RESPONSE TO 2020 DIVISION OF REVENUE BILL SELECT

RESPONSE TO 2020 DIVISION OF REVENUE BILL SELECT COMMITTEE ON APPROPRIATIONS 13 MAY 2020 www. salga. org. za

PRESENTATION LAYOUT Introduction 2020 DORB Allocation vs Constitutional Functions State of LG Finance by AGSA LGES Funding Gap Powers & Functions / Unfunded Mandates Additional burden of DMA Directives & Impact of COVID-19 on LG Revenue, Credit Control & Indigents Conclusion & Recommendations www. salga. org. za

INTRODUCTION • The financial and operational landscape in SA has changed since SALGA’s presentation on the 2020 Division of Revenue Bill (DORB) on 13 March 2020 to the Standing Committee on Appropriations • Although the response to the Outbreak of COVID-19 pandemic has been swift and decisive, the flaws in LG Fiscal Framework have been further exposed • The 2020 Division of Revenue Bill (DORB) perpetuates the continuation of financial incapacitation of LG that SALGA has decried for years • As we are in the grips of the pandemic and we slowly rise from it, it will now, more than ever, continue to place an unaffordable burden on struggling ratepayers • Over the past 20 years the financial resources available to municipalities have fallen short of the demands on municipalities for services and infrastructure delivery needs and this has been worsening over time • This is further complicated by the current state of the economy, especially limited tax revenues, retracted economic growth and rising debt levels. www. salga. org. za

2020 DORB ALLOCATIONS vs CONSTITUTIONAL FUNCTIONS VS • • Although LG is responsible for 46% of the constitutional functions, it receives the lowest allocation of the national expenditure allocation at 9% The scenario requires national fiscus to contribute a significant proportion for the provision of constitutional functions linked to the LG www. salga. org. za

STATE OF LG FINANCE BY AGSA www. salga. org. za

LGES FUNDING GAP: COST COMPARISON PER POOR HH (ELECTRICITY) Source: National Treasury www. salga. org. za

LGES FUNDING GAP: COST COMPARISON PER POOR HH (ELECTRICITY) • The current allocation for electricity services for the top 20 Eskom arrear debtors as per the LGES formula is R 1. 078 billion with an average cost of R 93. 66 per poor household per month. • SALGA’s costing model reflects an average cost of R 152. 40 per poor household per month and aggregate to R 1. 764 billion for the top 20 Eskom arrear debtors. • Therefor a shortfall on the Electricity allocation of R 686 million (63, 6%) for the top 20 Eskom arrear debtors. • The current LGES formula, based on a very loose assumption of costs of providing services at a horizontal level, affects the vertical distribution to such an extent that LG is completely underfunded for primarily Basic services but also other components. www. salga. org. za

LGES AND LACK OF DIFFERENTIATED COSTING Cost of Service vs Equitable Share • In many instances Cost of providing basic services exceeds Equitable share based on the following key factors – Topography (flat, rolling or mountainous terrain) – this dataset was obtained from the Agricultural Research Council (ARC), 25 November 2013; – Location (coastal or inland); – Distance from economic centers; – Development status referring to number of settlements and densities; and – Loss of economy of scale • Further in some instances consumption of indigents exceeds basic services – particularly in instances of yard connections. • Costing Methodology doesn’t differentiated circumstances faced municipality. • “South Africa’s 257 municipalities are also diverse, ranging from cities with large revenue-raising potential from property rates and the sale of services, to rural municipalities where most residents are very poor and the municipal budget is primarily funded from transfers. ” support by each BS: R 435, 03 per household per month for a package of free basic services Free basic services R 54 billion I: R 7, 4 m base allocation CS: R 10, 39 for MHS and R 122, 78 for other services www. salga. org. za

