Equitable, yes. But effective?

In South Africa, our Constitution provides that local government is entitled to a share of nationally raised revenue. To give effect to this requirement, the National Treasury has developed a robust formula, applied to each municipality uniquely, to determine its individual share of this revenue.

This is referred to as the 'equitable share' and its intention is to fund, among others, the provision of services to the indigent; the poorest of the poor, says Carl Stroud, CEO of Sebata Software Solutions.

Because they have significantly lower revenue-generating capabilities than large cities do, poor and rural municipalities rely heavily on their equitable share allocation. Urban municipalities, in comparison, are better placed to use their own resources to raise revenue collections, in order to perform their constitutional obligation of service delivery to the populations they serve.

However, due to the deteriorating fiscal health of larger municipalities and metros due to mismanagement and a skills deficit, they too are becoming reliant on equitable share allocations, ultimately burdening the national fiscus.

Many leading thinkers and economists consider the equitable distribution of nationally raised revenue to be a critical part of decentralising funding, in support of the rendering of government functions and service delivery. It is widely agreed, however, that allocations can't be the sole source of funding.

The numbers don't always add up

The amount of equitable share that a municipality receives depends on a number of factors, such as the size of its low-income population, the cost of basic services, and its capacity to raise its own revenue.

One of several problems is that the variables fed into the formula (population numbers, household income levels, etc) are based on the national census. But, because of the significant time lapses between censuses as carried out by Statistics SA, the share of nationally raised revenue between municipalities can be distorted, due to factors like migration patterns.

Municipal complacency

Another issue is over-reliance on grant revenue at the expense of municipal own resource effort. Municipalities have become increasingly dependent on the equitable share to fund expenditure that should have been funded from own revenue, ie, property rates, sale of water, sale of electricity, etc.

This is directly associated with their inability to manage their own revenue value chain, from accurate billing to basic credit control and debt collection.

Infrastructure is usually neglected

Furthermore, a key expenditure priority for any municipality must be the operational maintenance of existing infrastructure. That said, there is an ever-increasing trend in which municipalities reduce funding allocations to operational maintenance, and fund non-priority expenditure.

This practice is a vicious cycle that harms the continuity of municipal service delivery and damages their ability to generate their own revenue.

Unconditional, and yet monitored

How is this possible? The equitable share is an unconditional allocation, so local governments themselves determine the priorities for the funds and are accountable for how the funds are ultimately spent.

Therefore, a local government might be able to use its equitable share allocation for other things (things that are administrative or governance capacity-related), as long as this is done to provide 'free basic services'.

Having said that, municipalities receiving an equitable share are expected to spend this within the confines of the legislative framework that compels local government. Should they be found in contravention of the legislative framework and be deemed non-compliant, Treasury might withhold transfer of the equitable share to that municipality, until it has addressed the issue.

What's the reality of equitable shares?

Most studies suggest that for municipalities to be sustainable, they must have sound financial management systems in place and must be able to collect and effectively use own revenue to meet service delivery obligations. They should also be able to use grant funding to augment their own revenue sources efficiently and effectively, to create new infrastructure and to maintain it.

To be frank, it is doubtful whether many municipalities have the necessary capacity and skills to utilise grant funding to sustain service delivery, to create new infrastructure, and to maintain infrastructure already constructed.

Policy review of the equitable share system has also been called for, to explore design options that lead to reduced perverse incentives of the grant.