Michelle Rufaro Maziwisa, Dullah Omar Institute, University of the Western Cape
Relevance of the Practice
Division of revenue (DOR) in South Africa is an intergovernmental (IGR) fiscal process in which the national, provincial and organized local government – the South African Local Government Association (SALGA) – as well as the Financial and Fiscal Commission (FFC) play important roles. The Division of Revenue is guided by Section 214 read with Section 227 of the Constitution, which require national government to allocate an equitable share of revenue to provinces and local government from the National Revenue Fund. This allocation of revenue must be done by way of an Act of Parliament – he Division of Revenue Act (DORA). DORA is a money bill, meaning it deals with financial matters and therefore must be approved by both the National Assembly and the National Council of Provinces in terms of Sections 75 and 77 of the Constitution. However, the DORA may not be passed without undergoing a consultative IGR process, wherein the provincial government, organized local government (representing all municipalities, urban and rural) and the Financial and Fiscal Commission are consulted and their recommendations considered (Section 214(2) of the Constitution). The Intergovernmental Fiscal Relations Act establishes the Local Budget Forum for the purpose of consultation with organized local government, and the Budget Council for consultation with the provinces. The division of revenue is an important process which determines the resources that will be made available to local governments in the following year for the fulfilment of their constitutional mandates. The local and provincial equitable share are determined through a formula. This section will now turn its focus to the local sphere of government. The local equitable share varies from municipality to municipality, and ranges from about 10 to 80 per cent of municipal revenue depending on the municipality, and constitutes about 5 per cent of national revenue. Municipalities raise about 60-90 per cent of their own revenue depending on the municipality’s capacity, such that metropolitan municipalities often raise the bulk of their revenue, whereas smaller, and especially rural municipalities tend to rely quite heavily on national transfers as they have fewer opportunities for sourcing own revenue and less diversified revenue collection avenues.
Description of the Practice
The Division of Revenue in terms of Section 214 of the Constitution is an interesting feature of the post-Apartheid dispensation in that it marks more clearly, the recognition of local government as a separate sphere of government, having original powers, and fiscal autonomy to enable it to exercise those powers and perform its listed functions. Whereas in the previous dispensation local governments where creatures of statute, subsidiary to provincial governments, in the new (final 1996) Constitution, local government receives national transfers directly from national government, and also has authority to raise its own revenue through various taxes. It also highlights the distinction between types of local government, as in the first cycle of the DORA metropolitan municipalities and local municipalities received an equitable share allocation, but districts were excluded, until it was rectified in the following year, in response to litigation instituted by district governments.
The Intergovernmental Fiscal Relations Act 97 of 1997 establishes the Local Government Budget Forum as a consultative forum in which local government issues are discussed, and it sets out the process for the division of revenue. Section 8 of the IGR Fiscal Relations Act requires the Division of Revenue Bill to be tabled annually, setting out the allocations to local government (including the equitable share as well as conditional and unconditional grants). The Budget Forum is composed of the Minister of Finance, members of the provincial executive councils (MECs) responsible for finance and organized local government, which is the South African Local Government Association (SALGA). SALGA national branch nominates five representatives, while SALGA provincial branches nominate one representative per province to the Budget Forum. These representatives from SALGA represent both urban and rural municipalities, and they represent all categories of municipalities, that is metropolitan cities, secondary cities, small towns and rural areas. In other words, there is no separate forum for different categories of municipalities, the same IGR forum accommodates all 257 municipalities, and SALGA must find a way to represent their interests. This is obviously not an easy task as the municipalities are diverse and asymmetric in terms of their constitutional and legislative powers and functions. On one hand, the fact that SALGA represents urban and rural municipalities alike in the Budget Forum is an equalizer in the sense that it can place less capacitated municipalities such as rural areas on an equal footing to have their concerns heard, and it can increase their bargaining power in consultations with the national minister, and provincial executive through economies of scale. The Budget Forum is a cooperation forum, and therefore no issues of supervision are likely to arise in the Budget Forum, although it can play a dispute settlement function. Although the Budget Forum is not a decision-making forum as such, and cannot make binding legal decisions, Parliament has an obligation to consider the recommendations of the FFC. Which makes the FFC an additional tool to amplify the voices of organized local government, and present a balanced objective view, devoid of party politics in principle.
The FFC, which is an independent constitutional body is required to make submissions and Parliament is required to take into account various considerations including developmental and other needs of local government and municipalities (Section 214 of the Constitution). However, after the consultations, the final decision-making on the division of revenue lies with Parliament, which consists of the National Assembly and the National Council of Provinces.