Local Government Equitable Share Formula (LGES) & Distribution amongst Components LGES = BS + (I + CS)x RA ± C Where: LGES is the local government equitable share BS is the basic services component I is the institutional component CS is the community services component RA is the revenue adjustment factor C is the correction and stabilisation factor LGES Formulas consist of two Parts: Part 1: • Basic services component funds the delivery of free basic services and accounts for 80% of funds allocated • Addresses the first objective of the formula Part 2: • This part directs greater funds towards municipalities that cannot raise substantial own revenues • Institutional component funds admin costs • Community services component funds general municipal services • Addresses second objective of the formula www. salga. org. za

CRITIQUE & SHORTCOMINGS OF THE LOCAL GOVERNMENT EQUITABLE SHARE FORMULA (LGES) “ Municipalities may be • Currently, the basic services (BS) component of the formula does not differentiate between costs across municipalities. This is in spite of research confirming that issues such as distances, topography and settlement type having a significant impact on the cost of delivering services. As a result, the current practice does not appropriately recognize the different cost pressures faced by municipalities and local government, in general. • The community services (CS) component intended to capture and subsequently fund other general services provided by municipalities in addition to the four basic services. Currently, the CS component only directly funds municipal health and related services, again at a single subsidy per household, and a general allocation for “other” undefined services. • This also applies to the institutional (I) component of the formula, which comprises of a base allocation and a subsidy allocated by number of councilors. Costs of operating a general municipal administration would constitute an improvement to the current method used to allocate the I component. grouped together per definition or mandate but the context and circumstances of delivering services to communities differ from case to case, thus requiring the adoption of different methods and resources to achieve the optimal outcome…. ” www. salga. org. za

SALGA’S KEY COSTING MODEL FEATURES • Whilst Treasury’s model applies a single subsidy costing, SALGA has took the following into consideration wrt LGES formula: ‒ Comprehensive municipal-specific profiling (e. g. number of households in a particular municipality located on mountainous terrain). ‒ The costs of municipal basic services can be moderated individually, per category or in total, based on exogenous cost-influencing factors such as spatial characteristics, topography and geology. ‒ Ability to establish the cost of municipal services based on actual costs, benchmarked costs, average costs or some combination of these. ‒ The model allows for temporal adjustments to variable base datasets (e. g. population size and number of households). www. salga. org. za

WHITE PAPER ASSUMPTIONS - DISEQUILIBRIUM i. The current LGES formula, based on a very loose assumption of costs of providing services at a horizontal level, affects the vertical distribution to such an extent that LG is completely underfunded for Basic services. ii. The Conditional Grant system is both ineffective and costly especially for medium sized to smaller municipalities which constitutes at least 60% of all municipalities. iii. The problem is further exacerbated by the influence of current state of the economy on normal citizens and the subsequent ability for municipalities to collect “own revenue” sources. The quantum of Municipal “own revenue” through sales of services and taxes, as assumed in the 1998 White paper are not close to being met by most municipalities. iv. Most municipalities are very far removed from the White Papers’ vision of funding 90% of recurring operational expenditure through their own revenue. v. Household poverty rates are increasing notably in most municipalities. According to newest published numbers used to determine the LGES (Community HH Survey of 2016 and 2011 Census income data) 10, 3 million households in SA earn less than two old age pensions as income on a monthly basis. Although the dominant narrative is that ‘households can afford to pay, “they just choose not to”, current economic reality in South Africa suggest that this is might not be true for 70 -80% of Households. Credible research has now shown that one third of households are left with R 120 person per week to spend on foodstuff. www. salga. org. za

