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6/9/10 2011/12 Submission On The Division of Revenue
Submission for the Division of Revenue 2011/12
Financial and Fiscal CommissionVersion of 02 June 2010
6/9/10 2011/12 Submission On The Division of Revenue
Introduction
Financial and Fiscal Commission established in terms of Section 220 of the Constitution and the Financial and Fiscal Commission Act (2003) as amended
This submission is made in compliance with Chapter 13 of the Constitution, the Financial and Fiscal Commission Act (2003) as amended, the Intergovernmental Fiscal Relations Act (1997) and related legislation
Recommendations submitted 10 months prior to tabling of the next Division of Revenue Bill and the budget
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Outline of 2010 Annual Submission (4 Chapters)
The Global Economic Crisis, Fiscal Frameworks and Coping with Vulnerabilities
Options for Social Assistance Reform During a Period of Fiscal Stress
Towards an Effective, Efficient and Transparent Intergovernmental Fiscal System
The Performance of Conditional Fiscal Transfers in the South African Fiscal Relations System
Local Government Revenue Enhancement Programs and Fiscal Stress
The Review of the Local Government Equitable Share Formula
Regionalising Municipal Services: The Case of EDI
Intergovernmental Fiscal Issues in Urban Public Transport
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1. Global Economic Crisis, Fiscal Frameworks and Coping with Vulnerabilities
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Channels of crisis:
World Economy International prices International demand Foreign Direct Investment Tourism Remittances
Channels to households Consumer and producer prices Employment
Channels to children Consumption Access to child support grant, school etc
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Impact on government
Income/GDP and Savings /GDP for government
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Impact on real GDP
0
20
40
60
80
100
120
140
160
180
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
BAU
MOD
SEV
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Poverty headcount ratio (P0) under three scenarios
0.50
0.51
0.52
0.53
0.54
0.55
0.56
2007 2008 2009 2010 2011
BAU
Moderate
Severe
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Conclusions
Global crisis interrupted decline of child poverty and hunger – the impact was strong on child poverty, mostly at extremely low income levels, i.e. amongst the very poorest children
GDP and Employment effects worse, due to large wage rigidities and demand
Short- to medium-term fiscal imperatives: Fiscal consolidation unavoidable Little room for introduction of costly new
programmes
Longer-term fiscal imperatives: Deficit/debt projections suggest that fiscal reforms
required Longer-run revenue growth likely to constrain future
growth in spending
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Recommendations In the short term, government should continue to strive for
fiscal consolidation through limiting the growth in entitlement spending to those programmes that have demonstrably worked while refocusing expenditure to ensure better coordination and to deepen access by focusing on improved service quality. In particular the Commission recommends, Continued expansion of child support grant and old age
pension grant Maintain the high access level to education and health
services that have been achieved even during the period of fiscal consolidation
Reprioritise expenditure towards repair and maintenance by emphasising existing projects and initiating new ones.
In the medium to long term, government should: Introduce a block grant for education, health and social
development that funds clearly defined and costed outcomes in these areas
Carry out independent cost effectiveness and quality review (both public and private) in education, health and social wage
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2. Social Assistance Reform During a Period of Fiscal Stress
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Introduction
The South African social assistance system is large for a middle-income country 9th highest social assistance spending-to-
GDP ratio among 74 developing economies Three reasons for reflecting on the state and
future of the system: Deterioration of the public finances Trends in living standards since 1994 Reservations regarding design and impacts
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Source : South African Reserve Bank electronic data
General government spending on social protection (1983-2007)
5
6
7
8
9
10
11
12
13
14
15
1983 1987 1991 1995 1999 2003 2007
% o
f tot
al s
pend
ing
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
1983 1987 1991 1995 1999 2003 2007
% o
f GD
P
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Fiscal sustainability of the grants system
Post-1994 expansion of the grants system has not threatened fiscal sustainability
Successful fiscal consolidation (1994-2000): Overhaul of tax collection and administration Role of economic growth
Extensive fiscal space (2000-2007): Rapid revenue growth, falling interest
burden Expansion of most spending categories
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National government main fiscal aggregates (1985-2009)
Net loan debt
Source: South African Reserve Bank electronic data
Budget balance (surplus +, deficit -)
-8-7-6-5-4-3-2-1012
1985 1989 1993 1997 2001 2005 2009
% o
f GD
P
20
24
28
32
36
40
44
48
52
1985 1989 1993 1997 2001 2005 2009
% o
f GD
P
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Social grants and anti-poverty policy in South Africa
Social spending and poverty: Marked spending growth since 1994 (per
capita spending increased by 21% from 1995 to 2000 and a further 42% from 2000 to 2006)
Poverty impact of social spending enhanced further by improved targeting
Social spending had a large and growing redistributive impact from 1995 to 2006
Poverty impact of free basic services: severe data problems
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Developmental effects of social grants
No evidence of large-scale squandering of grant money
Grants receipts usually boost the food spending of recipient households
Increases in food spending associated with child support grants and social pensions improve the nutrition and health of children Evidence: ex post height-for-age rations Impact of gender of grant recipients?
