Borrowing Powers

1
FFC SUBMISSION DIVISION OF REVENUE
2002/2003 ----------------------------------------
------------------------ PORTFOLIO COMMITTEE ON
FINANCE 19 June 2001
2
BACKGROUND TO THE SUBMISSION FOR 2002/03

• FFC Constitutional mandate
• Recommendations for 2001-2004 MTEF cycle
• Response from the Minister of Finance (Budget
  review Annexure E, Feb 2001)
• Stakeholder consultations during 2001
• The issue of constitutionally mandated basic
  services(CMBS)
• Local Government issues

3
TOWARDS AN EQUITABLE SHARING OF NATIONAL REVENUE

• FFC PROPOSAL FOR STUDY OF
• Defining CMBS
• Institutional Element
• Norms and Standards
• Other Obligations
• Infrastructure Funding

4
PROGRAMME ANALYSIS FRAMEWORK

• The FFC believes that a programme analysis
  framework could complement and guide the
  decisions on the equitable division of national
  revenue
• The matrices indicate the use of Equitable Share
  and Sources of Revenue
• May be used as a basis for progamme analysis
  framework

5
Utilisation of total revenue, net of debt servicing costs and the contingency reserve Utilisation of total revenue, net of debt servicing costs and the contingency reserve Utilisation of total revenue, net of debt servicing costs and the contingency reserve Utilisation of total revenue, net of debt servicing costs and the contingency reserve Utilisation of total revenue, net of debt servicing costs and the contingency reserve
National sphere (current/capital) Provincial sphere (current/capital) Local sphere (current/capital) Total (current/capital)
Equitable Share
S-Element (Constitutionally mandated basic service obligations)
I-Element (Institutional and Administrative)
B- Element (Other constitutional functions)
Conditional grants -PCG - LCG PCG LCG CGPCGLCG
Total (NES-PCG-LCG) (PESPCG) LESLCG TNR
6
Sources of Revenue Sources of Revenue Sources of Revenue Sources of Revenue Sources of Revenue
National Sphere Provincial Sphere Local Sphere Total
Taxes
User Charges
Borrowing
7
NATIONAL GOVERNMENT

• PRINCIPLES
• CMBS
• Progressive Realization of CMBS
• STUDY ON CONTINGENCY RESERVE

8
PROVINCIAL GOVERNMENT

• DEVELOPMENT OF 2001-04 MTEF RECOMMENDATIONS
• Provincial Equitable Share formula
• Review of the formula to account for Section 228
  (Provincial Tax Powers) and capital grant scheme.
• Provincial Own Revenue
• Allow provincial access to taxes that raise
  significant tax revenue. The Commission reaffirms
  its previous position
• Allow provinces flexibility to determine own
  rates
• Creation of tax room in order to maintain
  national targets on tax burden.
• Capital Grants Model
• FFC capital grants model be applied in allocation
  of infrastructure grants

9
LOCAL GOVERNMENT

• A Framework for the Local Government Equitable
  Share

10
CONSTITUTIONAL PROVISIONSFOR THE EQUITABLE SHARE

• Section 214(2) of the Constitution states that
  the equitable share should enable local
  government to
• Provide basic services and perform other
  functions allocated to them
• Address developmental needs
• Meet their obligations in terms of national
  legislation
• Take account of fiscal capacity and efficiency

11
SUGGESTED FORMULA (LONG-TERM)

• The local government equitable share should
  therefore be structured like the provincial
  equitable share formula
• LES S m T I B
• S basic municipal services
• m spillover grant
• T tax capacity
• I institutional grant
• B other constitutional and legislative
  obligations
• In the medium term (MTEF 2004/05) use S and T
• In the long term incorporate I, B, and m

12
IDENTIFYING BASIC MUNICIPAL SERVICES (S)

• Role of Government Identification of basic
  municipal services (BMS)
• Constitution and legislation facilitate the
  identification of BMS. Five criteria can be used
• Schedule 4B/5B
• Bill of Rights
• Essential for life (Systems Act definition)
• Promotes development (S153a)
• Highlighted in policy and legislation
• Result potable water, sanitation, municipal
  health, firefighting, storm water drainage,
  refuse removal, municipal roads, electricity

13
PRINCIPLES FOR FUNDING BASIC MUNICIPAL SERVICES

• Extent to which basic municipal services are
  prioritised by a municipality will depend upon
  local circumstances
• One basic level of service, but different types
  of service delivery within the basic level
• If municipalities not delivering the full range
  of services, phase-in parameters may be needed

14
PRINCIPLES FOR FUNDING LIFELINE TARIFFS

• Income should be derived from two sources
  tariffs and low-income subsidies
• Subsidies could come from two sources
• National subsidy subsidies are a key instrument
  for redistribution and poverty alleviation
• Subsidy can be channeled through the equitable
  share or through a conditional grant, as
  facilitated by Municipal Systems Act
• Consumer cross-subsidy
• Limited application in many municipalities
• Government decides the proportion of national
  subsidy / cross-subsidy

15
SUGGESTED FORMULA MEDIUM-TERM

• Long-term LES S T I m
  B
• Medium-term ES CSR CR RRC
• ES equitable share
• CSR cost of service responsibilities (basic
  municipal services)
• CR cost recovery for electricity and
  water from tariffs, lifeline funding, and
  consumer cross-subsidy
• RRC revenue-raising capacity (includes tax
  capacity and user charges from other basic
  municipal services)
• and
• CR CCR Li
• CCR cost recovery from tariffs (electricity
  and water)
• Li low-income subsidy (national grant
  and cross-subsidy)

16
LOCAL GOVERNMENT

• Infrastructure and Borrowing

17
MUNICIPAL INFRASTRUCTURE TRANSFERS

• Current infrastructure grants CMIP, CWSS, LED,
  Urban Transport Fund, SA Housing Fund,
  Electrification Fund
• Evaluation of current system
• services viewed in isolation-not conducive to
  integrated development
• dissimilar institutional arrangements higher
  administrative costs
• Duplication CMIP covers water and sanitation but
  so does CWSS
• Funding ad hoc, based on one-year horizon
• No consistent criteria to assessing applications
• Sustainability
• Investment decisions and operating responsibility
  are not always held by same organisation

18
RATIONALISATION OF GRANT SYSTEM

• National Treasury Proposals
• One integrated grant, formula-based approach
• Allocations granted on 3 year basis
• Outcomes of projects will monitored as
  performance indicators
• FFC supports the principle of a single integrated
  capital grant
• In the interim a mechanism to promote
  co-ordination between national departments is
  required
• Introduction of a grant-matching system
• Municipalities should be required to fund a
  certain proportion of a particular project from
  their own revenue

19
TRENDS IN LOCAL GOVERNMENT BORROWING

• General holding back by lenders
• Uncertainty accompanying restructuring process
• Uncertainty surrounding the actual amount of
  outstanding municipal debt
• New boundaries may erode creditworthiness
• Limited access to private sector financial
  institutions
• No detailed impact analysis available on
  creditworthiness of new municipalities
• National Treasury studies suggest an erosion for
  non-metros

20
PRINCIPLES FOR LOCAL GOVERNMENT BORROWING

• Long-term loans at market or near-market rates
• Assistance to fiscally weak municipalities
• Improved capacity
• Predictable revenue flows
• Off-the-shelf loans
• Rules-based approach to complement market
  discipline
• Regulatory framework to provide clarity on the
  pledging of equitable shares to access loan
  finance