WHITE PAPER ASSUMPTIONS - DISEQUILIBRIUM vi. The outbreak of COVID-19 will dramatically increase the number of poor households with some research institutions looking at broader unemployment levels of up to between 50 and 60%. vi. Further to this, the influence of ESKOM’s role in the Electricity Distribution Industry on municipal own revenue should not be underestimated with municipalities losing billions of Rands due to the fact that ESKOM supplies consumers directly and municipalities are not able to levy any surcharges/”own revenue” on those sales. vi. Own Revenue generated from Organs of State that should be fairly certain has now resulted in debt of over R 12 billion. Ownership issues and Budget constraint by National and Provincial Government are put forward as root causes. vi. Unfunded Mandates are still in existence. Powers and Functions has for very long been left unattended with municipalities assuming functions (at the coal face of service delivery) of certain provincial services without receiving the required funding. This topic is rich in literature including publications by the FFC. The simple fact is that the Constitution and Human Bill of Rights forces municipalities to provide services even in instances where Provincial Government fails citizens. www. salga. org. za

POWERS & FUNCTIONS /UNFUNDED MANDATES Source: SALGA 2015/16 Business Case for the eradication of Unfunded and Underfunded Mandates (Information obtained from the 4 municipalities in WC) • • • LG bears significant costs for the delivery of unfunded and underfunded mandates; Municipalities perform functions on behalf of provinces; In some instances, the Service Level Agreements (SLAs) have not been signed by provincial departments; Some allocations from the province are not transferred on time according to the agreed payment schedule; Municipalities clearly perform functions on behalf of provinces without assigning full expenditure to the functions. This has implications for the equitable sharing of nationally collected revenue and the delivery of services. www. salga. org. za

POWERS & FUNCTIONS /UNFUNDED MANDATES Provincial Grants per Do. RB • Municipalities are at the coal face of service delivery and often forced to deliver unfunded mandates while revenue instruments stay with Provinces • This further compromises the financial viability of municipalities • Therefore, the revision of existing Powers and Functions is imperative towards creating an ideal municipal functionality model after which funding should follow • Transfers for assigned functions should not be dependent on the Minister or MEC’s discretion but directly transferred to municipalities www. salga. org. za

POWERS & FUNCTIONS /UNFUNDED MANDATES COVID-19 (RELIEF FUND APPLICATION) • Municipal Disaster Relief Fund – (R 354 Million) – Hybrid model applied (Review of business plans based on SALGA distribution model) – Metro’s exempted from the distribution • Municipal infrastructure Grants – (R 1, 5 Billion reprioritized from projected underspending for the 2019/20 financial year) – SALGA model not considered, based on project plan submissions by municipalities • Urban Settlements Development Grant – (R 2 Billion reprioritized from projected underspending for the 2019/20 financial year) – SALGA model not considered, based on project plan submissions by municipalities • Regional Bulk Infrastructure Grant and Water Service Infrastructure Grant – (R 800 Million repriorited by department) • Integrated National Electrification Programme – Funds committed, no reprioritization • Public Transport Network Grant – 15% of the grant reprioritized towards sanitation in the 2019/20 FY www. salga. org. za

POWERS & FUNCTIONS /UNFUNDED MANDATES COVID-19 (RELIEF FUND APPLICATION) • • In observing what the reprioritised funds and the municipal disaster relief fund have been earmarked for, SALGA has identified a potential for unfunded COVID-19 mandates for municipalities. Fund Mandates Covered MDRF Sanitation, decontamination of specific selected public spaces; PPE and hygiene packs and waste management MIG Mainly water and sanitation USDG No restrictions RBIG & WSIG Water provision PTNG Sanitation Directive 6. 6. Isolation and Quarantine as per the gazetted COVID-19 regulations is not funded by any intergovernmental relief funds except for possibly the USDG, however, Ekurhuleni at the SALGA MM forum indicated that NT rejected application for quarantine sites through USDG. www. salga. org. za

DISASTER MANAGEMENT ACT DIRECTIVES TO LOCAL GOVERNMENT www. salga. org. za

DMA DIRECTIVES REGULATION / CIRCULARS DMA COGTA Regulation No. 318 DMA COGTA Regulation No. 399 REGULATORY PRESCRIPT • Make resources and funding available to implement the Regulations or directions issued • Prevention and prohibition of gatherings with more than 50 people • Identify and make available sites to be used as isolation and quarantine facilities and provide the list to the DOH for resourcing. • Provision of water and sanitation services • Communication, awareness, and hygiene education • Waste Management , Cleansing and Sanitisation • Municipal public spaces, facilities and offices • Isolation and quarantine • Municipal operations and governance • Develop COVID -19 Response Plans • Precautionary measures to mitigate employee health and safety risks www. salga. org. za