Receipt of child support grants and old-age pensions also encourages school attendance
Absolute effects are small, because school attendance is high already
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The future role of the social grants system Very strong case for maintaining existing
social grants Poverty reduction in an environment
wherein informal social security is under pressure
Could developmental impact be strengthened by conditions?
What about the unemployed? Universal income grant should be avoided
(cost considerations, likely perverse incentive effects, possible dependency effects)
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Recommendations
Protect overall social-assistance expenditure during fiscal consolidation, in particular targeted social spending programmes and the main cash-transfer component of poverty-focused public spending (complements anti-poverty interventions)
Do not compromise the relative simplicity of the social assistance system especially when contemplating reform options.
Pilot conditional cash transfer and workfare programmes on a smaller scale, evaluate them in order to expand successful pilots.
Strengthen non-cash complementary social developmental services through emphasising quality improvements within a defined resource envelope.
Avoid universal income grants, as these are currently unaffordable and would need to be accompanied by a broader restructuring of the entitlement system
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3. Towards Effective, Efficient and Transparent Intergovernmental Fiscal System
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3.1 The Performance of Conditional Fiscal Transfers in
the South African Intergovernmental Fiscal
Relations System
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Challenges emerging from the implementation of conditional grants in South Africa
Introduction and termination of conditional grants
There seem to be no policy guideline for the introduction and termination of Conditional Grants.
Allocation criteria for conditional grants Rules for allocating and targeting of grants are not
always based on verifiable indicators E.g. allocation formulas for Municipal Infrastructure
Grant and Infrastructure Grant for Provinces do not pay serious attention to differentiated cost factors for delivering infrastructure
Classification and budget allocations by recipient government
Budget allocations at sub-national level do not always follow grant frameworks – examples include CASP, Phase II of EPWP, and System Improvements Grant
Reporting on the performance of conditional grants
Non-financial data on the performance of Conditional Grants is either scanty or non-existent.
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Recommendations I
When introducing and terminating conditional, national departments must:
Introduce a mandatory, systematic process for designing and planning individual conditional grants that covers incentive effects, administrative accountability arrangements and stipulates regular review periods and exit strategies of the grant
Ensure that there is an independent evaluation of the grant performance at entry, midterm and end of the grant
Government should make the criteria for dividing grant allocations transparent. At the moment, they are only explicitly reflected for the whole programme and not for each individual grant.
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Recommendations II
Government must continue to emphasise the importance of non-financial data reporting. In this regard it should link outer year allocations to independently evaluated performance information and gazette expected deliverables.
To ensure results-based accountability through incentive grants, national departments must make accounting for delivery a prerequisite for most conditional grants. They should encourage designing grants that consider explicitly promoting innovation in sub-national governments and strengthen incentives for optimal service delivery.
The budget allocation process must follow the grant frameworks specifically. This should be monitored periodically through s32 of the PFMA and s72 of MFMA.
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3.2 Local Government revenue enhancement programs and fiscal stress
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Introduction
Most local governments are generally perceived to be hard pressed for revenue or fiscally stressed
Municipal capacity to collect own revenue and the share of own revenue to total revenue is declining
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Main findings
Many municipalities demonstrating chronic fiscal stress
Own revenue being eroded by national transfers, inability and unwillingness to collect revenues by municipalities or to pay by residents.
Revenue challenges a result of: intergovernmental system design poor services delivery politics and administration interface local economic, social and demographic circumstances etc
Low revenue invariably due to low fiscal effort
Revenue enhancement programs are not producing desired results
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Recommendations I
Government should adopt standard early warning systems to detect fiscal stress in municipalities and reach consensus on them:
These should be pre-conditions for instigating mandatory provincial intervention in terms of S139 of the MFMA and MFRP in terms of S140 of the MFMA.
