Expenditure,FY 2002/03–FY 2005/06

74 Chris Heymans

TABLE 2.5 Direct Transfers as a Share ofTotal Municipal Expenditure, FY 2002/03–FY 2005/06

Fiscal year

Indicator 2002/03 2003/04 2004/05 2005/06

Total local government expenditure budget (R billion) 64.4 89.3 101.2 119.9 National direct transfers (R billion) 8.1 12.1 16.9 16.3 National direct transfers as a proportion oftotal local government expenditure (%) 12.5 14.1 16.9 13.6 Provincial direct transfers (actual and budgeted) (R billion) 2.3 — — — Provincial direct transfers as a proportion oftotal local government expenditure (%) 3.5 — — — Total direct transfers (R billion) 10.4 — — — Total direct transfers as a proportion oftotal local government expenditure (%) 16.1 — — —

Source: Personal communication based on budget data; National Treasury 2003b, 2004b. Note: — = not available. Totals may not add to 100 because ofrounding.

Reform oflocal government grants has been a priority since the 1998 White Paper.The number offiscal instruments has been reduced,but transfer allocations have moved from R 4.4 billion to R 8.1 billion between 1998 and 2003,and they are expected to grow to R 16.3 billion in 2005/06.It has been one ofthe highest percentage increases in the past two budgets,albeit offa low base.Whelan (2003a,2003b,2004) points out,however,that per capita increases for national and provincial services have been higher than those for local government in actual monetary terms.

National allocations to local government are announced in an annual Division ofRevenue Act (DORA),published to enhance predictability and transparency over a three-year period.Provincial treasuries are also required to publish their transfers to municipalities.Reporting requirements are stipulated in each DORA.Currently,every municipality receiving assistance under a grant program must submit monthly reports to the transferring national or provincial department.These reported are then submitted to the Treasury.In the cases ofthe financial management grant and restructuring grant,the National Treasury is the transferring department.Table 2.6

Local Government Organization and Finance: South Africa 75

provides a general overview ofthe major transfers to municipalities in FY2002/03 to FY 2008/09.

The Unconditional Equitable Share Grant consolidation started in 1998 with the introduction ofthe equitable share ofnationally raised revenue for local government.It consolidated more than 20 operating grants from provinces and national departments to municipalities.The consolidation process continues,but it has not always been a smooth transition.For example,the water operating grant was prepared for consolidation into the equitable share by 2005/06,but this date was shifted to 2011 as the full scale ofinstitutional changes required became more apparent.

Nonetheless,the equitable share had systematically grown to almost 53 percent oftotal national direct transfers by 2003/04.10 This growth acknowledges the vertical imbalance between the spheres and a gap between municipal fiscal capacity and expenditure assignments,especially to meet operating costs ofproviding infrastructure for poor households.Many municipalities are unable to match this demand;hence,nationally raised revenue is allocated in the form ofthe unconditional constitutional entitlement under the equitable share.

Allocations are made for three years,on the basis ofpriorities determined by the national cabinet,in consultation with the Budget Council and the Budget Forum and provincial premiers,and on considering recommendations from the Financial and Fiscal Commission.This political judgment comes on top ofa baseline allocation in the budget,which is based on the previous budget.The constitution requires factors such as provincial and local fiscal capacity,expenditure efficiency,developmental needs and backlogs,and provision for emergency funding to be taken into account to help determine this division.The local government formula is based on six components,the major one ofwhich targets households with expenditure ofless than R 1,100 per month.Over time,additional considerations have been added.For example,in 2002 the formula was adjusted to target services and institutional support at “nodal”points identified in the new Integrated Sustainable Rural Development Programme and the Urban Renewal Programme.Since 2002/03,the equitable share has also been allocated to district municipalities that perform basic service delivery functions.In the 2003 budget,this shift has meant changes to the weights:ofthe portion for service delivery (the S grant),23.3 percent is directed to water supply,41.9 percent to electricity,11.6 percent to sanitation services,and 23.3 percent to refuse