While the country’s nine largest municipalities are in a better financial position now than at any time during the last decade, they are still spending far less of their capital budgets than they claim.


This is a key finding of the State of the City’s Finances Report 2007, released in October last year by the South African Cities Network (SACN).

The report said that because municipalities adjust their budgets during the financial year, they appear to be spending more than at first they actually intend.


The authors of the report attribute the underspending of several municipalities to a lack of spending capacity, poor planning and the unreliability of the grant system, especially in respect of low-cost housing.


The report notes that because the budget adjustment process takes place after the legislated budget mid-year review process, cities, particularly those recording significant underspending, later adjust their budgets to reflect actual capital expenditure more realistically.


The study considered the financial statements of the 2003/04 and 2004/05 financial years and the nine biggest cities’ overall financial performance since 2002.


The report’s introduction states that “given their prominence in the national economy, the efficient functioning of the major cities is easily as important as the effective operation of wider national logistical systems such as the national road, rail, power and telecommunications networks.

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It also states that the “finances of city governments are … fundamental to the functioning of city governments. While city finance may appear to be a largely technical matter, it has deeply strategic, social, economic and political dimensions.”


The report identifies two underlying strategic themes to these: finance as a factor of decisions on the allocation of scares resources, and finance shape institutions.
Contrary to the negativity often displayed in the media, the report’s analysis of finance in South Africa’s nine largest municipalities “is currently a very reassuring story”.


Research, largely based on “audited financial results and other well-founded evidence, indicates convincingly that, while there are significant challenges, the country’s key cities are now increasingly financially secure.


“Indeed, taken as a whole, the cities are probably in a stronger financial position than at any time since the beginning of the 1980s.


“This positive outlook is not necessarily applicable to the whole of the local government sector; there appear to be many smaller and medium-sized local governments which are struggling institutionally.

“However, since the nine Network cities account for two-thirds of all spending by South Africa’s 283 local governments, their relative financial strength is important,” the report states.

The report states that the cities’ strong financial position may be partially explained by insufficient spending on services.


“However, since 2005 this has improved dramatically, with actual capital expenditure for the nine Network cities increasing from R6 157 billion in 2003/4 to R9 511 billion in 21005/6. A significant portion of this capital expenditure has been financed through improved cash flows generated from city activities."


The report also asserts that the challenges facing cities remain daunting with major backlogs, investment requirements to maintain existing assets and high demand for expenditure on services and infrastructure to underpin new growth.
Cities have started to show a good financial track record in the face of such challenges.

Threats to cities


The report, however, warns that “ironically, just as the outlook brightens, new and serious dangers are emerging in the form of a number of worrying national policy directions on a key set of issues. Collectively, these could profoundly undermine the newly established capabilities.”

First on the list of these threatening “national policy directions” is the abolishment of Regional Services Council (RSC) levies on the grounds of their poor technical design, and promises were made to have them replaced by more effective instruments.


“As yet, however, there is no clear direction on what, if any, instruments will replace them. In the interim, the revenue loss is largely – although not fully – compensated by means of a grant.”


The report also refers to “moves afoot to radically change the way in which electricity is distributed in South Africa, removing electricity supply from city control.”


The report points out that “apart from its importance to cash flows and balance sheets (to the cities), in researching this report, many municipal officials stressed how critical responsibility for electricity revenue collection was to recent successes in addressing non-payment across all services. “Some of the cities have introduced highly imaginative mechanisms based on piggy-backing on electricity pre-payment systems to manage non-payment of other services while remaining sensitive to poor households,” the report states.


The report also cautions against plans to incorporate the staff of municipalities into a single public service: while “there are clearly shortcomings in the management of human resources within the cities, the new approach could seriously damage the relative autonomy of city governments and their ability to attract the skills required to address their very distinct and complex challenges."

While no firm decisions have been taken on new electricity supply structures, replacement of RSC levies and a single public service, and there is no suggestion that proposals are made in bad faith, the authors suggest that “what is happening is that decisions are being made without any real understanding of their implications for city governments and administrations.”


These decisions are also made “without an appreciation that – collectively – these changes will seriously weaken the cities. This is could be a function of the limited access the bigger cities have to important national policy discussions.

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They also state that there “also appears to be insufficient understanding in some quarters that the key to success in a developmental state lies not in trying to control all implementation from the centre, but in creating effective, accountable local institutions with clear and coherent responsibilities together with the power and capabilities to meet them.


“City governments have not always been an effective voice in promoting their own interests, and must take some responsibility for the failure of other spheres of government to understand their administrative requirements and needs,” the report states.

Some conclusions


On the front of reform and change, the report points out that municipalities, including the nine Network cities, have been through two substantial processes of institutional change since 1995: “This entailed a period of institutional instability spanning over a decade and a half. Major boundary and other institutional changes have placed huge stress on administrative systems and processes.”