DMA DIRECTIVES REGULATION / CIRCULARS DMA Transport Regulation No. 412 REGULATORY PRESCRIPT • Provision of improved access and hygiene, disinfection control on all public transport facilities. • Prohibition of service of certain public transport during lockdown MFMA Treasury Regulation No. 429 • Municipalities are exempted from MFMA actions during period of national state of disaster (adoption of draft budget and budget) Small Business Regulations No. 450 • Municipalities to issue permits to spaza shops and informal traders. COGTA Circular No. 7 • Community Halls and recreation centres may be used to of 2020 provide essential services such as for the processing and payment of SASSA social grants COGTA Circular No. 8 • Municipalities to refurbish taxi ranks to curb the spread of of 2020 COVID-19 www. salga. org. za

ADDITIONAL BURDEN OF DMA DIRECTIVES AND IMPACT OF COVID-19 ON LOCAL GOVERNMENT www. salga. org. za

ADDITIONAL BURDEN OF DMA DIRECTIVES ON LG • DMA directives have induced significant additional responsibilities and costs in responding to the pandemic, including: – More frequent levels of service in informal settlements and water constrained communities; – Extra-ordinary cleansing of public facilities and taxi ranks; – Identifying quarantine sites and implementing support interventions for quarantine; – Identifying hotspots and implementing mitigation measures; – Monitoring social gatherings; – More frequent environmental health inspections; – Identifying and availing existing facilities for the homeless and in many instances erecting facilities to accommodate the homeless; – Identifying and availing existing facilities for processing of SASSA grant payment. ALL OF THESE DIRECTIVES PLACE A HUGE FINANCIAL BURDEN ON MUNICIPALITIES www. salga. org. za

COVID-19 IMPACT ON LG REVENUE COLLECTION AND OPERATING BALANCES • The South African economy is likely to go into further recession as a result of the coronavirus – current forecast are at economic contraction of 2. 5% in 2020. • LG will be affected by customers struggling to pay property rates and service charges as unemployment rates continue to increase. • The number of indigent households to increase as a significant proportion of the labour force is employed in the informal economy, which is severely affected by the lockdown (estimated 26% of labour force excluding agriculture) • With increase in indigent service provisions (through COVID 19 directives and the economy) the LGES which makes up 15% of operational revenue. Delay in revising the intergovernmental transfers will result in leading to liquidity risks for the sector. • Revenue collections from service charges and property rates are likely to decline over the next few months due to measures aimed at restricting movements across the country. • Credit control and debtors collection practices are discouraged, this will result in the number of customers in default will increase, exacerbating lower revenue collection rates Source: Moody’s www. salga. org. za

COVID-19 IMPACT ON LG REVENUE (CREDIT CONTROL) • The Pandemic and ultimate Lockdown will result in job losses and reduced income, this will ultimately impact on municipal revenues with Reduced collection levels and consequent inability to meet financial obligations; • Reduction of revenue from Water and Electricity due to reduced consumption e. g. closure of companies and businesses; • Loss of revenue from rental of municipal facilities due to the lockdown - Municipalities with Conference Centres and Community Halls will experience reduced revenues; • Municipal revenues are expected to decline as a result of the economic impacts of the lockdown - 5% drop in payment rates will cost an estimated R 14 billion. • With the revenue erosion, municipalities are likely to default on bulk supply accounts, as municipalities will not be able to use disconnections to put pressure on non-paying consumers; • This period may even cause municipalities with clean sheets on bulk supply account to actually fall into the Eskom debt trap; • While we are on lockdown, the demand curve for electricity will be high, some municipalities will exceed notified maximum demand Eskom will impose the penalty regime. • Eskom is still doing business as usual during the COVID-19 lockdown & continues to send disconnection threats. www. salga. org. za 24

