FINANCIAL VIABILITY OF MUNICIPALITIES

For an Equitable Sharing of National Revenue

Financial and Fiscal Commission

11th National Municipal Managers Forum: SALGA

31 August 2017

STRUCTURE OF PRESENTATION •  Role of the Financial and Fiscal Commission •  Financial Viability: Concept •  Causes of Financial Non-viability •  Threats to the Financial Viability of LG

–  Slowdown of the Economy –  Vertical Fiscal Imbalances –  Unfunded Mandates and –  Cost of Basic Services –  Frequent amalgamations of municipalities and Funding of DMs –  Municipal Debt

•  What could be done to Improve the Financial Viability of Municipalities

ROLE OF THE FINANCIAL AND FISCAL COMMISSION

•  What is the FFC? – Permanent statutory body established in terms of Section 220 of Constitution –  Independent and subject only to Constitution and the law – Must function in terms of an act of Parliament

•  Financial and Fiscal Commission (FFC) Act1997 as amended. •  The Commission makes recommendations to Parliament on the equitable

division of nationally raised revenue and on any other financial and fiscal matter

•  FFC in the IGFR system – Municipal Finance Management Act (2004), Municipal Systems Act (2000),

Money Bills Amendment Procedure and Related Matters Act (2009), Intergovernmental Fiscal Relations Act (1997) and FFC Act (1997) as amended

FINANCIAL VIABILITY

•  There is no common understanding of the concept of financial viability among stakeholders? –  National Treasury, refers to financial viability as the sustainability of the

municipal budget, and whether the municipality is able to sustainably meet its expenditure commitments from its own revenues and transfers. NT definition allows for dependency.

–  According to CoGTA a municipality that is not self-sufficient/self-reliant or if it is dependent on grants is considered financially non-viable. But DOR allows for dependency, i.e. some municipalities will have poor revenue base and therefore dependent on transfers

–  DMs are therefore financially non-viable as they have few own revenue sources. Are they?

•  :

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MUNICIPALITY VIABILITY •  But we agree that viability has three components:

5 11th National Municipal Managers Forum: SALGA 31/08/2017

Municipal Viability

Financial/Economic Viability

Community/Service delivery Viability

Governance Viability

Municipality Viability is multifaceted- or municipality serve many purposes

CAUSES OF FINANCIAL NON-VIABILITY

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Declining revenue bases Escalating expenditures Increasing debts Declining local economy Increasing government problems Growing social disintegration

•  Increasing transfer cuts•  Growing socio-economic problems•  Changing technological problems•  Changing legislation•  Changing boundary changes•  Changing political developments•  Damaging societal crises/unrest•  Opening of external markets•  Availing of new funding opportunities

SER

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TATIV

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Inte

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Exte

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MUNICIPAL VIABILITY•  Financial Viability •  Governance Viability •  Community Viability

THREATS TO THE FINANCIAL VIABILITY OF LG

1. SLOWDOWN OF THE ECONOMY •  First need to accept that some municipalities will never be financially viable.

The Division of Revenue is intended to make it possible for municipalities in all parts of the country to be financially sustainable

•  Slowdown of the Economy: Economy which is in a recession poses a risk to the financial viability of LG that is transfer dependent: –  Declining GDP implies amount available for sharing falls –  Declining GDP likely to result in low investment – unemployment-

poverty- ratepayers being distressed and eventually municipalities own revenues taking a knock, etc.

•  The Vertical Fiscal Imbalances: Reforms on the LGFF have focused on the horizontal distribution of resources. For example, most review of the LGES formula, focused mainly on the horizontal distribution not the vertical division, i.e the quantum of resources allocated to the LES. The LES is thus under immense pressure and a robust discussion informed by concrete evidence is needed.

