Intergovernmental fiscal relations in South Africa

1
Intergovernmental fiscal relations in South Africa

• Chris Heymans
• Presentation at NRB/WBI Conference on Fiscal
  Decentralization
• Islamabad, 3 May 2006

2
Foundations of current system

• Constitutional negotiations of 1993-94 sought
  national unity to overcome apartheid
  fragmentation
• SA state with differentiated political rights for
  some groups
• 4 provinces and racially demarcated local
  government
• Provinces fiscally dependent
• White municipalities fiscal capacity varied
  others lacked fiscal base yet people worked
  contributed to core economy
• 4 independent and 7 self-governing states for
  africans
• Negotiators faced
• Institutional inheritance in regions out of sync
  with economic reality
• Some parties demanding institutionalized regional
  influence
• A powerful local government pressure group in
  sub-negotiations
• Outcome a decentralized unitary state
• Numerous legislative and policy reforms 1994
  

3
The South African system at a glance

• Constitution underpins decentralized unitary
  state
• Three distinct spheres of government
• National
• 9 provinces
• 283 local governments (metro/ district primary)
• Administrative fiscal decentralization
• Revenue sharing
• Institutionalized co-operative governance
• Advisory Fiscal and Financial Commission

4
Institutional framework

• 9 provinces
• Elected governments and own budgets
• Social sector responsibilities
• Represented in 2nd House of parliament (CoP)
• 283 municipalities
• Elected councils with own budgets
• One-tier metropolitan municipalities in 6 largest
  cities (2 in Johannesburg, 1 each in Cape Town,
  Durban, Pretoria, Port Elizabeth)
• Two tier system elsewhere
• 231 local municipalities, all simultaneously
  falling into district municipalities covering 3
  to 6 local municipalities
• 42 districts, each covering 3 to 6 of the local
  municipalities

5
Some key elements of fiscal system

• Vertical imbalance through revenue-sharing
• Some fiscal powers at provincial and local levels
• Each provincial and local government has own
  budget
• Co-operative governance
• Constitutional requirement
• Intergovernmental forums, including Budget
  Council (national-provinces Budget Forum
  local government )
• Fiscal and Financial Commission
• Constitutional permanent
• Advisory powers
• National government makes final proposal
• Division of Revenue approved 2 Houses of
  Parliament
• Powers for higher level intervention, but no bail
  outs hard budget constraints

6
Key fiscal legislation

• Constitution
• National policy and laws take precedence
• Transparent annual Division of Revenue
• Independent advisory FFC
• National and provincial legislation
• Intergovernmental Fiscal Relations Act
• Provincial Tax Regulation Process Act
• Borrowing Powers of Provincial Government Act
• Public Finance Management Act (PFMA)
• Municipal Finance Management Act (MFMA)
• Annual Division of Revenue Act
• National and Provincial Appropriation Acts
• Taxation and Revenue Amendment Acts

7
Expenditure assignment

• National government
• Defence, justice, prisons and police
• Higher education
• Admin, policy, regulatory
• Provinces
• School education, health, social grants
• Housing, Provincial Roads, Agriculture
• Local government
• Water, electricity, refuse removal
• Housing infrastructure, municipal roads

8
Tax Assignment fiscal capacity

• National government
• Received 51.4 of national revenue in 2006
• Personal Income Tax (29), Corporate Tax (28),
  VAT (28.7), fuel levy, excise duties etc.
• Provinces
• Received 42.3 of national revenue in 2006
• Entitled to surcharge on income tax and fuel
  levy, but prefer revenue-sharing
• Own revenue less than 4 - car license fees
• Municipalities
• Received 6.3 of national revenue in 2006
• Own revenue more than 4 times transfers amount,
  but aggregate disguises major variation (e.g.
  metro vs rural)
• Property taxes and charges for basic services
• Regional levy just been phased out, replaced for
  now by grant

9
Grant framework
National Government
Division of Revenue Act
Unconditional
Sector grants
Provinces
10
Provinces the fiscal system

• Fiscal, budget and policy processes
• Multi-year MTEF
• Budget council with National Finance Minister
• Series of sector committees with national
  government (MinMECs)
• Grants
• Over 80 from equitable share based on
  population, poverty
• Conditional grants for health, education housing
  provincial infrastructure
• Social assistance grants transferred to national
  level in 2006 to combat corruption
• Expenditure
• 74 on social sectors
• Recent growth in social economic infrastructure
  spending
• Personnel consume 57 of expenditure

11
Local Government fiscal system

• Direct allocations from national to
  municipalities
• Three types of grants
• Formula based Equitable Share (over 50 of
  grants)
• Conditional grants for infrastructure
• Conditional grants for capacity-building/restructu
  ring/ reform
• National allocations range from 2 to 85
• Equitable share grant formula simple, same and
  transparent
• Basic services
• Development
• Institutional support
• Revenue raising
• Stabilization
• Own revenue integral to system

12
National priorities reflected in municipal grants

• Build effective local institutions
• Capacity building and restructuring grants over
  3 years to support infrastructure and services,
  MFMA, restructuring, governance and planning
  systems
• Restructuring grant incentive for major cities
• Accelerate the rollout of free basic services
• Electricity, water and sanitation, refuse removal
  
• Local infrastructure development
• MIG to provide the infrastructure to rollout free
  basic services
• Contributing to job creation
• Facilitate better planning and decision making

13
Some lessons

• Decentralization or devolution facilitate service
  delivery accountability if key conditions in
  system exist
• Resources should be commensurate with
  responsibilities
• Finance should follow function
• Overcome major fiscal gaps revenue sharing
• Targeted transfers for common service levels,
  equity and capacity
• Prevent end-of-year transfers
• 3 year budgeting system brings certainty
• Promotes better planning and spending
• A hard budget constraint ensures local
  accountability interventions should not be bail
  outs

14
Process lessons

• Get the big picture, but stay flexible in
  implementation learn as you go
• Fiscal arrangements work best when driven by
  political momentum
• Local accountability mechanisms vital
• Democratic governance
• Citizen participation
• Service provider accountability and fiscal
  viability
• Build systems and forums for intergovernmental
  exchange
• Set policy targets, enforce them, but dont
  over-control accountability grows where it is
  allowed to
• Regular reporting schedule
• Link budget to measurable outputs and service
  implementation plan