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Municipal finances in check for now – but the formula needs to change

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Despite the impact of COVID19 and an unstable and difficult macro-economic environment on municipal finances, the South African Cities Network’s (SACN’s) 2020 State of Cities Finance Report reveals that city revenues have grown by an average of 5,7% per year above operating expenditure growth of 5,5%, while the average annual increase in operating surpluses was 4,2%. The network’s CEO Sithole Mbanga unpacks the implications of the findings.

THESE figures may be positive on the face of it, but cities face long-term financial challenges especially as they remain the key drivers of the economy and home to most people in South Africa.

However, reduced margins on electricity and water sales, as a result of both rising unemployment and stagnating household incomes, and above-inflation increases in the cost of bulk purchases, mean that cities are less able to cross-subsidise the provision of basic services for lower income residents.

The misalignment of policy, budgets and planning and the contradictions between the municipal revenue and funding model needs to be addressed and can be achieved by focusing on the systemic problems that limit the ability of cities to meet the two crucial urban policy goals of developmental local government and spatial transformation.

Further, the financial model that underpins the way in which cities and other municipalities deliver on their constitutional mandate needs to change.

Against these odds, what then is the sustainable solution for cities? Firstly, they need resources to become urban spaces that are productive, inclusive, sustainable, and well-governed. However, they are limited in their ability to fulfil their developmental local government role because of insufficient budgets for new infrastructure (which is needed to transform the space economy), inadequate revenue-raising opportunities and threats to current revenue sources.

To increase own revenues, cities can – and should – implement some of the alternative financing solutions that have been suggested. SACN research on city finances over the years highlights the systemic problems in the way that cities are financed, and the intergovernmental fiscal framework that hinder their ability to meet urban policy goals. In 2016 in partnership with the City of Tshwane the SACN convened an expert panel to examine this question.

The panel, consisting of global and local experts in public finance, financial modelling, city development, urban economics, and political economy, was tasked with formulating and assessing possibilities for alternative metropolitan financing models for cities.

During 2017, SACN entered into an agreement with the National Treasury Intergovernmental Relations Directorate and the City of Tshwane to conduct additional research on the implications of cities adopting various innovative and alternative financing instruments.

Climate change

Cities also need to think of innovative ways of tackling the growing challenges of urban finances posed by the fundamental changes happening within the energy sector and the growing impact of climate change and the need to transition to a climate-resilient economy.

It is essential that our major metros transform from the practice where RDP houses are built beyond the city centres, and transport systems continue to be primarily car based. The model is not fit-for-purpose; while our major metros are performing positively in the short-term, we need a bigger vision which transforms the lives of citizens and addresses the injustices of the past.

The State of City Finances 2018 makes the argument that the vision espoused in South Africa’s urban policy (the Integrated Urban Development Framework) for productive, sustainable, inclusive, and well-governed cities can only be achieved with a municipal fiscal framework that works. Further, cities need to find ways to bridge the capital funding gap which prevents cities from meeting the infrastructure requirements of a steadily increasing urban population.

If the financial function is to enable cities to realise spatial transformation, municipal budgets must be aligned with policy, and urban planning should reflect that orientation. The municipal finance model needs to be reformed, so that cities can have more autonomy in raising and allocating the funding required to achieve their objectives of resilience, sustainability, and shared growth.

The pandemic has thrown into sharp relief the systemic problems affecting the ability of cities to achieve these goals and cities need to seize the initiative to place themselves firmly at the centre of the nation in the way that population demographics suggest they already are.

Just as the shock of COVID-19 has prompted many countries to re-examine the way in which societies are organised, it is perhaps time to review the way in which our South African cities and other municipalities deliver on their constitutional mandate to provide services to communities, and city residents and businesses, in a more sustainable, profitable manner.

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