11th National Municipal Managers Forum: SALGA 31/08/2017 8

2.VERTICAL FISCAL IMBALANCES Vertical Fiscal Imbalances

Exp

endi

ture

Nee

ds

Transfers

Own

Revenues and other Revenues

Inefficiencies

Mun

icip

al R

even

ues

Expenditure Decentralisation

Revenue Decentralisation >

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3. UNFUNDED MANDATES AND (4) COST OF BASIC SERVICES

•  Unfunded mandates (e.g. Library Services, Museums, Health Care Services)

•  Cost of basic services –  The adequacy of the LES is also not clear because no one has a

good grasp of the cost of basic services in different municipalities. Ideally the LES needs to be based on a sound costing framework for basic goods and services.

–  FFC-SALGA Model: The costs are measured and they depend on various factors, including the levels of services provided, technology used, materials chosen, the extent to which labour intensive methods are used, the scale of infrastructure works, geology, topography.

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5. FREQUENT AMALGAMATIONS OF MUNICIPALITIES AND FUNDING OF DMS

–  Model indicates some of the factors that are a threat to Municipal Viability, e.g.

•  The need to provide funding for the capital renewal of aging infrastructure is becoming more dominant.

•  There is an unhealthy administrative to service delivery cost ratio.

•  Frequent amalgamations of municipalities –  FFC research has shown that amalgamations are costly and will not

necessarily result in financially viable municipalities, but in many cases the situation of demarcated municipalities will worsen.

•  Funding of DMs –  The funding for DMs has remained unresolved and this affects their

viability 11

FUNDING OF DMS: RSC LEVY REPLACEMENT GRANT (1 OF 2)

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40%

50%

60%

70%

80%

90%

100%

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16

Percen

tage

C1 C2

Percentage share of C1 and C2 district allocations of the RSC levy replacement grant (2006/07 - 2015/16)

•  The differentiated annual growth rate has resulted in the share of allocations going to DMs with water and sanitation functions increasing:

-  From 37% in 2010/11

-  To 43 per cent in 2015/16

•  An adjustment of annual growth rates can have a significant impact on the distribution

•  DMs without water authority have received below inflation increases for 7 years

DMs with water services functions (C2)

DMs without water services functions (C1)

Table 1: RSC Levy replacement grant annual growth rate (2012/13 - 2016/17)

2012/13 2013/14 2014/15 2015/16 2016/17

Total/Overall Growth rate 5.3% 5.3% 5.5% 4.6% 5.3%

C1 3.2% 3.0% 3.2% 2.6% 3.0%

C2 9.0% 9.0% 9.0% 7.4% 8.5%

Growth RateRSC Levies Replacement Grant

DISTRICT MUNICIPALITIES UNDER FINANCIAL PRESSURE

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Type

RSC levy replacement grant allocations

R'000

RSC levy replacement grant per household

R'000Eastern Cape

DC14 Joe Gqabi C2 22 994 235DC44 Alfred Nzo C2 39 415 233

Free StateDC16 Xhariep C1 12 733 277

KwaZulu-NatalDC24 Umzinyathi C2 30 992 272DC27 Umkhanyakude C2 31 597 245DC43 Harry Gwala C2 28 074 251

Nothern CapeDC6 Namakwa C1 27 759 816DC7 Pixley Ka Seme C1 18 545 378DC8 Z.F. Mgcawu C1 36 229 594DC45 John Taolo Gaetsewe C1 35 285 569

North WestDC39 Dr Ruth Segomotsi Mompati C2 38 401 302

Western CapeDC3 Overberg C1 37 729 490DC5 Central Karoo C1 6 665 351

Municipality

Table 2: District Municipalities with the lowest RSC levy replacement grant allocations for the year 2017/18•  Identified group of

DMs with the lowest allocations

•  13 DMs have allocations of less than R40m each

•  Sizable gap between the highest allocation R39m in this group and the next lowest allocation (of R51 million)

•  7 of these DMs are not water services authorities so receive below inflation increases

District Municipalities whose allocations are the lowest in terms of the of RSC levy replacement grant allocations for the year 2017/18

6. MUNICIPAL DEBT

•  The diagram depicts a five year overview of three municipal creditors and the total amounts owed to them by municipalities year on year, from 2011/12 to 2015/16.

