_<mark>BS = [water subsidy 1 * poor with water + water subsidy 2 * poor without water] + [sanitation subsidy 1 * poor with sanitation + sanitation subsidy 2 * poor without sanitation] + [refuse subsidy</mark>_ _<mark>1 * poor with refuse + refuse subsidy 2 * poor without refuse] +[electricity subsidy 1 * poor with electricity + electricity subsidy 2 * poor without electricity] + [environmental healthcare subsidy * total number of households].</mark>_

## _<mark>Institutional Support Component</mark>_

<mark>The institutional support component is particularly important for poor municipalities, which are often unable to raise sufficient revenue to fund the basic costs of administration and governance. Such funding gaps make it impossible for poor municipalities to provide basic services to all residents, clients, and businesses. This component supplements the funding of a municipality for administrative and governance costs. It does not fully fund all administration and governance costs of a municipality, which remain the primary responsibility of each municipality.</mark> <mark>The institutional component includes two elements: administrative capacity and local electoral accountability. The grant is determined as follows:</mark> _<mark>I</mark>_ <mark>=</mark> _<mark>base allocation +</mark>_ <mark>[</mark> _<mark>admin support * population</mark>_ <mark>]</mark> _<mark>+</mark>_ <mark>[</mark> _<mark>council support * number of seats</mark>_ <mark>]</mark> <mark>where the values used in the formula are</mark> _<mark>I</mark>_ <mark>= R350,000 + [R1 * population] + [R36,000 * councillors]</mark> <mark>The “base allocation” is the amount that goes to every municipal structure (except for a district management area). The second term of this formula recognizes that costs rise with population. The third term is a contribution to the cost of maintaining councillors for the legislative and oversight role. The number of “seats” that will be recognized for purposes of the formula is determined by the minister for provincial and local government.</mark>

## _<mark>The Development Component</mark>_

<mark>The development component was set at zero when the current formula was introduced on April 1, 2005, pending an investigation of how best to capture the factor in the formula.</mark>

## _<mark>The Revenue-Raising Capacity Correction</mark>_

<mark>The revenue-raising capacity correction raises additional resources to fund the cost of basic services and administrative infrastructure. The basic approach is to use the relationship between demonstrated revenue-raising capacity by municipalities that report information and objective municipal information from Statistics South Africa to proxy revenue-raising capacity for all municipalities. The revenue that should be available to a municipality is then “corrected” by imposing a “tax” rate of 5 percent. In the case of the Regional Service Councils levy replacement grant, the correction is based on the actual grant to each municipality.</mark>

## _<u>Source</u>_ <u>: South Africa (2006).</u>

# **4.  Institutional Arrangements for Fiscal Relations**

Who should be responsible for designing the system of federal-state-local fiscal relations? There are various alternatives (see Shah, 2005 a for an evaluation framework and comparative reflections on alternate institutional arrangements). The first and most commonly used practice is for the federal/central government to decide on it alone The 43