Cities to face R569bn funding gap in 10 years unless finances are fixed

A report released in Johannesburg by the SA Cities Network (SACN) on Monday described the country’s nine largest cities and their citizens as being in financial crisis.

It said the capital expenditure funding gap could balloon to R569-billion over 10 years if immediate measures are not introduced to improve cities’ financial health.

SACN’s State of City Finances 2018 report said inadequate transfers from national government, expenditure inefficiencies, insufficient fiscal controls, and expenditure that provides no revenue all contribute to the funding gap.

Municipal capital expenditure on fixed assets is crucial to for cities’ role in alleviating developmental challenges. SACN’s report provides estimates of the metropolitan municipalities’ future available revenue and capital finance and compares it to what’s required for them to deliver on their mandates.

“This shortfall in funding poses a risk to the ability of metros to provide adequate services in the medium to long term,” reads the report, which outlined various financial challenges in the nine cities, home to 40% of the population.

In the last four years, the nine cities spent R42-billion of capital expenditure spending on infrastructure for trading services, such as electricity and water; R41-billion was spent on economic and environmental services; R23-billion was spent on infrastructure for community and public safety, which includes housing.

Using economic modelling, SACN says the funding gap for such projects was R18-billion in 2017, which could rise to R83-billion in 2026, with a total shortfall of R569-billion over the next 10 years.

“The funding gap may be due to an individual metro’s policy choices or poor performance, as well as to insufficient transfers from other government spheres,” reads the report.

“This gap is likely to widen further, given the need for climate change adaptation and mitigation and the changing patterns in electricity and water demand,” it continued.

The report said municipalities will increasingly have to generate their own income to cover their budgets. The national government in February cut R13.9-billion off local government grants to fund free higher education.

But cities’ finances are strained. Johannesburg, Tshwane and Mangaung ended 2016/17 with less than a month’s cash to cover monthly operating costs, which is what Treasury recommends the municipalities have available. Each of the nine cities had less cash in 2016/17 than the previous year.

The other cities cited are Cape Town, eThekwini, Ekurhuleni, Nelson Mandela Bay, Buffalo City and Msunduzi.

Tackling unauthorised, irregular, and fruitless and wasteful expenditure will help but it won’t solve the problem. For example, the nine municipalities recorded R2.8-billion in unauthorised expenditure in 2016/17, which only accounts for 1.4% of their combined operating budget for the year.

To improve their finances, the report recommends municipalities improve spending efficiency, focus on core service delivery mandates, and review and reform their revenue models, which could result in a variety of modified or new taxes.

It recommends national government must assess the powers and functions of local governments and whether they should have the responsibility for implementing many core services that they currently cannot afford.

“For cities to be able to continue contributing to economic growth and realising South Africa’s development objectives, the gap must be closed,” the report reads.

“If not, metros will be unable to perform their core mandates over the medium to long term, implying unacceptable social consequences such as growing informal settlements and insufficient investment in maintenance of economic infrastructure.” DM