Amend Section 71 of the MFMA to require that accounting officers report on actual revenue per source and on the percentage of collected revenue to the total value of billed revenue.
Government legislates, through S43 of the LGMS Act of 2000, revenue collection as one of the key performance areas against which to assess overall municipal performance. Indicators used to include at least:
The collection ratio, which is the extent to which services are billed, collected and enforced.
The coverage ratio, which is the extent to which all service users are captured on the tax or rates roll.
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Recommendations II
Excessive levels of municipal debt from residential customers, businesses and government must be reduced through taxpayer education and incentives to improve the provision of good quality services generally.
Government must enable local government through the MSA of 2000 to issue garnishee orders on defaulting customers.
Judicial system should have dedicated courts to deal with outstanding municipal accounts until the debt is reduced to acceptable levels.
The Revenue Raising Component of the Local Government Equitable Share should be reformed so that it rewards good performance in revenue collection as opposed to the current ‘Robin Hood system’, or stepped tax bands, which allocates more funds based on low revenue collection.
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Recommendations III
Municipalities should have broad revenue improvement programmes focusing on revenue-side interventions, expenditure-side interventions and efficiency-based interventions.
Interventions must be specific to local economic circumstances so that small rural municipalities, which mainly face structural fiscal stress, develop efficiency-based and expenditure-side revenue improvement interventions. Urban municipalities, which encounter cyclical fiscal stress, can pursue revenue-side interventions.
Small rural municipalities must develop institutional arrangements or reforms that emphasise revenue assignment that is geared especially to sharing powers and functions between category B and C municipalities.
Effective revenue management processes, good financial management and the provision of good quality services should underpin revenue improvement programmes. Municipalities should only conduct them when they have maximised the collection of locally available and outstanding revenue sources.
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Recommendations IV
Government should support efforts to estimate the fiscal capacity and fiscal effort of municipalities to dispel the perception that certain municipalities will never be financially viable.
Where feasible, bigger municipalities, which already have financial systems, should be encouraged to share their systems and expertise with smaller ones.
The performance of revenue improvement programmes should be subjected to empirical tests that cover changes in the effective tax rates, tax burdens for all service users, the total revenue yield, economic efficiency and overall fairness.
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3.3 The Review of the Local Government Equitable Share (LES) Formula
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Background
Tight economic environment calls for institutional and operational efficiencies of fiscal and revenue instruments of Local Government
Performance and efficiencies of intergovernmental transfers and own revenue sources crucial for cushioning the effects of recession and providing a solid platform for buoyant and equitable growth
Section deals with how to reform the Local Government Equitable Share formula to improve its effectiveness and efficiency
Highlight urgent issues to contribute to and form part of greater review undertaken by Treasury
Based on static (one year) and dynamic (multi-year) analysis of allocations as well as simulations
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The Current LES
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LES = BS + I + D – RRC ± C
Where: BS = Basic Services Component
I = Institutional Component
D = Development Component
RRC = Revenue Raising Component
C = Correction Component
Municipality Type
Number of
Municipalities
Share of
Muncipalities
Basic Services
Component
Institutional
Component
Development
Component
Revenue Raising
Correction
Component Total
Metros 6 2% 97% 3% 0% 37% 100%
Secondary Cities 21 7% 95% 5% 0% 8% 100%
Medium to Small Tow ns 29 10% 90% 10% 0% 7% 100%
Small Tow ns 111 39% 88% 12% 0% 2% 100%
Rural Municipalities 70 25% 89% 11% 0% 0% 100%
Districts w ithout W&S Function 25 9% 62% 38% 0% 46% 100%
Districts w ith W&S Function 21 7% 94% 6% 0% 2% 100%
Total 283 100% 92% 8% 0% 12% 100%
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Key Findings and Conclusions
Technical shortcomings of current formula Lack of accurate costing framework to determine
subsidies
Inefficient calculation, application and possible unconstitutional aspects of the RRC component
Lack of transparency of the correction/stabilisation component and is currently inefficiently applied
Formula not robust enough to factor in changes and target funding
Use of outdated data and lack of frequent data updates
Poverty indicator “outdated” and income not a good measure of poverty
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Key Findings and Conclusions (2)
Dynamic analysis suggests previous government reforms of formulae have largely been ineffective
Static analysis indicates certain degree of redistribution and high dependency on LES funds for rural municipalities
Review of LES to consider following issues: Differentiated approach to funding LG Links to broader objectives of the LG fiscal framework (eg
MIG) Funding maintenance of social infrastructure Flexibility to incorporate any changes to current FBS policies
and expenditure and tariff shocks Factor in other services provided by LG The cross subsidisation ability of urban municipalities
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Recommendations
Government should use the institutional component of LES to assist poor municipalities.
