IMFO president assesses the state of local government {writer: Piet Coetzer}

While local governments in South Africa have contributed to the achievement of a number of significant social and economic development advances; and the majority of the country’s people have increased access to a wide range of basic services; and more opportunities have been created for their participation in the economy – local government systems are still showing signs of distress.

This was the assessment by Chris Nagooroo, president of the Institute of Municipal Finance Officers (IMFO), in his address at the Institute’s 80th annual conference recently held in Cape Town.

At the top of his list of “key issues” he placed service delivery, and said that while the turnaround strategy for local government promised to address many of the issues, more needs to be done.

Persisting apartheid-era spatial segregation patterns require large subsidies, and poor households face disproportionate cost-to-access opportunities. At the same time, the current pace of urban population growth is outstripping economic growth, and the urban economic growth rate has failed to deliver required jobs.

Nagooroo said cities are increasingly becoming home to large populations living in poverty and conditions of extreme deprivation, while backlogs to secure housing and services are rising. This leads to the rapid growth of informal settlements.

The result is that public transport, land and housing delivery systems are failing. Existing infrastructure and equipment for public transport, community roads, water, sanitation, power, etc. are inadequate as well as worn out.

Nagooroo warned that the effects of climate change would affect the urban poor more than anyone else, via flooding of low-lying informal settlements and lack of jobs and food – creating security concerns.

Against this background, the priority projects of the government are the acceleration of provision of community infrastructure as well as access to water, sanitation and electricity by 2014. By then, all should have access to decent human settlements, and all households to the basic services.

The scale of reinvestment required to address these issues, however, is beyond the capacity of the national fiscus alone.

Nagooroo pointed out that well-performing cities are linked intrinsically to successful rural economies. There should, therefore, be funding for the rollout of social programmes to towns and rural areas.

Delivery protests

Alluding to the unprecedented wave of popular and violent protests since 2004 that has flowed across the country, he said it was not only about the provision of services – particularly housing, water and ablution facilities – but many of the protests were about the failure of municipalities to engage ordinary people in political processes.

“Protesters explain that they took to the streets because there was no way for them to get to speak to government, let alone to get government to listen,” Nagooroo added.

Service delivery protests increased from 10 in 2004 to 111 in 2010, and to 56 until August 2011. Socio-economic conditions – poverty, living conditions, attitudes of councillors, corruption, unrealistic expectations and lack of confidence and trust in the system – have all contributed to
these protests.

Public participation is poor because ward committees are not established or are not functioning due to non-attendance of ward councillors and a lack of resources.

The “State of Local Government in South Africa Report (October 2009)” admits that “the national government may have created expectations that local government cannot fulfil, or placed a burden on municipalities that perhaps only the strongest among them can carry.”

While sufficient steps were taken to address backlogs, further improvement is required due to population and economic growth pressures, said Nagooroo.

Capacity challenges

The majority of municipalities faces economic and human resource capacity challenges, while the two main obstacles to accelerating basic service delivery are the lack of critical infrastructure in rural areas and increasing informal settlements in urban areas.

Factors contributing to delays in service delivery rollout include:

• Inherited backlogs;

• Insufficient capacity;

• Funding restraints;

• Economic migrants;

• Poor credit control and debt collection; and

• Unrealistic promises.

Financial state of local government

Nagooroo noted that the Municipal Finance Management Act (MFMA) requires municipalities to “take reasonable steps to ensure the resources of the municipality are used effectively, efficiently and economically.”

Corruption, financial mismanagement and non-compliance with financial legislation are common in many municipalities. This results in poor performance, and delivery of service is compromised.

In his 2003/04 report for Local Government financing, the auditor-general of South Africa noted that: “[T]he basis of income generation might not provide sufficient funds for delivering the services expected of municipalities. This means that sustainability of service provision by local government has to be called into question.”

He said the financial viability of the impoverished municipalities needed some consideration. These municipalities cannot perform their functions due to fiscal distress. These municipalities do not have extensive powers to raise their own revenues through property and business taxes, nor to impose fees for services.

Municipalities with weak revenue bases cannot survive on the current municipal infrastructure grant and equitable share funding allocations to fulfil their mandate.

Such allocations are insufficient to ensure universal access to adequate services, and will not enable poor and small municipalities to eradicate backlogs; municipalities with financial limitations cannot translate their integrated development plans into workable socio-economic programmes.

Many municipalities find it difficult to leverage funds for even moderate municipal functions, while strategies to address backlogs cause significant cost pressures.

Compliance with financial management systems and processes as per the MFMA is another constant challenge, with poor audit reports for over half the municipalities.

The financial environment of municipalities is challenged by the following:

• A poor skills base or capacity;

• Weak provincial support;

• Poor financial and system controls; and

• Uneven application of systems software and programs.

Nagooroo said that many municipalities have an inadequate economic base and an increasing reliance on local government transfers (grants). There are 57 municipalities that receive more than 75% of their revenue from grants, with some being 100% grant-dependent where local municipalities have no formalised township from which to collect revenue.

Often, unspent conditional grants are spent on other operations by some municipalities, and are therefore not cash-backed. There has been a decline in the revenue share of municipalities of service charges, from 49% in 2003/04 to 42% in 2009/10 due to sharp increases in grants, although service charges remain the main source of revenue.

Other challenges experienced:

• Challenges with debt collection, increased aged debtors, high levels of indigents, and a culture of non-payment;

• Further losses in respect of illegal connections for water and electricity because municipalities are unable to upgrade or maintain infrastructure;

• In June 2009, 56 local and eight district municipalities were on the National Treasury financial distress list;

• Investment is often not optimised due to political tensions and instability;

• Municipalities with a weak revenue base cannot raise the required funds for their proper functioning;

• Debt-collection systems are not updated and are not reconcilable to financial management systems;

• Inefficiencies in expenditure management;

• The increase in outstanding debts highlighted possible governance problems;

• Credible budgets with certain municipalities show a poor ability to plan and spend budgets accurately;

• Significant risk is caused by some municipalities’ spending plans outstripping realistically collectable revenues;

• The MFMA requires the funding of budgets from realistic revenue to be collected, cash-backed accumulated funds, and borrowed funds for capital budget only;

• Capital budgets were overspent by 32 municipalities, with underspending in 177 municipalities;

• Budgets are not always well aligned to service delivery expectations; and

• There is often insufficient capacity to plan or budget correctly.

Fiscal gap

City governments face a significant fiscal gap between their expenditure responsibilities and revenue resources. The nature of the gap varies, however.

In the cities and some other municipalities, much of the gap relates to the requirement to provide infrastructure and services for economic growth and development, and specifically public transport infrastructure and operations. For many other municipalities, the gap still consists largely of a basic service standards backlog.

A detailed study of infrastructure required for the eight metropolitan areas suggests approximately R450bn over the coming decade, together with substantial new operational demands – with a further R310bn required for other municipalities. Approximately one-third (33%) of this amount is required for infrastructure refurbishment and a further 50% for growth and development.

Detailed assessments of the fiscal and debt-carrying capacity of the metropolitan governments suggest they would at best be in a position to finance 50% to 75% of the capital amounts required (depending on the city concerned).

More seriously, the associated operational and maintenance costs of the expanded services would not be sustainable.

Municipalities themselves are responsible for closing this gap by improving their performance through a variety of measures including expenditure efficiencies, billing completeness and accuracy, collections efficiency, debtors minimisation and management, and real tax and tariff increases for existing revenue sources.

Nevertheless, even allowing for substantial (though realistic) improvements on these aspects, a fiscal gap of the order of R200bn would remain on the capital side, together with substantial operating costs.

This substantial amount implies an increasing inability of city governments to provide the services required, with significantly adverse effects on a metro business environment generally, including city efficiency, economic development and job creation, Nagooroo said.

“These governance challenges require robust interventions by the national government to expedite local government transformation,” he added.