The National Treasury in Pretoria. (Photo: Matthew le Cordeur)
About a third of South Africa’s municipalities have made a mockery of budgeting by adopting “unfunded” budgets, laments this week’s Budget Review.
These 81 municipalities have councils that voted for financial plans they knew there was no money for.
This makes “some form of financial distress inevitable”, said Treasury.
What’s more, the number was 101 before national or provincial interventions helped 20 municipalities turn unfunded budgets into funded budgets.
South Africa has 257 municipalities and, in addition to the 81 who have unfunded budgets, there are still 31 that are, according to Treasury, “funded with risk” or simply “undetermined”.
“It is a common municipal practice to overstate or inflate revenue projections when preparing an annual budget. Revenue estimates are seldom underpinned by realistic or realisable revenue assumptions, which results in cash flow difficulties,” said Treasury.
“Neither national nor provincial government can force local governments to adopt different budgets, despite advising them that their proposed budgets are unfunded.”
Constitutionally speaking, it is up to provincial governments to decide to put any particular municipality under administration.
Local governments receive 9% of the national budget – about R118bn in the year ahead – which is meant to supplement the rates and taxes they are supposed
Treasury has grown increasingly unhappy with how municipalities spend that money.
In the Review, it wagged a finger at rural municipalities that primarily use extra money they get from national government to pay their employees more.
A sample of 11 rural municipalities that saw their collective grants rise from R1.6bn to R2.5bn between 2012 and 2016, used about 66% of the increase on wage hikes, notes the Budget Review.
Although the equitable share of national revenue given to local government is unconditional and set by a formula, about R13.9bn has been cut out of the medium-term allocations to municipalities.
This is coming out of the grants for electrification, for upgrading informal settlements and for rapid bus systems.
Municipal arrears to Eskom and to South Africa’s various water boards are becoming a crisis.
“The 20 municipalities with the largest outstanding commitments owed creditors R17.4bn, but had only R1.7bn of cash on hand. Most of these debts are owed to Eskom and water boards,” said Treasury.
More often than not, the municipalities that owe money are in turned owed money by their residents.
In the review, Treasury blames “a culture of non-payment and ineffective punitive measures” for municipalities’ inability to collect what is due.
One new mechanism being proposed is a grant for financially distressed municipalities, which would be conditional on their having “demonstrated the political will to implement reforms necessary to turn themselves around”. This new grant will be designed in the course of 2018, according to the review.
In the meantime, some of the major transfers to local government are getting reduced.
There are nine cities currently trying to set up rapid bus systems like those in Johannesburg, Tshwane, Cape Town and George.
Treasury warns in this week’s budget review that it will have to “assess whether some cities should put projects on hold while they revisit system design”.
That is after already significantly reducing grants for these bus systems in this year’s and in last year’s budgets.
MUNICIPALITIES MUST BORROW MORE
According to the Budget Review, one imminent reform to help municipalities will involve letting them borrow money using much more of their future income as security.
Clauses in the Division of Revenue Bill, the legal instrument that gives effect to the budget, dictate that municipalities can only offer the grant transfers they expect from the state for three years as security to lenders. Doing this requires an “onerous” approval process, said Treasury.
In future, they “will be able to borrow against all their future revenues”. This indicates that municipalities will also be able to borrow money against expected future income from rates and taxes, not just grants from the national government.
Much more of the local government expenditure on infrastructure could be borrowed, reasons the review.
In 2008, municipalities funded 24% of their capital budgets with borrowings. By last year, this had fallen to 15%.
Another amendment that will soon see the light will allow municipalities to levy more “development charges” for the infrastructure they provide to developers, like linking their projects to water and power networks.
An imminent amendment to the Municipal Fiscal Powers and Functions Act will clarify how developers can henceforth be made to pay the full cost of these kinds of infrastructure provisions.
Development charges could net municipalities over R7bn a year, according to a 2015 study by Treasury.
TALK TO US
Do you think Treasury should take over the running of failing municipalities?
SMS us on 35697 using the keyword MUNICIPAL and tell us what you think. Include your name and province. SMSes cost R1.50
* Sign up to Fin24’s top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER