New Local Government Equitable Share Formula: briefing by National Treasury

Standing Committee on Appropriations

18 February 2013
Chairperson: Mr E Sogoni (ANC) and Mr T Chaane (ANC – North West)
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Meeting Summary

The meeting was a joint sitting of the Standing Committee on Appropriations and the Select Committee on Appropriations. National Treasury briefed the Committees on the Local Government Equitable Share Formula and said that the equitable share formula had been reviewed over a period of one and a half years with an extensive consultation process where the principles and objectives had initially been agreed to, followed by agreement on the formula’s structure and lastly on the determination of the new allocations. Municipalities would be impacted not only by the new formula but also by the impact of the new 2011 census data. To this end the formula would be phased in over a period of five years. The new formula came about because the 2001 census data was aged, the service costs did not reflect cost pressures, fewer funds were allocated to poor communities, there was a large growth in the number of households with the top ten growing municipalities having a growth of over 60% and small and rural towns were showing negative growth.

The local government equitable share was divided amongst 278 municipalities and was an allowance for basic services, community services and administration. In the context of a changed distribution of poverty, the monthly pension amount of R2300 was being used as a threshold level. The formula had two objectives: to enable municipalities to provide basic services to poor households and to enable municipalities to afford administration and governance capacity to perform core municipal functions.

The new formula was: Equitable Share= Basic Services + (Institutional Component + Community Services) x Revenue Adjustment +/- Correction and Stability amount. Basic Services accounted for approximately three quarters of the total amount of the share. The subsidy amount per poor households below the threshold level was R275.17, which was to cover water, sanitation, refuse removal, energy and included an amount of 10% to be used for maintenance. The institutional component funded the administration costs. The base allocation was R5m and an extra amount was given based on the size of the municipality. Community Services were a new component to cover things that were not in the Basic Services, like health and parks. Allocations were based on the number of households. The Revenue Adjustment factor was to take into account the revenue raising capacity of municipalities. The Correction and Stability component was such that all municipalities initially receive 90% of their allocation and the new formula would be phased in over five years in 20% increments. The impact of the new formula would be that rural areas and small towns would get more. Implementation of service delivery however remained a challenge.

The Financial and Fiscal Commission (FFC) said that there had been extensive consultation and that a number of issues raised by the FFC had been addressed but that the biggest question was whether small municipalities were getting their fair share of the cake. Sufficient skills capacity and support needed to be given to municipalities to ensure responsible use of the increased resources coming their way.

The South African Local Government (SALGA) said its concerns had been captured in the formula but that a better empirical way to determine the basic services allocation needed be found as SALGA felt the current ones were underestimates. SALGA felt that the debate around the vertical division of the allocation needed to be opened for discussion as local government had a history of disinvestment since 1995 as well as a backlog, which municipalities had to fund in addition to maintenance.


Members asked how the ineffectiveness of municipalities to collect revenue had been taken into account; how the message that there would be a decrease in funds was being passed on to the municipalities; if Treasury had a monitoring tool and whether it had taken into account that different municipal areas had different cost profiles because of topography or geology. Members wanted know the difference between the equitable share and the Rural Household Infrastructure Grant (RHIG); how the R275 subsidy figure had been determined; how would local government limit energy consumption to the set figure when there were no meters installed; how had the threshold amount been determined; were all municipalities consulted; how did the adjustment factor work; why was there an emphasis on rural municipalities when the rural population was shrinking? Other questions were: Had poverty within the richer metro municipalities been taken into account? Until when was the presentation document embargoed? Members said nothing had been spoken about the new census figures and its implications for the budget and how had the figures been factored in. What was meant by the cost of administration? Did it refer to increased human resources or developing the skills capacity of those in administration? What was the poverty datum line in South Africa? Whether metro municipalities and their ability to afford the basic services component was an assumption or whether it had been tested to be a valid statement? Members said that in Cape Town there were two worlds in one city. How could it be ensured that the poor benefited more than the rich in metro municipalities. Members said the government was giving the allocation for specific purposes and if this was not adhered to, did Treasury have the power to intervene and ensure that the money was disbursed correctly? Members asked if section 216 could be invoked by Treasury to withhold funds regarding service delivery. Members said the allocation had to benefit the people it was supposed to benefit. It seemed Treasury was not in charge of government money leading to a lack of service delivery and uprisings. Members asked if the equitable share grant could be tweaked at provincial level. Members said that under section 215(2) Treasury could intervene and had to ensure that the equitable share allocation was identified in provincial budgets. Members suggested specific problems needed to be addressed in the formula as national had no control over the provincial allocations. Members asked if there would be no equitable share for a municipality if there were households that were poor in it. Members said there had been a move to take the RHIG from the Department of Human Settlements to the Department of Cooperative Government and Traditional Affairs (COGTA) yet the President had said that it should remain in Human Settlements. How far was Treasury in meeting with stakeholders and how was the grant going to work? Members said the equitable share budget of municipalities needed to be properly structured to deliver services.

