3.13 Fiscal mechanisms for waste management

3.13(1)
In planning for the implementation of the Waste Management Act, DEA has undertaken a costing of the overall impact on government budgets as a result of the different measures contained in the Act. Current government spending on waste management is estimated to amount to approximately R 2 070 million per annum (2007 estimates)¹⁷. Importantly, the Act is expected to result in long-term savings due, amongst other things, to reduced resources spent on reactive environmental clean-up operations and reduced need for landfill airspace. However there will be short to medium term increases required in government budgets in the range of R 205 million in the first year after introduction of the Act, rising to approximately R390 million in the second year. The net savings in government budgets are only expected from year 9 or 10 onwards. The net present value (NPV) of these impacts over a 10-year period amounts to R 1 390 million at a discount rate of 3.5%. Implementation of the Waste Management Act will therefore add approximately 5% to the total discounted waste management cost over the next 10 years. This means that the additional costs to government budgets as a consequence of the Waste Act will be limited.

3.13(2)
Funding for waste management functions in the national and provincial government is allocated according to the Division of Revenue Act which prescribes how revenue will be divided between the three spheres of government and between the nine provinces.

3.13(3)
The budget for waste management is allocated to the national and provincial environmental departments. All budgets are formulated within the context of the Medium Term Expenditure Framework (MTEF), which details three-year rolling expenditure and revenue plans for national and provincial departments. Budgets are developed within the political priorities which are clearly spelt out in the annual State of the Nation address by the President and Medium Term Strategic Framework.

3.13(4)
Allocations to the provinces are based on the equitable share from the division of revenue, and their share of conditional grants.

3.13(5)
Local government is entitled to an equitable share of revenue raised nationally to enable it to provide basic services and perform the functions allocated to it. The equitable share is an unconditional transfer, and the distribution of the equitable share between individual municipalities is formula based, taking into account population, levels of poverty and service delivery, historical backlogs and capacity. The equitable share is part of the regulatory and institutional framework which enables local government to operate sustainably and contributes basic fiscal resources for each municipality to deliver a package of basic services to low income households. Included in this package is free basic refuse removal to the indigent.

3.13(6)
The Municipal Infrastructure Grant (MIG) is a capital subsidy that supplements the funding of infrastructure programmes on municipal budgets, in order to address backlogs in municipal infrastructure required for the provision of basic services including waste services.

3.13(7)
In December 2008, Cabinet approved the introduction of the Municipal Infrastructure Grant for Cities through splitting the Municipal Infrastructure Grant (MIG) into two windows. This decision allows a differentiated funding approach to be introduced to account for significant differences in context, challenges and capabilities between larger urban municipalities and smaller, more rural municipalities. Smaller, more rural municipalities will continue to operate under the existing MIG framework, with some innovations introduced over time to address capacity and resource deficiencies in order to improve expenditure outcomes. The MIG (Cities) focuses on enabling cities to more effectively manage, support and account for built environment outcomes.

3.13(8)
The equitable share and MIG provide an operating and capital subsidy respectively for municipal services, including waste. Unlike the allocation to provinces, the municipal sector raises over 90% of its income from own revenue sources. The provision of waste services is funded primarily via local tariffs for waste services set by each municipality, supplemented by allocations from property rates. Given the public good nature of waste services provision, there is merit to a portion of waste management costs being subsidised from the property rates account.

3.13(9)
Unlike the national fiscus, most municipalities are not favourably positioned to absorb the impact of the local fallout from the global economic crisis. Consequently, national government has sought to insulate the local government sphere from the full impact of the slowdown in national revenue collections.  To supplement municipal own revenue an additional R12.2 billion is allocated to local government over the medium term. This means national transfers to local government will grow by 8.4 per cent from 50.1 billion in 2009/10 to 73.2 billion in 2012/13, which is an important tool for supporting local operations and services.¹⁸  Despite the above average transfers to municipalities, the efficacy and sustainability of delivery of solid waste services is constrained by severe fiscal challenges. Capital and operating expenditures are much lower than the required levels, and operating deficits continue to expand. The structure of capital financing for waste services is not optimal, with reliance on grant financing, subsidy leakage to non-poor consumers, and user charge revenues that are too low. The municipal solid waste sector is in general facing a serious fiscal situation, with operating deficits ballooning to the point at which the sustainability of service delivery will be threatened.

3.13(10)
In this context, the need to expand delivery solid waste services sector requires greater efficiency of fiscal mechanisms and a clear strategy to improve operating efficiencies, secure financial sustainability of waste services delivery, and boost municipal revenues.

3.13(11)
As a first step, municipalities will undertake full cost accounting for waste services, in order to understand the long term capital and operating costs of the service, and to be able to properly evaluate different options for levels of service and extension of services to unserviced areas. A municipal circular will be drawn up and circulated by National Treasury in order to provide guidelines for ring-fencing service budgets and the associated accounting practices required to facilitate a greater degree of transparency in subsidy levels relative to the cost of service delivery. Full cost accounting for waste services will be implemented in all municipalities by 2011.

