The focus of the grant system was to get municipalities to spend the funds transferred within a year. Review of Local Government Infrastructure Grants: Emerging Options for Reform Page 8 Improve the effectiveness of the reporting system to promote accountability. After each section, we present a list of "options for reform" as a way of summarizing some of the possible changes that could be made to the grant system.
Current position relating to allocations by sector
The allocation mechanism should be aimed at providing grants that best meet the infrastructural needs of municipalities. The allocation mechanism may also differ for direct and indirect grants based on the different objectives of each type of grant. Review of Local Government Grants for Infrastructure: Emerging Opportunities for Reform Page 13 needs (for example responding to large water backlogs in the Eastern Cape).
But regardless of how municipalities spend MIG, the formula breakdown has not been updated for 10 years and updates to the MIIF1 model suggest that the current sectoral breakdown (shown in the top right pie chart) may no longer be appropriate and could be updated. better reflect the reality of municipal infrastructure needs in the next decade.
Direct grants: Formula vs. project based allocations
Indirect grants: national responsibility for project selection
If indirect grants are to be used, planning requirements must be established that must be met for national transferring departments.
Arguments for incentives
Many officials raised concerns about incentive-based grants adversely affecting citizens living in underperforming municipalities, while those responsible for poor performance (ie, municipal decision makers) may not experience any punishment4. However, continued poor performance by some municipalities means that this is the status-quo at present; families lose due to poor use of grants by institutions and responsible officials. The integrated urban development grant is currently distributed based on various performance indicators that are designed to incentivize certain good practices.
As the grant is in its first full year, this review is not yet able to analyze performance to assess the impact of incentives on performance, but uptake among metropolitan municipalities has been positive so far. Designing and monitoring nuanced indicators would be difficult for grants that would be awarded to all municipalities, but it is clear from domestic, international and theoretical analyzes that incentives should not be limited to indicators that have the potential to "play" - such as . a spend percentage indicator that is often used to assess the success of a grant.
Avoiding perverse incentives
Review of local authority infrastructure grants: New opportunities for reform Page 16 Discussions about incentives in breakaway groups at local and national sector workshops were more cautious, however. Review of local authorities' infrastructure subsidies: New opportunities for reform Page 17 renewal of existing infrastructure; many grants, including MIG, are considered by the implementing officials5 to be exclusively for the creation of new infrastructure.
Incentivising co-funding
Incentivising revenue raising
Incentivising capacity and establishment of good systems within municipalities In many cases the grant system invests in municipalities which do not have the capacity to manage the
Incentivising resource conservation
Introduce matching funding (especially for economically related infrastructure) to avoid grant dependency - Increased accountability and analysis of data (eg unit cost) to avoid dependency on % spend as the main performance indicator, which can lead to inflated costs at the expense of service delivery. Grants not limited to 'new' infrastructure, to avoid current perverse incentive to continually build new infrastructure rather than sustainably manage existing infrastructure. Aim to integrate planning between different spheres and branches of government to avoid grant mismatches.
Application and planning processes such as those introduced for health and education grants distributed to provinces. Introduce incentive elements into the awarding mechanisms of current grants so that good performance – as determined by a range of financial and non-financial indicators – in one year is rewarded with higher awards in the next year. The strongest alignment between municipalities and national sector departments was on the issue of asset management.
All stakeholders expressed concern that the current subsidy system does not strike an appropriate balance between the creation of new infrastructure, which targets households that currently lack services, and the sustainable management of existing assets that can ensure that connected households do not lose access to services. To assist with the analysis and recommendations around sustainable asset management, infrastructure renewal (/renovation/replacement) and maintenance are discussed separately:.
Maintenance
Emphasize the monitoring of maintenance funds within municipal budgets – along with the use of fees and shared equal funds used to finance maintenance – to provide more information on need. Provide more guidance and funding from national government to improve systems surrounding maintenance management – such as creating reliable asset registers.
