1

Review of the SACU revenue-sharing formula

Standing Committee of Finance14 September 2010

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Content

Context

An economic perspective of Union

SACU revenue-sharing regimes (1910 to 2002)

How the 2002 formula works and its outcome

Exposure to a volatile form of revenue

Objective of a new formula and proposed changes

Some tentative ideas

Proposed way forward

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Context

In December 2006, SA notified Council that it intends to review the RSF

Following national consultations and in accordance with Article 43, SA formally proposed the review of the RSF, because:

The revenue sharing arrangement is unsustainable – great volatility

Revenue considerations should not be the single driver of trade policy decisions

Great deal of polarisation caused by trade and revenue reconciliation

SACU payments to the BLNS is seen increasingly by the SA public and parliament as a fiscal burden

RSF limits the possibility of expansion – building block of a SADC customs union

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An economic perspective of the Union

505.3

25.4 13.9 5.9 3.3

SA Botswana

Namibia

Swaziland

Lesotho

Nominal GDP @ PPP (US$ bn)

EIU data for 2009

1,840.6

27.6 64.0 16.4 12.9

Real domestic demand (R billions)

An economic perspective of the Union, cont…

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Real imports of goods and services

EIU data for 2009

Real export of goods and services

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SACU revenue-sharing regimes – 1910; 1969 and 2002

1910

1969

2002

Size matters

SA keeps residual

Shares based on forecast and reconciled against actual collections and intra-trade data

SA collected and distributed according to size of economies

• Share calculated for BL(N)S based on trade data of past 3-years

• SA received residual• Adjustments made in year t+2

• Revenue earned from customs and excise

• Customs component is redistributive• Introduced a development

component

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Workings of the 2002 revenue sharing formula

Customs component

Excise component

Development component

• Value of GDP• % of total SACU GDP

• 15% of excise component

• CIF value • Imports from member states

into area• % of CIF value of intra-SACU

imports

Ci= Mi * Ci=n

∑ Mii=1

Ei= GDPi * Ei=n

∑ GDPii=1

Di= 20 * (1-(F/H-1)/10) *I

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Result of 2002 revenue sharing formula

South AfricaBLNS

2008/09

B L N S SA

R ’m 149.6 100.3 361.0 135.1 45 422.6

% 0.3 0.2 0.8 0.3 98.4

Contribution into CRP

2008/09

B L N S SA

R ’m 9 001.4 4 097.7 6 621.8 4 989.0 21 456.1

% 19.5 8.9 14.3 10.8 46.5

Received from CRP

South AfricaBLNS

SARS Annual Report

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Customs collected by SA o.b.o BLNS

A destination principle was applied to approximately R1.75 billion worth of goods entering SA and destined for the BLNS in 2006/07 – goods that enter SA, bonded on route to the BLNS, and the duty collected when it enters the territory of final destination

Destination Botswana Lesotho Namibia Swaziland

Total value 776.5 188.1 483.0 299.8

Value of bonded goods in 2006/07 – R millions

SA collected duties of R5.2 million on behalf of the BLNS in 2006/07

Botswana Lesotho Namibia Swaziland

Customs 706.9 11.2 193.9 261.2

Duty 1.4 0.051 0.365 3.4

Customs duties collected in 2006/07 obo the BLNS – R millions

Source: CAPE System operated by SARS Customs

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High dependency on customs revenue

20.1

5 6

12

5

1215

70

55

34

29

4 3

18

24

3333

Customs as a percentage of total revenue

•2006

•2008

•2010

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…and exposed to volatility

Global recession has forced SACU revenue down to pre-2005/06 levels

Actual customs revenue declined from a forecast of R31.3 bn to R22.8 bn in 2008/09

The BLNS will all experience a decline in excess of 50% btw 2009/10 and 2010/11

Revenue will return to 2005/06 levels in 2011/12

% B L N S

Decline btw ’09/10 and ’10/11 32.2 30.6 31.8 30.7

Incl. recovery of deficit 55.7 53.7 55.6 58.2

Trends in SACU Revenue

• Customs revenues a function of the structure of the tariff book

• Higher tariffs on final consumer products-sensitive to demand-side pressures

• Low or no tariffs on capacity building capital goods and most inputs

• Customs revenue highly dependent on consumer goods

• About half of all customs revenue collected from vehicles (29%), Electrical goods, footwear, beverages and clothing.

• Reasons for sharp decline in revenue…

• Evident in the large share of capital goods in VAT collection on imports

• Over indebted consumers (low levels of private credit extension, NCA etc.)

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SACU revenue as a percentage of Budget Revenue

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A new formula should …

Achieve a sustainable revenue-sharing arrangement

Have a strong development thrust that supports regional infrastructure

Lead to greater transparency and parliamentary oversight

Support the expansion of SACU

Contribute to:

a reduction in non-tariff barriers

the harmonisation of customs systems and procedures

fiscal and tax administration reforms

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…will require changes

Customs Component Based on volume of

internal trade Largely redistributive

Receive what economy produces Determined from own collections, re-

exports and duty drawbacks Eliminate intra-SACU trade data from

formula

Excise Component Linked to size of GDP

Eliminate excise Should be a sovereign tax that all

members set individually

Development Size of GDP and

percentage of excise duties

Each member contributes based on GDP and p.c. GDP

Redistributive Subject to parliamentary appropriation Partly conditional?

Current RSF under 2002 Proposed changes

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Some tentative ideas

Customs Each member state receives

what they are entitled to: customs collected in

individual territories customs collected on behalf

of another member state re-exports

Revenue distributed as forecasts in year t and adjustments in year t+2, in accordance with above customs collections

Structural/Development Fund Contribution as a

percentage of GDP Inverse redistribution of

contribution by each member state

Inverse factors can include GDP and p.c. GDP and others

Can be determined at level of revenue-shares in 2008/09

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Proposed way forward

Presentation sets the tone for discussion and further study

Negotiations that should not take longer than six months

Parallel consultations in each Member State Formulation of changes to 2002 Agreement Parliamentary ratification of amended Agreement Council approval of new revenue-sharing

arrangement when determining revenue-shares in December 2010

Implement new revenue-sharing arrangement in 2011/12