Further, although organized local government is permitted to attend the NCOP, it does not have any vote. It is argued that it would be better if capable municipalities, such as metropolitan municipalities were able to participate in the Budget Forum directly, and represent their own interests because they have very large budgets and typically have the capacity to represent their own interests well. Moreover, the concerns of metropolitan municipalities are likely to be different from those of local or district municipalities, especially those districts and local municipalities in rural areas. The main difference between the urban and rural municipalities in this process lies in the categories used in the calculation of the equitable share, which takes into account various factors such as basic services that the municipality is to provide, capacity to raise own revenue, and predictability of division of revenue. Based on these considerations, the allocations to urban and rural municipalities are likely to differ significantly, and it is SALGA’s role to flag revenue concerns on behalf of all its members.
The DORA is based on the ability to raise revenue and the nature of spending required to fulfil constitutional obligations. This means in practice that metropolitan cities and some secondary cities are more likely to get a bigger piece of the cake than other smaller and rural municipalities. Secondly, the local equitable share (LES) formula enables municipalities to provide basic services to indigent persons in their municipalities, and enables municipalities with low own revenue, such as category B3 and B4 (rural) municipalities to afford administrative costs and exercise core functions through the institutional and community services components. For example, while rural municipalities have taxing powers in relation to property tax, most rural property is communally owned and tax exempt, so rural municipalities have a smaller tax base and are unable to generate significant own source revenue. This financial autonomy comes with a responsibility because it makes municipalities more directly accountable to their communities. Further, although the DORA is based on anticipated national revenue, the amounts allocated to local government are fixed, such that if the national government fails to raise the anticipated revenue, it bears the shortfall and not the local governments. Thus, this process is crucial to local governments.
Revenue allocation affects several report sections as revenue determines the resources that will be available for the implementation of service delivery (section 2 on local responsibilities), implementation of integrated development plans (section 6 on people’s participation), and it deals with finances (section 3 on local finances).
Assessment of the Practice
The objectives of the Budget Forum are to create an IGR forum in which national, provincial and organized local government can consult on fiscal, budgetary and financial matters affecting the local sphere of government, and any proposed legislation or policy with financial implications on local government (Section 6 IGR Fiscal Relations Act).
While the Budget Forum broadly meets its objectives as noted above, the fact that the outcomes of the Budget Forum are not binding, and the FFC can only make recommendations, tends to leave most of the power to the national and provincial government, which sit in the two houses of Parliament. The fact that SALGA does not have a vote in the NCOP further weakens the position of both urban and rural local governments alike in terms of Section 163(b). SALGA is mandated to represent all 257 municipalities, however, the vast differences and inequality between rural and urban municipalities make it difficult for SALGA to represent their unique interests adequately. One of the reasons for this is that SALGA’s elected executive committee members (which are the national and provincial representatives) who participate in the Budget Forum, sometimes have difficulty obtaining their members’ full mandate if municipalities fail to participate in scheduled meetings and workshops to voice their concerns ahead of the Budget Forum. In instances where SALGA is unable to obtain the mandate from some of its members, this may undermine the aims of the fiscal IGR process that culminates in the division of revenue. Additionally, it presents an opportunity for larger municipalities to assert their interests as they are more likely to submit their mandates to SALGA than smaller, and rural or otherwise less resourced municipalities.
References to Scientific and Non-Scientific Publications
Constitution of the Republic of South Africa, 1996
Municipal Finance Management Act 56 of 2003
Scientific and Non-Scientific Publications:
Khumalo B, Dawood G and Mahabir J, ‘South Africa’s Intergovernmental Fiscal Relations System’ in Nico Steytler and Yash Ghai (eds), Kenya-South Africa Dialogue on Devolution (Juta 2018)
Fiscal and Financial Commission, ‘Fiscal Federalism/Intergovernmental Fiscal Relations’ (Presentation at the University of the Western Cape, 17 May 2019)
Steytler N and de Visser J, Local Government Law of South Africa (issue 11, LexisNexis 2018)
 The Municipal Demarcation Board defines municipal categories as follows: ‘B1: Secondary cities: the 19 (9%) local municipalities with the largest budgets. B2: 26 (12%) municipalities with a large town as core. B3: 101 (49%) municipalities with relatively small populations and a significant proportion of urban population but with no large town as core. B4: 59 (29%) Municipalities which are mainly rural with, at most, one or two small towns in their area. C1: 23 (52%) of the district municipalities that are not water services providers and generally have few service delivery functions. C2: 21 (38%) of the district municipalities that are water services providers and often have substantial obligations’. Municipal Demarcation Board, ‘Municipal Powers and Functions Capacity Assessment’ (2018) <http://www.demarcation.org.za/site/wp-content/uploads/2019/01/MDB-capacity-assessment-Executive-Summary-FINAL-1.pdf> accessed 30 October 2020.