The report concludes that “it is testimony to the dedication and professionalism of many local political representatives and administrative officials, as well as the generally sound policies and programs that have been adopted nationally, that the local government system in the major urban areas has remained coherent and functional.

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With regard to cities’ finances over the 2002/03 to 2005/06 period, the following conclusions are reached:


• The new accounting standards mean that the financial statements reflect the real financial position of the cities more accurately than has previously been possible. We can therefore have considerable confidence in the financial picture presented.


• The cities have made considerable financial progress over the last several years. This is true even taking into account the impact of the new accounting standards.


• The position regarding debtors has recovered substantially with better collection


• Several key financial risks remain, including the question of asset stripping and its implications for service delivery, and the risks associated with the increasing reliance upon government grants.

The report further concludes that South African cities require considerable financial resources to confront poverty, growth and maintenance challenges adequately.


The big ticket items for the cities are:


• Housing backlogs (housing and infrastructure project top-ups);


• Infrastructure for growth (notably roads, stormwater, water and sanitation) and also the proposed new transport service infrastructure; and

• Maintenance and refurbishment backlogs (notably roads, stormwater, water and sanitation).

“The ability of the cities to address these challenges will depend, among other things, on their ability to generate sufficient financial resources, primarily from their own revenue sources.


“In principle city governments must charge tariff increases which will allow them to pay the costs of necessary infrastructure. The Development Bank of Southern Africa, in a recent study, estimated that municipal service delivery tariffs will rise by 4% above the rate of inflation to cover these costs,” it is reported.


On the question of revenue collection, the report concludes that cities manage large and complex revenue streams, based partly on their authority to tax and partly on services provided.


“The long-term challenge is to maximise collection rates, and cities have generally made progress on this matter,” the report states before outlining some of the more important mechanisms and instruments they can use to enhance revenue collection:


• Cities should establish effective billing systems and well-organised and well-resourced revenue departments, where billing technology in itself does not provide a solution. “The entire revenue value chain must be well-designed and well-organised. There must be consistency between the billing technology, the business process and the revenue organisation. It is of paramount importance that the system as a whole generates and maintains accurate data.” The nine cities are increasingly conscious of the necessity to devote considerable resources and attention to the billing function, although it could be argued that some municipalities continue to lag in this regard.


• Where modern systems pioneered in South Africa for electricity distribution have become widely used across the globe for mobile phones, pre-payment mechanisms should be used.


• Convenient mechanisms to restrict consumption, which households often lack, should be implemented to prevent unaffordable accounts at month-end. Water sector pre-payment systems offer similar scope. Restrictors are used by some municipalities for those in arrears, with approximately six kilolitres per month delivered free of charge. Low pressure is, however, inconvenient to consumers. In some municipalities, yard tanks are provided and filled each day so that households can limit and manage consumption.


• Electricity should be cut off to enforce payment for all services where all payments made are first offset against other services because it is much technically, socially and politically easier to disconnect electricity than evict people and re-possess property for non-payment of property tax or disconnect water for non-payment. “Some municipalities have used the electricity pre-payment very effectively in their management of payment for other services by linking of accounts for various services.


• Quick responses in cases of non-payment should be ensured since delays, especially of more than 60 days, tend to exacerbate the problem. “This means that a practical, feasible and well-designed system of sanctions and rewards is required.”


• Integrated customer management is required. Service departments negotiate different and sometimes contradictory arrangements with households around payment for services; this is time consuming and leads to confusion and inefficiency. “Many municipalities have found that an important principle of customer or citizen management is that there should be a single integrated approach from the various departments within the municipality.”


• Good payment habits should be encouraged. “A well-founded system cannot be based on payment by crisis.” Write-offs of arrears can also undermine good payment habits. “Some municipalities have instituted systems where arrears are written off over time based only on sustained and up to date payment of current municipal accounts.”

• Ensuring clear accountability for revenue functions. “In terms of newly introduced accounting approaches non-payment for services increasingly impacts directly on the budgets of the services, which have to set aside provisions to compensate for non-payment. This results in other services demanding stronger accountability form the Revenue Service. It is critical that the structures of accountability be designed to enhance overall responsibility and an appropriate sharing between Revenue and other services.”


• Accurate information on property ownership is essential – successful collection often depends on accurate understanding of who is responsible for payment. Changes in property ownership are often not properly recorded. “A number of municipalities are devoting considerable attention to these issues. Some of these matters should be addressed by municipalities as well as the National Department of Land Affairs,” which is responsible for deeds registration processes.


• Efficient meter reading must be ensured. Irregular or inaccurate readings constitute a major cause of deterioration in the citizen and municipality’ relationship. “New technologies are being investigated to make meter reading easier and more accurate, such as remote meter reading.”

Leon Albert