Government should remove the step structure of the differentiated tax mechanism of the RRC and develop a flat gradient structure so that municipalities on the outer ends of bands are not treated unfairly
Government should develop alternative methods of revenue prediction for the RRC component.
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3.4 Regionalising Municipal Services:
The Case of the Electricity Distribution Industry in South Africa
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Background
Improving service delivery performance and ensuring value for taxpayers’ money an ongoing government concern
A number of approaches to tackle these challenges:
Legislative promulgations e.g., MSA (No. 117 of 1998), as amended and MSA (No. 32 of 2000)
Rationalisation and corporatisation of municipal services e.g., Johannesburg’s iGoli 2002 programme
Capacity support to local governments, e.g., Project Consolidate later linked to Siyenza Manje.
In dealing with a specific municipal function challenges like electricity distribution, government has attempted to create six Regional Electricity Distributors (REDs) since early 1990s
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Background Notwithstanding all these intervention efforts,
government tabled the Constitution Seventeenth Amendment Bill in 2009.
Seeks to empower national government to regulate the executive authority of municipalities further with regard to matters listed in part B of schedule 4 and part B of schedule 5 of the Constitution
FFC submitted its submission on Constitution 17th Amendment Bill to Department of Justice in March 2010
Hoped this will achieve regional efficiencies and economies of scale with regard to a specific municipal function
Restructuring of the electricity distribution industry (EDI) by creating REDs used as an example in the memorandum to the bill.
However, challenges facing service delivery at local government level are complex, dynamic and require a proper diagnosis
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Research findings
Adopt holistic and integrated reform approach
Base reform decisions on solid research findings
A proper diagnostic of the challenges should be carried out on a case-by-case basis
A differentiated approach to reform recognising cases of good performance is preferable
Base participation in reform processes on appropriate incentives and knowledge of benefits of the change
Ensure compatibility of individual operational systems of municipalities and harmonise employment levels
Social objectives of universal service access should not be lost in the process of restructuring
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Recommendations I - General
In the absence of an assessment of the specific performance challenges that municipalities face in implementing the functions listed in part B of schedules 4 and 5, a blanket regionalisation approach, as proposed in the 17th amendment to the Constitution, is not supported. Current legislative provisions allow for alternative and creative service delivery arrangements that do not call for a dilution of executive authority at the local level.
Not all electricity distributors suffer from the challenges that the restructuring intends to overcome. As a result, the EDI restructuring process should consider a differentiated approach that allows for differences in performance.
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Recommendations II – Assuming EDI restructuring proceeds Government should revisit the Blue Print
assumptions initially made to restructure the EDI. The EDI component was informed by restructuring the electricity industry as a whole, including the electricity supply industry. Government needs to clarify the policy issue of whether it is necessary to change ownership and structure in order to ensure efficiency, economies of scale, robust regulations and to deal with management challenges in the sector
Government should conduct an up-to-date re-evaluation and analysis of the benefits of restructuring the EDI. In addition to the political, economic and social changes that have happened in the last eight years which raise questions about the current assumptions underpinning the restructuring process, delaying the implementation of the REDs has generated new costs that require a total re-evaluation against the benefits that were perceived at the conception of the idea.
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Recommendations III – Assuming EDI restructuring proceeds Government should finalise the EDI
Restructuring Bill and the practical guidelines (the Asset Transfer Guide) related to the shifting of municipal/Eskom distribution assets first, before moving towards more advanced stages of restructuring.
Government should ensure the compatibility of operating systems that will underpin the activities of the REDs before establishing them as this can negatively affect service delivery and reduce any savings from the restructuring
It is important that the social objective of making access to electricity universal is not lost in the process of restructuring the EDI. The government must make it clear which sphere of government will be responsible for planning, budgeting for and implementing the electrification programme.
