15th Annual Meeting of the Network on Fiscal Relations Across Levels of Government, OECD, 2-3 December 2019

1. Overview of Intergovernmental Fiscal
Reforms in South Africa
2-3 December 2019
OECD 15th Annual Meeting of the Network on Fiscal
Relations Across Levels of Government

2. Summary of the structure of SA’s
intergovernmental transfers
Equitable share funds are
unconditional transfers
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Division of nationally
raised revenue
Equitable share
Conditional grants
Allocations-in-kind
Provinces
Equitable share
Conditional
grants
Allocations-in-kind
Local Government
Conditional grants are transfers that can
only be spent for the specified purpose
and subject to conditions
Indirect grants are spent by national
departments, for the benefit of
provinces/municipalities
• 9 provinces
• Few own revenues
• Provide free
schooling and
healthcare to most
residents
• 95% transfer funded
• 257 municipalities
• Collect property rates (2%
of GDP) and charge tariffs
for most of their services
• 30% transfer funded (on
aggregate) to provide free
services to the poor
Types of transfers
SA population: 55.8 million

3. Intergovernmental transfers achieve
significant redistribution in SA
• South Africa is one of the most unequal countries in the world
• Taxation and public spending reduce SA’s gini coefficient by about 0.18
• South Africa’s tax base is concentrated in urban areas, but allocations to subnational
spheres transfer higher per capita/per household amounts to rural areas
• Our system aims to achieve vertical equalisation
• Allocations to rural municipalities of R11 200 per HH is more than twice as much as
to metros (R4 900), due to metros’ higher own revenue raising abilities
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Provincial transfers per capita, 2019/20 Local government transfers per household, 2019/20

4. Reviewing our largest intergovernmental
transfer: the Provincial Equitable Share formula
• Allocations are based on
demographic factors indicating
demand for services
• Review is being conducted by
National Treasury together with 9
provincial treasuries
• Major issues include:
– Absence of an explicit factor
accounting for “rural costs”
– Formula structure has not adapted
to changes in spending pressures
between functions
– Need to update and align health
funding with National Health
Insurance reforms
– Annual data updates result in
declining real allocations to slower-
growing provinces (as a result of
tight fiscal environment at national
level)
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How the PES formula accounts for demand for services
Education (48%)
Allocated based on:
 School aged population
(updated*)
 Enrolled pupils (updated
LURITS data from DBE)
Health (27%)
Allocated based on:
 Population without
medical aid, adjusted for
health risk (updated*)
 Hospital and clinic use
(updated DoH data)
Basic Share (16%)
Allocated based on:
 Share of population*
Economic activity (1%)
Based on share of GDP-R
(updated StatsSA data)
Poverty (3%)
Allocated based on:
 Share of poverty* (IES
and mid-year estimates)
Institutional (5%)
Same allocation to each province
* Updated with data from StatsSA’s mid-year population estimates

5. • Many municipalities are in financial crisis
– Problems mainly stem from governance failures
– These failures occur in municipalities of all sizes
• Primary response to failures cannot be from fiscal transfer instruments
• But, where possible changes to grants are being made to include performance
incentives
– Too soon to evaluate effectiveness of these
Increasing differentiation and incentivising
performance local government grants
• Municipalities across SA have
very different revenue
potential, levels of capability
and development challenges
– Conditional transfers to urban
areas are being restructured to
promote increased investment
of own revenue.
– Urban reforms also encourage
spatial transformation (to
address legacy of apartheid
– Transfers to rural
municipalities have greater
oversight and support
attached
Performance varies widely within urban & rural municipalities
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6. THANK YOU
For additional information on national and
provincial budgets, please visit our new budget
data portal: https://vulekamali.gov.za
For information on local government finances,
please visit: https://municipalmoney.gov.za
Division of Revenue Act information can be accessed on National Treasury’s website:
http://www.treasury.gov.za/documents/national%20budget/2019/DOR.aspx