Meeting report

New Local Government Equitable Share Formula
Mr Kenneth Brown, Head of the Intergovernmental Relations Division at the National Treasury, said that the equitable share formula had been reviewed over a period of one and a half years with an extensive consultation process where the principles and objectives had initially been agreed to, followed by agreement on the formula’s structure and lastly on the determination of the new allocations. Municipalities would be impacted by not only by the new formula, but also by the impact of the new 2011 census data. To this end the formula would be phased in over a period of five years.

Mr Steven Kenyon, Senior Economist at the National Treasury said that the local government equitable share was divided amongst 278 municipalities and was an allowance for basic services, community services and administration. Amongst the problems of the old formula was that the 2001 census data was dated, the service costs did not reflect cost pressures, less funds were allocated to poor communities, there was a large growth in the number of households, the top ten growing municipalities had growth of over 60% and in one case growth was over 100% and small and rural towns were showing negative growth. In the context of a changed distribution of poverty, the monthly pension amount of R2300 was being used as a threshold level and it covered 59% population but he added that it was not a poverty datum line. The principles underlying the formula were that it had to be objective, fair, dynamic, recognise diversity, use high quality credible data, be transparent, simple and provide predictability and stability. The formula had two objectives: to enable municipalities to provide basic services to poor households and to enable municipalities to afford administration and governance capacity to perform core municipal functions.

The old formula was Equitable Share = Basic Services + Development + Institutional Component - Revenue Raising Capacity +/- a Correction and Stability amount. The new formula was Equitable Share = Basic Services + (Institutional Component + Community Services) x Revenue Adjustment +/- a Correction and Stability amount. Basic Services accounted for approximately three quarters of the total amount of the share. The subsidy amount per poor household below the threshold level was R275.17, which was to cover water, sanitation, refuse removal, energy and included an amount of 10% to be used for maintenance. The subsidy would be updated annually based on inflation and NERSA adjustments. The institutional component funded the administration costs. The base allocation was R5m and an extra amount was given based on the size of the municipality. Community services were a new component to cover things that were not in the Basic Services, like health and parks for example. Allocations were based on the number of poor households. The Revenue Adjustment factor was to take into account the differing revenue raising capacities of municipalities. This capacity was dependant on total income, property values, the number of households, the unemployment rate and the proportion of poor households, which had been combined into an index that ranked municipalities by per capita revenue-raising potential. The Correction and Stability component was such that all municipalities initially receive 90% of their allocation and the new formula would be phased in over five years in 20% increments. The impact of the formula would be that rural areas and small towns would get more. The advantages of the formula was that it responded to the stated objectives, the cost estimates were realistic, the poverty measures covered 60% the households, the community services component had been included and key data had been updated. Implementation of service delivery however remained a challenge. Municipalities were now able to check their allocation themselves unlike in the past when it was just a figure received from Pretoria.

Mr Bongani Khumalo, CEO of the Financial and Fiscal Commission (FFC) said that there had been extensive consultation and that a number of issues raised by the FFC had been addressed but that the biggest question was whether small municipalities were getting their fair share off the cake. Sufficient skills capacity and support needed to be given to municipalities to ensure the responsible use of the increased resources coming their way.

Mr Subesh Pillay, Head of the National Working Group of the South African Local Government (SALGA) said SALGA’s issues had been captured in the formula but that a better empirical way to determine the basic services allocation needed be found as SALGA felt the current ones were underestimates. A second issue was that SALGA felt that the debate around the vertical division of the allocation needed to be opened for discussion as local government had a history of disinvestment since 1995 as well as a backlog which municipalities had to fund in addition to maintenance.


Discussion
Mr M Swart (DA) asked how the ineffectiveness of municipalities to collect revenue had been taken into account.

Mr C de Beer
(ANC – Northern Cape) said it was important for Treasury to control and monitor the allocation of funds to ensure that local government worked. It was his experience that provincial treasuries needed to be capacitated. How was the message that there would be a decrease in funds being passed on to the municipalities?

Ms A Mfulo (ANC) asked if Treasury had a monitoring tool. She said different municipal areas had different cost profiles because of its topography or geology and had this been taken into account in the formula.

Ms R Mashigo (ANC) wanted know the difference between the equitable share and the
Rural Household Infrastructure Grant (RHIG)

Mr R Lees (DA, KwaZulu-Natal) asked how the R275 subsidy figure had been determined. How would local government limit energy consumption to the set figure when there were no meters installed? How had the threshold amount been determined? Were all municipalities consulted? How did the adjustment factor work? He asked why the emphasis was on rural municipalities when the rural population was shrinking. Had poverty within the richer metro municipalities been taken into account? Until when was the presentation document embargoed?

Mr L Ramatlakane (COPE) said nothing had been spoken about the new census figures and its implications for the budget and how had this been factored in. What was meant by the cost of administration? Did it refer to increased human resources or developing the skills capacity of those in administration? He wanted to know what the poverty datum line was in South Africa. He asked whether metro municipalities and its ability to afford the basic services component was an assumption or whether it had been tested to be a valid statement.

Ms L Yengeni (ANC) said there were small changes between the old and the new formula. She said that in Cape Town there were two worlds in one city. How could it be ensured that the poor benefited more than the rich in metro municipalities.

Mr Brown replied that the equitable share for basic services was a subsidy amount (R275.17) multiplied by the number of poor households in the municipality. The City of Cape Town municipality for example, could provide other services and therefore its share of administration costs and community services was zero. The city needed to identify where the poor households were and provide them with free basic services. The disparities within the city had to be dealt with by the city and other monies were also given to the city, for example for informal settlements and public transport grants.

Ms Yengeni said the government was giving the allocation for specific purposes. If this was not adhered to, did Treasury have the power to intervene and ensure that the money was disbursed correctly?

Mr Brown replied that the level of affordability for the old formula was R800 and for the new formula it was R2300. There was a dispute on what the poverty datum level was in South Africa and Treasury had not wanted to enter into the debate. It had chosen R2300 because it wanted to accommodate pensioners in the formula. Metros would have to cross subsidise. The new census figures had had an impact on the budgets and the equitable share was in fact over subsidised. According to the census figures R25b had to be given, whereas the actual amount was R30b, therefore local government could absorb the changes brought about by the new formula.

Mr Kenyon said the revenue adjustment factor was calculated using the census statistics to derive a model of the revenue raising capacity of municipalities and had undergone two rounds of consultation.

Mr Brown said that the energy component was derived using Eskom’s block tariff structure of 60c per kWh. This totalled R30; however the actual energy component of the subsidy was a generous R56.