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4. Intergovernmental Fiscal Issues in Urban Public
Transport
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Background Subsidy regime has developed around assisting
workers to get to and from work in this high cost context
Distribution of economic activities results in a tidal flow of commuters in and out of cities in morning and evening (twin peaks)
Data – National Transport Household Survey last conducted in 2003
Public transport serves largely urban poor Considerable amounts invested in infrastructure
for private motorists hence difficult to undo Coordination between different transport modes
needs to be improved There has been under-investment in the rail sector
and the National Rail Plan was developed to guide re-investing purposes.
Investment on rail infrastructure currently does not follow corridors prioritised on the National Rail Plan.
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Background Serious public transport challenges especially in
major urban centres Significant increase in public transport spending
in recent years with the inter-governmental fiscal system being instrumental in much of this expenditure
Key items include the ongoing bus subsidies, the Gautrain, and the new bus rapid transit projects
Apparent confusion about accountability in the three spheres of government has been amongst the biggest obstacles to investment in the improvement of public transport.
Urban form of South African cities results in long trip distances hence higher costs
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Institutional arrangements/legislative issues
The nDoT plays a pivotal role in the roads and transport sector by providing strategic policy direction and regulatory oversight which are implemented through provincial departments, local government and public entities
SANRAL on behalf of the nDoT is responsible for the planning, design, construction, operation, management, control, maintenance and rehabilitation of national roads
Provinces are responsible for the management of the provincial road network
Bus subsidies have traditionally been transferred from the nDoT to provincial departments, based on a variety of agreements.
Municipalities are responsible for the construction and maintenance of municipal roads and streets within their areas of jurisdictions
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Institutional arrangements/legislative issues
National Land Transport Transition Act is key to the reviewing of the way in which bus subsidies are awarded Key is shift from lifelong permits to tendered bus contracts
National Land Transport Act is also one of the key pieces of legislation and provides for metropolitan governments to become responsible for managing the bus contracts previously managed by the provinces the potential financial risk to them could be overwhelming.
Especially since the general tax revenues, which cities control, are property taxes and a share of the fuel levy which do not offer the scope or depth to manage this level of risk.
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Overarching financial strategic issues
Over-riding financial question is how public resources should be spent to optimise mobility and access in cities.
The key question becomes how revenue raising powers and subsidy flows between the different spheres of government should be configured to lead to optimal solutions.
Existing subsidies for public transport are quite substantial.
However, these are mostly available for weekly or monthly tickets. Those not travelling on most working days can therefore not use the subsidised fares.
Subsidies are being used to maintain an inefficient status quo, rather than to improve efficiencies.
Incentives are required to encourage relocation, taking account that this is likely to be highly contentious and could have negative distributional effects.
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Emerging strategic issues for local government
When Johannesburg and Cape Town embarked on their bus rapid transit projects, it was thought that the investment in capital would improve operational efficiency so that operating subsidies would not be required.
However, actual experience indicates that annual operating subsidies will be required.
There is a danger that, if public transport responsibilities are shifted to metropolitan and city governments without addressing the concomitant financial implications, city finances could be severely affected.
This matter needs to be addressed urgently if the new city-level public transport initiatives are to be extended as envisaged.
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Emerging strategic issues for local government
The National Land Transport Act provides for Municipal Land Transport Funds.
Considering how these funds are to operate, what their responsibilities are, and how they are to be funded may be a useful approach to addressing some of the issues as they relate to municipal governments.
There is a lack of aligned and coordinated infrastructure investment project plans between PRASA and cities.
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Recommendations I
Passenger Rail Agency of South Africa and cities should ensure that investment projects on rail and roads infrastructure are aligned and coordinated. This will ensure that limited resources are used optimally to a targeted area or group of passengers instead of each mode investing independently on its own infrastructure to service the same target group of passengers
Government should decide as a matter of urgency on the funding streams that will contribute to the Municipal Land Transport Fund. Delays could negatively affect the financial position of affected municipalities.
PRASA should ensure that funding made available for investment on the commuter rail sector prioritize corridors already identified as A and B in the National Rail Plan.
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Recommendations II
A comprehensive review should be conducted on costs associated with current urban form in a selection of major cities in order to improve the efficiency of land use patterns.
The Department of Transport, National Treasury and other key stakeholders should review the current mechanisms and basis for distributing transport subsidies in order to promote the efficiency and equity of urban transport and land use systems.
The potential financial implications resulting from the promulgation of the National Land Transport Act on municipalities should be examined by the Department of Transport and the National Treasury and dedicated funding streams for public transport identified.
The Department of Transport should regularly update the South African National Household Travel Survey.
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