The National Treasury’s chief director for local government budget analysis, Jan Hattingh, said the data was clear that, as local governments become more unstable, a lack of fiscal discipline follows.

Hattingh was part of a webinar panel hosted by the South African Cities Network (SACN) on Tuesday night, unpacking the state of the finances of the country’s major cities.

He said it was the national government’s perspective that metros were not failing because of a lack of funding, but rather as a result of poor leadership and management.

“The lack of permanent city managers in many of our metros, and the ongoing challenges in the political landscape, have had significant negative impacts not only on financial management, but also, critically, on service delivery to communities,” said Hattingh.

Earlier this month, the Department of Cooperative Governance and Traditional Affairs and the SACN — a non-government research institute funded predominantly by various municipalities — released the State of Cities Finances Report (SoCF), its fifth over the past decade.

The report examined the finances of Johannesburg, Cape Town, eThekwini, Ekurhuleni, Tshwane, Nelson Mandela Bay, Buffalo City, Mangaung and Msunduzi, from 2011 to 2021, traversing local government election cycles. 

Key findings included how a stagnant or declining national economy has had a negative impact on all city incomes, affecting both self-generated revenue and the share of intergovernmental transfers. 

It was also found that the country has yet to bounce back to pre-2020 levels post the Covid lockdowns, and that climate change and the continuing energy crisis will affect the metros. 

Coalition instability

The report found that a rise in coalition governments had not added to the stability of the municipalities, and instead led to “policy incoherence and dissonance and delayed decision-making”, as well as a steady increase in corruption and deteriorating local governance, compounded by civil unrest such as the 2021 July riots.

Hattingh said the report provided a “critical reality check on the financial performance of our cities” and aligned with the analysis undertaken by his office.

“When we assess the performance of municipalities generally, we look at the four pillars of sustainability. It’s the relationship between good governance, financial health, institutional arrangements and service delivery. 

“If you want to facilitate improved service delivery, you have to meet the preconditions of good governance, and the political aspect of a political economy is something that we all know is something we are struggling with, collectively.” 

Hattingh said the Treasury had since 2017 been working on enhancing and improving reporting mechanisms and introducing various support services. 

“Despite the support provided, the state of municipal finances remains a concern and most of them (municipalities) do not have adequate cash and investments to meet current obligations. There is inadequate infrastructure investment and inadequate investment in maintenance and refurbishment.”

However, Hattingh said there was hope on the horizon as the Treasury fine-tunes its reporting requirements, which will allow the department to ask the hard questions on just how government’s taxes are being spent. 

Unaffordable municipal tariffs

Fellow panellist Tracy Ledger, head of energy and society programmes at the Public Affairs Research Institute, said a key issue that did not get enough attention was the affordability of municipal tariffs on households.

She said while it is “critical… that everybody pays their bills” to allow for the effective functioning of cities, “hard questions” needed to be asked about the affordability of municipal tariffs and whether they were not counterproductive. 

“The State of City Finances report says that 53% of households that live in cities have a total income of R3,000 or less, which means that a significant portion — somewhere between 40% and 50% of households and citizens — are living at or below the poverty line… For each household, the total monthly income is insufficient to buy a basic box of goods.”

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She said the assumption made by many was that these households were covered by municipal indigent policies and had access to free basic services, but this was not the case.

“The bottom line is that for a significant percentage of households in cities, paying their municipal costs has other significant negative socioeconomic impacts, which the state is then spending money in other places to try to address, such as the issue of food insecurity. 

“We need to have more subsidised free basic services in the [local government] system and make sure that those services are getting to the households in need,” said Ledger. 

Incorrect funding assumptions

Michael Sachs, deputy chairman of the financial and fiscal commission at Wits University, said three key assumptions were made over 20 years ago on how local government would be funded. These assumptions, said Sachs, remain with us today and have proven to be incorrect.

He said the assumptions were that electricity would remain cheap; that people would pay for services if they could afford to do so; and that the country and its cities were embarking on a process of growth and development, forging greater integration. 

“I would want to suggest that the combination of those three things not having materialised has led us into this situation now where we might face a generalised fiscal crisis of local government.

“I would suggest that we’re going to have to reform the system… to look at deep structural reforms to the system of local government. It’s not going to be enough to simply fix the system. We’ve been trying to fix the system for a long time,” said Sachs. 

He said one example that brought forward the argument that the fiscal framework needed reshaping was that wealthier residents from across the country continued to “semigrate” to affluent, well-run municipalities such as Cape Town and Stellenbosch, eroding the tax base of poor and poorly run municipalities.

“We’re going to have to find ways of mobilising more revenue out of that tax base and redistributing it back.”

Grim outlook

The State of Cities Finances Report presents a grim outlook for most of South Africa’s biggest cities. Performances were analysed over two local government election cycles — 2011 to 2016 and 2016 to 2021 — with the latter being described as a “watershed moment” when the ANC lost control of Tshwane, Johannesburg and Nelson Mandela Bay, among other councils, for the first time. 

In its analysis, the report found that “fundamental challenges facing cities in 2022 are the erosion of the underlying economy and the ability to levy taxes and service charges”. 

“Unstable coalition governments and perceptions of corruption and poor governance mean that communities and businesses have declining trust in local government and may even question the legitimacy of city governance.

“This erodes their willingness to pay for services and creates a climate ripe for civil unrest and protest. Together, these factors also have a negative impact on investor sentiment and the ability of cities to raise capital finance,” said the report. DM