Chapter four: Economic governance and management sectors show that most domestic investment is in the private sector, while key infrastructure investment is mainly donor-funded. Box 4.2: The new SACU revenue-sharing formula and its implications for Lesotho The governments of South Africa and Botswana, Lesotho, Namibia and Swaziland (the BLNS countries) signed a new SACU agreement in October 2002. The new agreement seeks to entrench a democratic approach to trade policy, while facilitating an equitable sharing of revenue from customs and excise and reducing revenue instability during a period of declining tariffs. The new SACU revenue-sharing formula (2002), which came into effect in July 2004, deals with customs and excise revenues separately and explicitly. It does so through three distinct components: a customs component; an excise component; and a development component, which aims to provide a redistribution mechanism for lower-income member countries. First, total customs revenue collected will be distributed according to each country’s share of intraSACU imports (i.e., countries that import the most from within the Union will receive the largest share of the customs pool). Secondly, 85 per cent of total excise duties collected in all member countries will be distributed on the basis of each country’s share of total SACU GDP, a proxy for the value of excisable goods consumed. Thirdly, the new formula will distribute the remaining 15 per cent of total excise duties almost equally to each member country, but with a marginal adjustment in favour of the countries with a lower per capita GDP. Under the new revenue-sharing formula, the actual proportion received by each member country will therefore be based on the national GDP and per capita GDP of all five member countries, the overall size of the revenue pool (which, in turn, depends on tariff levels, duties and overall intra-SACU imports), as well as approved duty rebates. Under the old formula (1969 revenue-sharing formula, with the stabilisation factor), revenue was shared according to each country’s share of SACU imports and excisable production (including excise duties), with guaranteed minimum receipts equal to 17 per cent of imports going to the BLNS countries as a group. To reduce the risk of preliminary and inaccurate numbers, the data used for distribution will be postponed by two to three years (i.e., the proportion to be allocated in 2005/2006 will probably be based on macroeconomic data for 2002/2003 or 2003/2004). It is highly likely that the BLNS countries will lose financially under the new revenue-sharing formula, with the completion of new tariff-reducing trading agreements, as they are expected to shrink the size of the customs pool to which each country’s revenue allocation will be linked. To support financially weaker countries, the 2002 revenue-sharing formula could be amended in the event of new tariffreducing trade agreements. Source: Public Expenditure Management and Financial Accountability Review (PEMFAR) in the Lesotho World Bank Assessment Report (2006). 442. 122 The observed overdependence on aid reduces budget predictability and the incentives for mobilising domestic resources. This, in turn, weakens budget control and performance assessment and constrains long-term development planning.