Why you want your municipality to be financially independent

08 April 2019

According to Stats SA's latest Quarterly Financial Statistics of Municipalities (QFSM) covering October to December 2018 - and this applies across the country - the biggest percentage of the total R102-9-billion income earned by municipalities was 42 percent, derived from the combined service charges of electricity, water, sewage/sanitation and refuse removal.

Working through the quarter's pie chart the percentages tell an interesting tale. Sales of electricity account for R25-7 billion (25%), property rates R18-billion (17.5%), sales of water R10.6-billion (10.3%), sewage and sanitation R4.1-billion (4%), refuse removal R2.9-billion (2.8%), and "other" R12.4-billion (12.1%).

Grants and subsidies

The "other" is that murky area, largely concerned with earnings derived from two different streams: own income; and grants/subsidies from different spheres of government. Own income is usually sourced in the form of fines, licences and permits, gains on disposal of property, plant and equipment, charges for the use of facilities such as sports grounds and recreation centres, and public contributions and donations.

Fiscal transfers (or grants), which incidentally do not have to be repaid to government, are usually conditional in that they are often directed at a specific purpose, maintaining infrastructure for example. Those that are unconditional are used at the discretion of the municipality but excludes improvements of basic services.

The municipal fiscal framework requires municipalities to supplement the grants they receive by generating their own revenue, and in that regard the metropolitan areas generally tend to be self-sustainable. But it is the rural areas that are severely impacted given that these have a lower and poorer constituency base where non-payment of services by residents is common, particularly in a depressed economic climate.

The report highlights the Engcobo (Eastern Cape) and Kagisano-Molopo (North West) municipalities as exceptionally dependent on income from grants and subsidies, at 95% and 86% respectively. Throw into this mix Eskom's woes, and a loss of income from the amount of power not delivered due to national load shedding, it won't just be the rural municipalities that will be scrambling to maintain and/or recover percentages.

Potential revenue losses

From a metropolitan perspective, municipalities are also concerned about losing much of their source of revenue from the supply of power as more residents take up renewable energy options, now seeming much more attractive and economically viable given the forthcoming rolling tariff hikes by Eskom, the first of which was implemented at the beginning of April.

It's a paradox for municipalities that complicates the self-funding dilemma; on one side of the coin they need a healthy income to develop, build and maintain infrastructure, which in turn encourages new residents, but on the flip side they are negatively impacted by traditional sources of income being unsustainable (e.g.: fiscal income) and/or not able to deliver services, such as power, which in turn impacts on the viability of local businesses. And so starts a Catch 22.

Global agenda's for dealing with the dilemma of how to self-fund highlight public-private partnerships as the most effective solution. According to the World Bank this is the way to build inclusive, resilient and sustainable cities and communities "and help create competitive economies".

See more: Maddening municipal mishaps

Sources for self-funding

Another route for funding that is becoming more popular is Municipal Bonds, loans investors make to local governments usually to fund infrastructure developments. In South Africa only four municipalities have sold these bonds, those of Johannesburg, Cape Town, Tshwane and Ekurhuleni, according to Stats SA.

Hesitancy by smaller municipalities to enter the MuniBond market is understandable because capital market borrowings requires them to have a sound revenue base. It also requires highly-detailed and structured due diligence management processes in order to comply with regulatory frameworks.

Similar applies to Green Bonds, earmarked specifically for "green or environmentally-positive" investments, with these subject to higher administrative costs with management far more intensive and demanding. Rural and poor municipalities are constrained here because they have much larger imperatives than directing their already meagre, if any, earnings on funding climate-mitigating projects, although many are sited in area's that could host windfarms.

There has been, in recent months, talks of "pooled finance", whereby municipalities can jointly access capital markets and avail of lower borrowing costs at reduced market risk. If local governments are to explore this option, they will need aligned credit profiles and financial processes, and must be clear on how they will together adhere and subscribe to the Municipal Financial Management Act, which guides in how finances must be managed.

Property tax reviews

What residents should be alerted to is the USA trend that when local governments begin to experience revenue decline, they tend to look at increasing property taxes because of the general one-quarter total revenue base it provides. In many USA states, property taxes are reviewed at least every three years, and are closer aligned to the higher assessments by real estate agents. In South Africa, reviews are every five years in accordance with the Municipal Property Rates Act.

Of a number of smart growth solutions applied in the US, a popular choice is to maximize property tax revenue without the need to raise these taxes. This type of approach includes revitalising disused districts, turning those into retail and commercial hubs with walk-and bike-able routes, hosting of concerts, and celebratory events. We are seeing more of these developments in SA's major cities but rural communities have little to offer in this regard.

It's obvious that to bring about the health of a municipality's bottom line depends on the bringing together of a critical mass of players to spur economic development. But in these uncertain economic times, with potential investors holding onto their funds, at least until after the general election, the current climate is not conducive to those all-important public/private partnerships.

Article published courtesy of BIZCommunity

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