COVID-19 IMPACT ON LG REVENUE (INDIGENT MANAGEMENT) DORB 2020 p. 99 The basic services component This component helps municipalities provide free basic water, sanitation, electricity and refuse removal services to households that fall below an affordability threshold. Following municipal consultation, the formula's affordability measure (used to determine how many households need free basic services) is based on the level of two state old age pensions. …. Statistics South Africa has calculated that 59 per cent of all households in South Africa fall below this income threshold…” According to NT the basic services subsidy will fund 10. 4 million households in 2020/21 based on Community Survey 2016 Growth rate in household numbers from 1996 census to 2016 suggests that number of households should be approximately 19, 7 million in 2021. If 59% of HH are then assumed to be poor as per STATS SA then LGES should be based on 11, 6 million Households The impact of COVID 19 has not even been considered. www. salga. org. za

COVID-19 IMPACT ON LG REVENUE • SALGA has noted the following: - – Acknowledged that the lockdown has and will likely continue to impact the income levels of many households; – disconnection of electricity and interruption of water consumption of defaulting households, will only worsen the current COVID-19 induced crisis; and – The reduced collection levels are highly likely to negatively affect the ability of many municipalities to service their bulk accounts for water and electricity respectively, amongst others. www. salga. org. za

COVID-19 IMPACT ON LG REVENUE • SALGA recommended the following: 1. Whereas municipalities must introduce measures to collect as much revenue as possible, the disconnection of water and electricity should be suspended for the duration of the lockdown period; 2. Eskom should be engaged to: • Similar to municipalities, suspend all electricity disconnections for the duration of the lockdown; and • Review the interest payable on arrears caused by and linked to the national state of disaster and the lockdown. • SALGA called on municipalities to suspend the disconnection of water and electricity for the duration of the period of the lockdown. www. salga. org. za

CONCLUSION • It is acknowledged that while the amounts of transfers to LG have been growing, they come from a very low base and they are nowhere close to what is required • There is a need for a radical review of the proportions of allocations to the 3 spheres • Consideration should be made to transfer Provincial grants directly to municipalities, where municipalities are performing functions on behalf of Provinces • Some White Paper funding and revenue assumptions for municipalities are no longer valid and have therefore led to chronic underfunding of municipalities • The impact of COVID-19 will be long lasting and the DORB must start to address this • 2019/20 and 2020/21 MTREF budgets will have serious short and massive delays in projects which requires reprioritisation • Funding allocations for 2019/20 and use of conditional grants for COVID-19 should be reprioritised • The financial sustainability risk for LG in light of COVID-19 continues to incapacitate LG in providing basic services www. salga. org. za

RECOMMENDATIONS www. salga. org. za

WAY FORWARD Short term • The DORB should ensure that in cases where functions are delegated/ assigned to municipalities, funding for those functions must be appropriated directly to those municipalities in the DORB • LGES formula to portray realistic cost differences in municipalities (Eliminate single subsidy costing) • SALGA proposes that the R 20 billion distribution should be equitable and agile in responding to the urgency of the COVID-19 crisis • The impact of COVID-19 must be addressed beyond the R 20 billion through the LGES and other grants. • Consideration must be made to make the grant framework to be more flexible to respond to emergencies. Medium term • SALGA has for a considerable amount of time lobbied for a process of review of the division of revenue between the 3 spheres of government • Appreciate the opportunity to participate in the Budget Forum Lekgotla as mentioned by the Minister of Finance. • The policy changes to be discussed at the Budget Lekgotla should leave all stakeholders in a better position to come up with a more equitable division of revenue from 2021 onwards. www. salga. org. za

THANK YOU! INSPIRING SERVICE DELIVERY! www. salga. org. za 31