3.13(12)
Secondly municipalities will develop and implement cost reflective tariffs in order to correctly price waste service provision. Municipalities will structure the tariffs for utility services such that they generate the resources required to fund the maintenance, renewal and expansion of the infrastructure required to provide the services. Tariff increases will need to be appropriately phased in such that their impact on consumers and businesses can be managed. National Treasury requires that municipalities must justify in their budget documentation all increases in excess of the 6 per cent upper boundary of the South African Reserve Bank’s inflation target. Excessive increases in property rates and other tariffs are likely to be counterproductive, resulting in higher levels of non-payment and increased bad debts. When considering increasing user charges, indigent populations and local economic conditions need to be taken into account. Nevertheless, in the long term, above-inflation increases in user charge rates will be unavoidable.

3.13(13)
To avoid the unintended consequences of this approach (in particular an increase in illegal dumping as a result of increased disposal tariffs) the enforcement capacity in municipalities will need to be increased in parallel.  Municipalities must ensure that by-laws are updated to support the enforcement of regulatory measures. These measures will be included in municipal IWMPs.

3.13(14)
Once financial sustainability and operational efficiency have been achieved in waste service provision, further amendments to tariff structuring to promote waste minimisation can be considered. The impact of the introduction of volumetric tariffs in the City of Tshwane will be evaluated by DEA, and a guideline developed on municipal waste service tariffs.

3.13(15)
Targeted subsidies to ensure the provision of a basic level of service to indigent households are required. In this regard DEA will finalise a policy on Free Basic Refuse Removal (FBRR) services in 2010. Municipalities must manage subsidies to reduce subsidy leakage to non-poor households. Indigent households registered for Free Basic Refuse Removal (FBRR) services must be re-evaluated after a given period of time as specified by the concerned municipality. Abuse should be managed through the disciplinary measures envisaged by the FBRR policy.

3.13(16)
DEA will participate in municipal budget reviews undertaken by National Treasury, and in performance monitoring of metropolitan councils, in order to ensure that waste sector objectives are met in relation to municipal financial management.

3.13(17)
To support the requirement for increased capital investment in the waste sector it is proposed that a solid waste project development fund will be established in consultation with National Treasury. The objective of the fund will be to:

• Ensure that capital expenditures in the sector increase.
• Create a robust pipeline of municipal projects.
• Develop an appropriate capital financing mix. 

3.13(18)
The fund will operate through two funding windows:

• Universal service window: this will be used to assist municipalities to make greater use of MIG for financing solid waste infrastructure to support labour intensive projects that expand services to poor households. The efficacy of the window can be measured by the proportion of total MIG funding allocated to solid waste infrastructure.
• Private financing: this window will support municipalities to develop projects that may be financed through development contributions, carbon credits, private investment or borrowing.

3.13(19)
DEA will request that a proportion of MIG funding is earmarked for bulk solid waste infrastructure during the annual MTEC. This earmarked portion will support infrastructure in instances where MIG funding cannot be utilised, for example trucks and other infrastructure that are used for ongoing service delivery in small to medium sized municipalities.

3.13(20)
DEA together with National Treasury will examine the creation of a remediation fund. The chapter on remediation describes the provisions and procedures related to the remediation of contaminated lands. A for specific fiscal allocation for remediation is required to enable the state to remedy the environmental damage where the person responsible for the damage cannot be identified. It is anticipated that fund this will be earmarked for administration of the costs related to state initiated site assessment and remediation, where the liability for land contamination cannot be apportioned.

3.13(21)
Further investigation is required into the merits of a dedicated fund for supporting the extension of municipal waste services to unserviced communities. DEA is currently conducting a pilot project in Mafikeng municipality, utilising EPWP funds, to deliver waste services through a community based, labour intensive and SMME driven model. At the same time a programme of technical assistance is supporting the municipality to take over and fund the service after an initial three year period. DEA is providing grant funds to cover the costs of the service and capacity building, and the level of funding support is progressively stepped down to the point that the municipality takes over the funding obligation. Based on the lessons learnt from this model, DEA together with National Treasury and COGTA will consider the most appropriate fiscal mechanism for rolling this model out on a broader scale.

3.13(22)
The above mechanisms form part of an overarching fiscal framework for implementation of the NWMS and the achievement of the waste hierarchy. DEA will work in close conjunction with National Treasury and the Department of Cooperative Governance and Traditional Affairs to monitor the implementation of the framework, and ensure that the necessary policy and regulatory tools are implemented.

Footnotes:

¹⁷Clements J,on behalf of Department of Environmental Affairs and Tourism, “Assessment of the likely impact on government budgets of the proposed National Environmental Management Waste Bill”, May 2007.

¹⁸National Treasury 2010 Budget Review, Chapter 9