ATC130618: Report of Select Committee on Appropriations on the Financial and Fiscal Commission’s Report Entitled “Sustaining Local Government Finances – Final Report on the Financial and Fiscal Commission’s Public Hearings on the Review of the Local Government Fiscal Framework”

NCOP Appropriations

REPORT OF THE SELECT COMMITTEE ON APPROPRIATIONS ON THE FINANCIAL AND FISCAL COMMISSION’S REPORT ENTITLED “SUSTAINING LOCAL GOVERNMENT FINANCES – FINAL REPORT ON THE FINANCIAL AND FISCAL COMMISSION’S PUBLIC HEARINGS ON THE REVIEW OF THE LOCAL GOVERNMENT

REPORT OF THE SELECT COMMITTEE ON APPROPRIATIONS ON THE FINANCIAL AND FISCAL COMMISSION’S REPORT ENTITLED “ SUSTAINING LOCAL GOVERNMENT FINANCES – FINAL REPORT ON THE FINANCIAL AND FISCAL COMMISSION’S PUBLIC HEARINGS ON THE REVIEW OF THE LOCAL GOVERNMENT FISCAL FRAMEWORK” , DATED 18 JUNE 2013
 

 

1. Background

 

The Financial and Fiscal Commission (the Commission) is a Chapter 9 institution established in terms of section 220 of the Constitution. Section 3(2 )( b)(i) of the Financial and Fiscal Commission Act, 1997 mandates the Commission to undertake research and report to Parliament and provincial legislatures. On this basis the Commission undertook a study on the review of the local government fiscal framework. The Commission’s report on its findings, entitled “ Sustaining Local Government Finances - Final Report on the Financial and Fiscal Commission's Public Hearings on the Review of the Local Government Fiscal Framework” , was tabled in Parliament on 22 April 2013. The Select Committee on Appropriations, in terms of the powers and functions conferred to it by the Constitution, Money Bills Amendment Procedure and Related Matters Act, 2009 and the standing rules, considered this report.

 

2. Terms of reference

 

The Committee invited the Commission to make a presentation on its report to the Committee. During a meeting at Parliament on 22 May 2013, the Committee met with a delegation from the Commission, led by its acting Chairperson, Mr B Khumalo . Various other stakeholders were invited to attend, including the Minister for Cooperative Governance and Traditional Affairs, Members of the Executive Council (MECs) for Cooperative Governance, chairpersons of provincial portfolio committees on cooperative governance, National Treasury, SALGA, the Select Committee on Cooperative Governance and Traditional Affairs and the Standing Committee on Appropriations.

 

3. Presentation by Financial and Fiscal Commission (FFC)

 

The report was divided into three chapters – Chapter 1 contained the problem statement and method of research, Chapter 2 contained an analysis of the problem statement and the research outcomes, and Chapter 3 contained the conclusions and recommendations.

 

3.1 Problem statement

 

The Local Government Fiscal Framework (LGFF) is broadly defined as the aggregate revenue arrangement or funding framework of local government relative to its aggregate expenditure mandates and responsibilities.

 

The Commission views the LGFF as the funding arrangement or framework required to ensure that local government and individual municipalities are sufficiently financially resourced to fulfil their constitutional mandates to render services to communities.

 

The main issue the Commission wanted to address in its study was: How can the current LGFF be configured to appropriately fund the various needs of different types of municipalities in the country, to ensure they are financially and fiscally well capacitated to fulfil their constitutional mandate?

 

The Commission indicated that the methodology it followed was discussion-driven or stakeholder-based research. In this study the general problem statement, specific problem areas and associated solutions were generated through intensive interactions with experts and stakeholders in the local government arena. The process included two public hearings.

 

3.2 Problem analysis

 

Based on the outcomes of both public hearings the Commission came to the conclusion that, in undertaking a review of the LGFF, the following should be the guiding principles:

 

(a) A better understanding of the dynamic between fiscal capacity and fiscal effort needs to inform any revision of the fiscal framework. In balancing expenditure needs with revenue sources, a distinction needs to be made between a lack of fiscal effort and a lack of fiscal capacity – and the policy response needs to be appropriate to the underlying causes.

 

(b) The LGFF should ensure that incentives created in the intergovernmental fiscal relations (IGFR) systems are compatible with policy intent.

 

(c) Being mindful of the three re-demarcation stages by the Municipal Demarcation Board, the fiscal criteria for re-demarcation should be clarified when demarcating municipalities.

 

(d) The design of a new LGFF must be predicted on a clear understanding of the redistributive and growth-enhancing roles of local government.

 

(e) Local government is embedded within whole-of-government performance.

 

(f) Instead of focussing on categorisation into urban and rural municipalities, the focus should be the linkages between urban and rural areas within functional economic regions.

 

(g) All elements of the LGFF should be transparent to all stakeholders.

