OPINION | Berni Muzenda: Are bailout grants contributing to the demise of SA municipalities?

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Construction cranes seen in front of skyscrapers. (Photo by Creative Touch Imaging Ltd./NurPhoto)
Construction cranes seen in front of skyscrapers. (Photo by Creative Touch Imaging Ltd./NurPhoto)

Are grants giving local government a myopic view of the possibility of other funding options, or is the financial situation dire and grants the only way out, asks consultant Berni Muzenda.

South Africa has a substantial backlog of infrastructure projects (in the form of new projects as well as maintaining and upgrading existing infrastructure) that fall outside the financial funding ability of local government. These projects are principally funded by the municipal budget, grants or loans. Most municipalities simply do not have the means to fund projects from their budgets.

Grant funding, or borrowing from capital markets, thus becomes the most probable way to mobilise financial resources for municipalities. However, for municipalities to take out loans, they ought to prove their creditworthiness. Investors and banks use the creditworthiness coefficient to assess the risks associated with lending to municipalities.

The creditworthiness of a municipality is primarily determined by the availability of sufficient internal revenues as well as the stability, predictability and conditionality of (at least some) intergovernmental grants. The lack of sufficient budgets to fund projects has a detrimental effect on creditworthiness, leaving grant funding as the saving grace to acquire funds.

Infrastructure development is a catalyst for the acceleration of growth within any economy. Municipalities are in constant need of either providing new infrastructure or maintaining and refurbishing existing infrastructure as required to fulfil their mandate to deliver basic services.

Local government is the third most notable recipient of grants and subsidies, after the provincial government and extra-budgetary accounts and funds. The national government, through the Department of Cooperative Governance, is responsible for managing and transferring municipal grants.

Eliminate backlogs

The Municipal Infrastructure Grant (MIG) was established to increase access to basic services for low-income households so as to alleviate poverty. The MIG seeks to eliminate municipal infrastructure backlogs in low-income communities, allowing basic services like water, sanitation, roads and community lighting to be provided.

Should both poor and non-poor households utilise infrastructure, the municipality will need to find alternative funding sources (other than MIG funds) to cover the portion of providing services to non-poor households.

The Department of Water and Sanitation administers two grants, i.e., the Regional Bulk Infrastructure Grant (RBIG) and the Water Services Infrastructure Grant (WSIG), across predominantly indigent municipal areas. These grants fund projects identified in the Integrated Development Plans (IDPs) and Water Services Development Plans (WSDPs) of the water service authorities.

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RBIG supports the development of new and/or refurbishment of regional bulk water infrastructure and regional bulk sanitation collection, as well as regional water and wastewater treatment works (social component only). While WSIG supports water service authorities in developing interim and intermediate water supplies to reduce water and sanitation backlogs.

Section 229 of the Constitution, 1996, assigns municipalities the authority to generate their revenue through property rates and surcharges for services (e.g., water, sanitation, waste removal, electricity, and the use of municipal facilities such as sports grounds). The responsibility, therefore, lies with each municipality to ensure sustainable revenue collection and management.

Revenue collection low

This is attained by ensuring that the appropriate customer is billed for the correct services and at the correct tariff and/or amount. The collection of revenue of all money payable to the municipality remains the municipality's responsibility. Each municipality should put in place policies to adopt, maintain and implement credit control and debt collection practices.

In some municipalities, revenue collection is low, and this is attributed to the significantly lower tax base in predominantly rural and poor municipalities in comparison to large cities. This significantly impacts the ability of poor municipalities to raise their revenue, and hence they become increasingly reliant on national transfers through various forms of grants.

In municipalities where the tax base is high and revenue is collected, there are issues with revenue management, and funds may be unbudgeted towards infrastructure. This forces municipalities to seek grant funding to maintain and/or upgrade infrastructure. According to Statistics South Africa, in 2020, grants and subsidies accounted for 18% of metropolitan municipalities' revenue and 72% of revenue in mostly rural municipalities.

In the absence of grants, how would SA municipalities provide new infrastructure and maintain and/or upgrade existing infrastructure without grant funding bailouts? Infrastructure is at the core of the provision of basic services, which is the local government's mandate.

Municipalities do not have the liberty to choose not to provide these basic services. In the absence of functioning infrastructure, local governments encounter challenges in providing basic services.

Local governments face a double-edged sword: the need to provide basic services while also dealing with deteriorating or non-existent infrastructure. This impacts their ability to adequately deliver basic services to the constituents they serve.

Will not change

The financial outlook of most municipalities will not change overnight. Therefore, intentional efforts ought to be made to make strides towards a positive financial outlook. It is therefore critical that, in the interim, local governments explore funding alternatives to unlock revenue for municipalities.

The ideal state that local governments should aspire to should be to become self-sufficient in revenue. It improves the ability to deliver basic services and leads to better accountability of officials to the constituents that they serve. While municipalities work towards the state of self-sustenance, transformation needs to be implemented in the local government sector to improve revenue collection and management, as well as to explore and tap into revenue enhancement streams.

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Moreover, public-private partnerships (PPP) represent another funding option that municipalities can explore, taking into cognisance the potential risks that may come with some PPP projects. According to National Treasury, in 2021 34 PPP projects (from the health, transport and roads, and tourism sectors) were completed with project value to the tune of approximately R90 billion.

Are grants giving local government a myopic view of the possibility of other funding options, or is the financial situation dire and grants the only way out? Grants, in my opinion, should solely exist to complement differences in expenditure needs and not to bail municipalities out.

- Berni Muzenda is an engagement manager at Ntiyiso Industrialisation Consulting.

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