•  Municipal debt to Eskom shows a serious increase from 2014/15 to 2015/16. •  Debt for bulk water has had a moderate increase, whereas debt to SARS on PAYE

deductions shows a steady decline over the years.

-

2,0

4,0

6,0

8,0

10,0

12,0

14,0

16,0

2011/12 2012/13 2013/14 2014/15 2015/16

Rbillion

s

Year

BulkElectricity_Eskom BulkWater PAYEdeducEons-Sars

Municipal and Consumer Debt Municipalities currently owe Eskom over R10 billion and at the same time

they are owed R113 billion by national and provincial spheres, businesses and households

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WHAT MUNICIPALITIES ARE OWED BY ORGANS OF STATE, 2015/16

617 603

1 122

788

479

806 753

624

290

390 406

911

617

417

712 662

549

139

-

200

400

600

800

1 000

1 200

EC FS GP KZN LP MP NC NW WC

R m

illio

n

Province Total overall

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WHAT COULD BE DONE TO IMPROVE THE FINANCIAL VIABILITY OF MUNICIPALITIES

WHAT COULD BE DONE TO IMPROVE THE FINANCIAL VIABILITY OF MUNICIPALITIES

•  Review the Vertical Division of Revenue: Very Urgent. Incorporate objectively determined costs to determine the LGES allocations

•  Review existing powers and functions of DMs so that their funding is objective •  Resolving Debt Issues

–  The debt issue should be resolved within the IGFR system and not in courts. The IGFR forums should dedicate sufficient time to finding a lasting solutions to debt problems within the Local government sector.

–  Approach to debt should be fair and not one sided. Similar pressures should be exerted to all spheres of government to honor their debt. Compliance with the 30 day payment rule should be enforced on municipalities, national and provincial government departments and entities alike

–  A proper diagnostics of the root cause of non-payment be done and if it is due to bad management, there should be appropriate consequences

–  Stricter measures should be imposed on individuals within municipalities that are responsible for continued flouting of MFMA rules.

–  Electricity and water undertakings must be ring fenced. 17

WHAT COULD BE DONE TO IMPROVE THE FINANCIAL VIABILITY OF MUNICIPALITIES

•  Concessions have been made by Eskom (and approved by the Eskom Board): –  Move to a 30 day payment period as opposed to the earlier 15

days –  Decrease the interest rate charged on overdue balances (the

aspect of single/compound interest charged is yet to be resolved)

–  Rationalising of municipal tariffs to reduce the tariff options from 11 to 3

–  Changing the payment allocation policy to allocate payments to capital first and then interest

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WHAT COULD BE DONE TO IMPROVE THE FINANCIAL VIABILITY OF MUNICIPALITIES

Increasing Alternative revenues Streams: Some recommendations •  National Treasury improves access to credit markets for large cities by:

–  Establishing a credit rating mechanism for municipalities. •  The PPP Unit at National Treasury improves the PPP deal flows within

municipalities by: –  Streamlining the PPP approval process by subjecting only high value (above

R100 million) and complex projects to rigorous feasibility studies –  Using the Financial Management grant to build capacity within large cities in

specialised skills in PPP development, procurement, negotiating and monitoring. •  National Treasury creates awareness of land value capture fiscal instruments among

large cities •  National Treasury should ensure that the Local Government Equitable Share and

conditional grants are informed by objectively derived cost estimates, without which the viability of rural municipalities will always be under threat

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THANK YOU.

Financial and Fiscal Commission Montrose Place (2nd Floor), Bekker Street,

Waterfall Park, Vorna Valley, Midrand, Private Bag X69, Halfway House 1685

www.ffc.co.za Tel: +27 11 207 2300 Fax: +27 86 589 1038