Towards increased fiscal and operational sustainability in Western Cape Local Municipalities

A previous article in the Local Government Bulletin distilled the key findings from that study. This article offers some recommendations which could improve the resilience of the response of WC municipalities to the pandemic. Many of the recommendations could have relevance to municipalities in other provinces as well.

Funding of capital programmes

• In the face of tightening capital budget constraints, municipalities should review their systems of capital project prioritisation to ensure that they balance social infrastructure (e.g. informal settlement backlogs) with economic infrastructure that can generate revenues and grow the tax base, and balance new infrastructure with rehabilitation and upgrades.
• Municipalities should establish a pipeline of shovel-ready projects in a pipeline and aim to deliver early in the financial year in order to take advantage of additional unplanned capital funding grant opportunities. Shovel-ready infrastructure projects are those at a sufficiently advanced enough stage of development for project initiation to start soon (e.g. planning is near completion, approval permits have been secured, etc and only finance is awaiting confirmation).
• Municipalities should build up their internal reserves to help finance their capital expenditure and facilitate borrowing once the pandemic has ended. This has implications for tariff setting in order to generate operating surpluses.
• Municipalities should explore project finance and other forms of off-balance sheet lending where bankable projects can be identified. Cooperation among municipalities with provincial government support to help identify and package bankable projects may be required for projects which transcend the boundaries of any single municipality like dams, and renewable natural gas projects from municipal solid waste landfills and wastewater treatment facilities.
• Innovative lending arrangements should be explored e.g. green bonds and concessionary financing from the World Bank’s Climate Investment Fund. The City of Cape Town, for instance, has already issued green bonds, and its current small-scale embedded generation programme could be scaled up as a basis for a tradeable renewable certification scheme. This would establish markets for both renewable energy and tradeable green energy certificates. If other municipalities were to generate their own renewable energy, these sales and revenue from selling green certificates could ensure the sustainability of this form of borrowing.
• Capital grants should be further streamlined to reduce their administrative burden, in a differentiated, risk-based approach which recognises municipalities’ track record in delivery and good financial management.

Existing revenue sources: balancing affordability and sustainability

Enhancing the ability to optimise existing revenue streams from rates and tradeable services, revolve around the following possibilities:

• Enhancing the attractiveness for targeted categories of households to relocate (Municipal strategic planning, but district-wide initiatives may require District Development Model-type planning by all role players).
• Promoting further advances in optimising existing revenue streams through expanding capacity for data management and considering the mechanisms for increasing revenue from property rates proposed by the South African Cities Network’s State of City Finances Report of 2018.
• Better utilisation of dormant capacity in service systems or reducing costs through constraint management combined with alternative delivery models (Municipal tactical planning, but district-wide initiatives may require District Development Model-type planning by all role players).
• Investigating the feasibility of municipal re-demarcation with a view to amalgamate small rural municipalities (Provincial Department of Local Government and national Department of Cooperative Government), or create single-tier rural municipalities.
• Reviewing the Municipal Property Rates Act and related legislation with a view to make allowance for affordable repayment arrangements for businesses affected by the pandemic.
• Promoting further advances in optimising existing revenue streams of tradeable services through expanding capacity for data management and analysis in order to pursue a differentiated service affordability strategy for the basket of services provided by WC Municipalities”, with provincial support if required.

New revenue sources

• WC municipalities should apply to National Treasury via the Municipal Fiscal Powers and Functions Act to pilot revenue instruments which have been proposed (congestion charges etc) to more accurately gauge their feasibility in terms of impacts, potential revenue and administrative costs.
• Municipalities (especially those with property portfolios) should investigate the feasibility of implementing land value capture mechanisms, within a transparent and predictable governance framework.
• A 'virtual municipalities’ simulation based on actual data could be set up to enable sensitivity analyses to test the viability and impact of new sources of revenue, and potential behavioural responses of various categories of service users and ratepayers.

Managing costs of employment pressures

• Where municipalities cannot fund nationally negotiated agreements on costs of employment, they should apply for an exemption.
• At least once every five years, municipalities should conduct productivity studies resulting in recommendations to inform the review of staff establishments, organizational design and delegations. These should be tabled at Council which should be required to explain how they intend to respond to the recommendations.
• Good practice productivity benchmarks for the municipality as a whole and individual services should be developed e.g. to balance administrative and core delivery spending. This could not only improve internal efficiency but promote civil society oversight.
• An impact evaluation of the 2018 upper limits on the remuneration for senior management should be done, with a view to improving the effectiveness of these regulations and minimising unintended consequences.
• Where practical, work-from-home and online meeting practices developed during the pandemic should be maintained, in order to attract and retain staff with scarce skills and reduce travel and subsistence costs (especially for the more distant, rural municipalities). These can also facilitate the sharing of human resources among municipalities, since travel time between municipalities and travel costs could be vastly reduced.

Free Basic Services

• Municipalities should ensure that their projected increases in indigent households are realistic.
• A consolidated provincial data set on households receiving FBS should be created to assist in identifying vulnerable households in the event of a national disaster such as a pandemic, and to track the impact of the free basic services policy with a view to impact evaluation.

Affordability of political support structures

The cost of political structures and control support costs can be enhanced by issuing guidelines and norms and, as a last resort, by means of prescripts where excessive compared to own revenue, population size and other guideline benchmarks.

Revenue certainty of agency funding arrangements

All agency agreements should be formalized and duly gazetted with the aim of providing at least a minimum degree of funding certainty for municipalities over the Medium Term Revenue and Expenditure Framework (MTREF) period and avoid audit queries.

Public-private partnerships (PPPs)

To the extent that PPPs as a range of alternative service delivery models may be appropriate and sustainable, the following reforms are required:

• Removing or reducing regulatory impediments (national reform, implementing National Treasury recommendations);
• Strengthening consequences for council, the political executive and senior management of service delivery failure (national reform);
• Institutionalising outcomes evaluation;
• Providing capacity (including grant funding for feasibility studies) for successfully configuring a PPP as a viable option (provincial responsibility); and
• Creating a community of practice and safe space for small-scope ’sandbox’-type controlled experiments on PPPs which bring together highly experienced local government practitioners, sector professionals, legal experts and researchers to jointly develop innovative solutions (Local and provincial government, regional offices of national departments and research institutions).

By Tania Ajam, Johan Burger, Geo Quinot, Melissa Botha, Deyana Isaacs & Johnny Douglas; Stellenbosch University (School of Public Leadership and the Department of Public Law)