 

3.3 Financial and Fiscal Commission findings

 

(a) Although the vertical division of revenue appears sufficient on the operating budget, the possible funding gap on the municipal capital expenditure budget is of concern.

 

(b) The current data available at the local level is not sufficient to support the design of a responsive and accurate LGFF.

 

(c) The continued introduction of new, and fragmentation of existing, grants increase the compliance and reporting burden on municipalities and create difficulties in managing and spending such grants.

 

(d) While municipalities do not need incentives to perform their constitutional mandates, the fact is that the current system is not resulting in optimum performance.

 

(e) Designing a fiscal system to be redistributive and focused towards municipalities with a limited revenue base cannot be appropriately achieved if the constraints on municipal own revenue sources are not remedied.

 

(f) The Commission noted the legislative requirement for community consultation and participation in the affairs of local government, but showed that the poor implementation of this legislative requirement created tensions within communities that led to service delivery protests.

 

(g) The dysfunction of local government is equally the result of the failure of national and provincial spheres of government to monitor, supervise and support municipalities effectively.

 

(h) National driven policies, such as electricity demand-side management, are also having negative impacts on municipal revenues.

 

3.4 Financial and Fiscal Commission recommendations

 

(a) The LGFF should account for the differences in the minimum efficient expenditure

needs and fiscal capacities of municipalities in the country. This also includes the

endogenous and exogenous factors that impact on these differences.

 

(b) A review of the funding for capital expenditure in local government is needed; given the identified vertical gap on municipal capital budgets which is driven by increasing infrastructure needs and constraints on municipal capital revenues.

 

(c) The role of the Local Government Data Forum should be strengthened to ensure that its mandate of rationalising data requests to local government is fulfilled. The Commission further recommended that Statistics South Africa conduct a census every five years, in accordance with the Statistics Act of 1999.

 

(d) Government should generally refrain from introducing new or fragmenting existing grants unless they have clear objectives and value is added to the LGFF. The Commission further wished to be consulted when new grants are introduced.

 

(e) There is a need for a formula-based grant that will encourage performance and reward good performance and not poor performance.

 

(f) Municipalities should be given greater flexibility and autonomy in deciding increases to their tariffs and surcharges. Such flexibility applies to the MFMA budget circular guidelines and the imposition of norms and standards on surcharges as prescribed in the MFMA.

 

4. Findings and observations

 

During engagement with the Financial and Fiscal Commission and other stakeholders on the Commission’s report entitled “ Sustaining Local Government Finances - Final Report on the Financial and Fiscal Commission's Public Hearings on the Review of the Local Government Fiscal Framework” , the Select Committee on Appropriations observed the following:

 

4.1 There is a need for research on the tourism levy as a source of revenue for rural municipalities.

 

4.2 There is a need for further study on how rural municipalities can be made financially

viable .

 

4.3 There is a need for further research to assess the extent to which smaller municipalities can benefit from the fuel levy.

 

4.4 There is a need for the Commission to engage the traditional leaders as stakeholders on the findings of this study.

 

4.5 Surcharges on electricity as a source of revenue is not yet fully utilised.

 

4.6 Capacity constraints are not only a problem within municipalities but even in departments that should be providing support to municipalities.

 

4.7 Proposed municipal incentives might have unintended consequences if they are not properly designed.

 

4.8 There is a need for a further study on economic linkages between urban and rural areas to ascertain to what extent they are exploitative or mutually beneficial.

 

5. Recommendations

 

After engaging with the Financial and Fiscal Commission and other stakeholders on the Commission’s report entitled “ Sustaining Local Government Finances - Final Report on the Financial and Fiscal Commission's Public Hearings on the Review of the Local Government Fiscal Framework” , the Select Committee on Appropriations recommends the following:

 

5.1 The Financial and Fiscal Commission should engage other stakeholders (such as National Treasury and SALGA) on further research regarding the tourism levy as a source of revenue for rural municipalities.

 

5.2 The Commission should engage other stakeholders (such as SALGA and Municipal Demarcation Board) on how rural municipalities can be made financially viable.

 

5.3 The Commission should engage National Treasury regarding further research to assess the extent to which smaller municipalities can benefit from the fuel levy.

 

5.4 The Commission should engage traditional leaders as stakeholders on the findings of this study.

 

5.5 The Commission should engage SALGA and ESKOM with regard to surcharges on electricity as a source of revenue for municipalities.

 

5.6 The National Treasury and the Department of Cooperative Governance and Traditional Affairs should investigate capacity constraints of departments that are supposed to provide support to municipalities.

 

5.7 The proposed municipal incentives should be well designed to avoid unintended consequences.

 

5.8 The Commission should conduct further research on economic linkages between urban and rural areas to ascertain to what extent they are exploitative or mutually beneficial.

 

5.9 The National Treasury should consider the findings of the Commission and its recommendations.

 

 

Report to be considered.