revenue
• Imputation takes account of
• RSC levies in As and Cs, and
• Property taxes in As and Bs
• Imputation is necessary because of lack of and
  incomplete data
• The methodology is non-arbitrary and is cushioned
  from inaccurate data from individual
  municipalities
• A tax rate of 5 is imposed on potential
  revenue
• An amount R1,2 bn is thus reallocated through the
  BS component

29
Institutional component

• Recognises the need to fund institutions of
  governance
• National government subsidises rather fully funds
  the function
• Elements in the component presume that
• Fixed contribution to each municipality
• An element that recognises that the cost of
  administration may increase with the population
  serviced
• An element that subsidises councilor remuneration
• Therefore
• I R350 000R1PoplnR36 000 councilors

30
Summary of overall impact
Population Indicative (Rands) Final Allocation unconstrained (Rands) change Final Allocation with guarantees (Rands) change
Western Cape 4,524,335 453,727,271 497,331,204 9.6 495,111,576 9.1
Northern Cape 984,314 219,716,996 246,590,376 12.2 246,296,484 12.1
Eastern Cape 6,436,763 1,456,726,085 1,453,187,101 -0.2 1,559,609,445 7.1
Free State 2,706,775 646,402,055 857,982,705 32.7 782,029,142 21.0
KwaZulu Natal 9,426,017 1,703,711,013 1,781,307,558 4.6 1,853,275,728 8.8
Mpumalanga 2,868,380 557,229,224 638,121,060 14.5 607,643,192 9.0
Limpopo 5,496,148 1,182,064,835 1,266,244,958 7.1 1,264,877,933 7.0
North West 2,986,498 603,847,431 724,120,154 19.9 682,552,712 13.0
Gauteng 9,390,546 1,519,940,088 1,678,479,884 10.4 1,651,968,789 8.7
Grand Total 44,819,778 8,343,364,999 9,143,365,000 9.6 9,143,365,000 9.6
Total Metros 14,679,241 2,076,166,713 2,297,784,182 10.7 2,242,187,819 8.0
Total B's 30,140,537 5,015,374,265 5,431,906,414 8.3 5,501,016,759 9.7
Total C's 30,140,537 1,251,824,020 1,413,674,404 12.9 1,400,160,423 11.8
Percentage Metros 32.8 24.9 25.1 1.0 24.5 -1.5
Percentage B's 67.2 60.1 59.4 -1.2 60.2 0.1
Percentage C's 67.2 15.0 15.5 3.0 15.3 2.1
31
Clauses in the Division of Revenue Bill
32
Division of Revenue Bill 2005

• Number of substantive amendments
• Social assistance now a conditional allocation.
• This has significant fiscal and moral risks for
  national government. New clause inserted to
  regulate roles and responsibilities of national
  government and provinces
• Different arrangements for Schedule 4 grants,
  especially hospital and infrastructure grants
• Cash management reforms related to CPD accounts
  with SA Reserve Bank for equitable share and
  social assistance allocations to provinces
• Housing accreditation of municipalities
• Alignment with MFMA now that it has taken effect
  1 July 2005
• Role of category C and B municipalities
• Number of technical amendments

33
Social Dev and Schedule 4 grants

• Social Development poses biggest moral risk
• Schedule 4 allocations supplement the funding of
  programmes funded from provincial and municipal
  budgets
• duties of transferring and receiving officers
  included in separate clauses
• CAPEX budgets to be appropriated on the votes of
  provincial departments responsible for functions
  and not that of provincial public works
  department to ensure clear lines of
  accountability

34
New clauses

• Transfers by public entities to municipalities
• Social Assistance Transfers and Social Assistance
  Administration conditional allocations
• Integrated Housing and Human Settlement
  Development allocation
• Water Services Operating and Transfer Subsidy
  allocation
• Duties of transferring national officer and
  receiving officer for Schedule 4 allocations
• Category C municipalities and related allocations
• Matters relating to internal audit units
• Re-allocation of allocations after stopping
• Non-committed Schedule 5 and 6 allocations
• Preparations for next financial year
• Unauthorised and irregular expenditure

35
Deleted clauses from 2004 Act

• Section 5(7) on withholding municipal equitable
  share
• Transfers of assets to municipalities
• Interim arrangements for re-allocations
• Funds follow transfer of functions or obligations