Ms Wendy Fanoe, Chief Director of Intergovernmental Policy and Planning at the Treasury, said that the 278 municipalities generated their own revenue, were given grant funding and could borrow externally from the market. The equitable share allowed for the administration costs of providing free basic services and this was dependant on its revenue collection ability. This factor was influenced by the amount of traditional land, the fact that certain rural areas were growing faster than metro areas, the size of the municipality and the size of the allocation.

Mr Brown said that Treasury did monitor the spending of municipalities as did provinces, but that it needed strengthening. He said Treasury could monitor up to a certain point only.


Mr de Beer asked if section 216 could be invoked by the Treasury to withhold funds regarding service delivery.

Ms Yengeni said the allocation had to benefit the people it was supposed to benefit.

Ms Mfulo questioned whether there was a limit to the intervention Treasury could do. She said this was a serious challenge, as it seemed Treasury was not in charge of government money leading to a lack of service delivery and uprisings.

Mr G Snell (ANC) asked if the equitable share grant could be tweaked at provincial level.

Mr Sogoni said that under section 215(2) Treasury could intervene and had to ensure that the equitable share allocation was identified in provincial budgets.


Mr Brown replied that Treasury would look at the idea of area based budgeting for neglected areas. He said it was not Treasury’s intention not to intervene and they did intervene when they saw wrong doing, especially around financial mismanagement, however if Treasury became the oversight body they would be doing somebody else’s job and would need an increase in the budget to be able to do so. He said tweaking a budget was not the right word to use as Treasury had to be impartial, fair and not open to manipulation. The equitable share was not linked to performance unlike conditional grants where there was leverage to intervene. Treasury withheld the equitable share only as a last resort and Treasury was involved with the budget process of provinces and provided support to municipalities.

Mr Snell suggested specific problems needed to be addressed in the formula as national had no control over the provincial allocations.

Mr Lees asked if there would be no equitable share for a municipality if there were no households that were poor in it.

Mr Khumalo said it was not necessary to use the formula approach, one needed to take into account the criteria that had been listed. Free basic services were a policy decision. Equitable share grants were unconditional and Treasury could not tell a metro municipality what to do, however the provincial legislature needed to do oversight on its implementation of the grants.

Mr Chaane asked if colleagues in the municipalities had an understanding of its monitoring role. Council members needed to be educated and SALGA had a role to play.

Ms Yengeni said there had been a move to take the RHIG from the Department of Human Settlements to COGTA yet the President had said that it should remain in Human Settlements. How far was Treasury in meeting with stakeholders and how was the grant going to work?


Mr Brown replied that it was apparent that the Committee’s concerns were whether the money was actually reaching the people it was intended for and this would feed into the reforms Treasury could do for their budget and IDP formats. Treasury was currently doing a study on whether budgets affected the tangibles it wanted changed. It had done consultations at a technical level with municipalities on how the formula was structured and broken it down to particular areas so as to empower ward councillors. Constitutionally, Treasury could not force municipalities. He said a meeting of stakeholders on the matter of RHIG was scheduled for early March. Last year 50 to 60 municipalities had not submitted annual financial statements despite Treasury support. By June the number was down to 40, which were given until August to submit, failing which the constitution would be invoked to withhold funds. Only nine did not comply but made specific promises. In the case of Nala municipality, the issue went beyond the annual financial statements to gross violations and deep-rooted corruption. Treasury wanted Nala to draw up annual financial statements and wanted documentary proof that the budget had been approved and that the municipality had a plan of action. The municipality did not meet these conditions and section 216 was invoked as a signal to the other eight municipalities that action would be taken. Nala had paid 20 service providers for services they had not rendered and source documentation had been destroyed. In December its allocation had been stopped. Treasury and Council had passed a resolution to adhere to the annual financial statements, to implement a forensic investigation, to recover the monies given to the 20 service providers. This case was mentioned to indicate that Treasury stopped the allocation only as a last resort.         

Mr Sogoni said the equitable share budget of municipalities needed to be properly structured to deliver services.

The meeting was adjourned.

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