Renewal
Review of local authorities' infrastructure grants: new opportunities for reforms Page 21 infrastructure, but as the data analysis shows, municipalities struggle to prioritize renewal funding in their capital budgets - illustrated briefly in the table below. Grant funds should therefore only be used for the renewal of infrastructure targeted at the poor, with own revenue contributions, if it is a mixed use. The need for renewal or rehabilitation of infrastructure is highly dependent on the quality and extent of maintenance that the asset has received.
To avoid incentivizing poor maintenance, grants should only be for infrastructure that has fulfilled its normal asset life and is not depleted due to poor maintenance with the knowledge of national funding for renewal. Review of local government infrastructure grants: emerging options for reform Page 22 funding of renewal infrastructure and as previously highlighted, many of the problems surrounding poor asset management at municipal level stem from the absence of credible asset registers detailing the condition and extent of assets. . Update allocation formulas to not only allocate for the need of existing infrastructure, but also allocate based on the need for renewal of existing 'social infrastructure' (which serves the poor).
The financing is conditional on the municipality having a credible asset register, which they prove they use to prioritize expenditure. Renewal funding only for infrastructure that serves the poor and has been properly maintained by the municipality - to avoid perverse incentives.
Differentiation
Metropolitan municipalities
Revision of local government infrastructure grants: emerging options for system reform and lower-than-expected passenger numbers; and the need for more differentiation in the public transport systems in different cities. As part of this, a change to formula-based allocations should be considered as a way to give cities more certainty about the size of their future allocations and encourage them to plan within these plans and make more contributions from their own revenues. The INEP, which finances electricity connections, is the only basic service (water, sanitation, electricity, waste and roads) that is not currently part of the USDG.
Although licensing in the electricity sector means that the indirect portion of the INEP grant implemented by Eskom is still needed, there is no reason why the direct portion cannot be part of a larger grant package. Some of the urban reforms are still ongoing and the devolution of the housing function from provinces to accredited metropolitan municipalities is yet to be finalised, although a capacity building grant was introduced in 2014/15 to assist the transfer of this function. The integration of the integrated national electrification program (INEP) grant into a consolidated urban grant package.
Make PTIG a formula-based general transport subsidy that can also be integrated into a consolidated city subsidy package. Accreditation of the housing function would mean that parts of the housing development subsidy would have to be transferred directly to the metropolitan municipalities.
Emerging Cities
For example, Buffalo City had a USDG allocation of R673 million in 2014/15, but if it had been part of the MIG formula (which allocates according to demographics, poverty and disadvantage) it would have received a 65% lower allocation of R237 million have and less than cities like Mbombela and. Data analysis shows that MIG spending varies depending on the needs of the local area and encourages the municipal discretion it is set to provide – for example the Free State's MIG spending focuses on sanitation while the Eastern Cape focuses on water projects focus (see diagram in the Grant Mechanism section). Slow spending of the MIG has in recent years raised concerns from stakeholders at national and provincial level and the official and political level.
Increased oversight of MIG – as evidenced by the freeze and reallocation exercise in the 2013/14 financial year – could have curbed wasteful spending and improved the output of the grant, even as underspending increased. Sector-specific policy issues to be considered when designing the architecture of the subsidy system Electricity. The licensing arrangements, where Eskom gets a license for electricity distribution in many areas of the country (especially in more rural areas), while municipalities have a license in other areas, means that the electricity infrastructure must be financed through both direct (municipal) and indirect (for Eskom) areas) subsidies in the foreseeable future.
The accounting practice related to the replacement of the road wear stream, whether bituminous or gravel, needs to be clarified. Acknowledging the different capacities of municipalities and the frustration that national sector departments can sometimes feel when the provision of municipal services is slow or does not respect some of the principles listed above, indirect grants have had an increasing role in recent years. Two consolidated grants split based on whether the funding is for basic services (water, sewerage, electricity, waste and roads) or more general community services (sport, street lighting, LED etc) - Excluding sport from the package of basic services should enable better and fairer investment choices.
Would see INEP directly and the water grants incorporated into one fund, along with most of MIG - Will need renewed interaction from the sector departments with the administering department.
