The financial problems faced by municipalities are a reflection of weaknesses in governance, or even fraud and outright corruption, finance minister Tito Mboweni said on Wednesday.

“All South Africans share the pain of poorly performing municipalities: potholes, broken street lights, roads that flood when it rains, and challenges with electricity. We are acutely aware that some municipalities are facing serious capacity constraints in executing their plans and programmes,” Mboweni said in his medium-term budget policy statement (MTBPS).

In many areas of the country, municipal finances are under pressure. This is the result of the rising cost of delivering basic services and weak financial planning and controls, with poor management decisions leading to underinvestment in and insufficient maintenance of infrastructure.

In some cases, corrupt practices have taken root in local administrations, according to the policy statement.

In 2018-2019, 113 municipalities adopted unfunded budgets, up from 83 in the prior year. In addition, municipalities owe more than R23bn in arrears, including to Eskom and water boards. According to the budget statement, sustainable financial recovery will require improved governance within the affected municipalities following intervention by provincial and national government.

Over the medium-term expenditure framework period, R415.5bn will be transferred to local government, including R146.3bn in infrastructure conditional grants. The largest transfer to municipalities is the local government equitable share, which will grow 9.9% in 2019-2020, 9.7% in 2020-2021 and 8.6% in 2021-2022.

“These above-inflation increases account for growth in household numbers, and higher bulk water and electricity costs. The government will strengthen municipal capacity to improve the use of these allocations,” it says in the budget statement.

Meanwhile, policy reform to clarify the role of development finance institutions in municipal borrowing and to regulate municipal development charges, is under way to broaden municipal access to private capital markets.

Part of President Cyril Ramaphosa’s plan to revive the economy focuses on investing in municipal social infrastructure. According to the budget statement, the government will support cities to implement further reforms that support private-sector investment and that can boost growth.

Financing arrangements with development finance institutions and multilateral development institutions “will include much-needed technical assistance to improve project planning, preparation and implementation”. 

Reforms to municipal grants will incentivise increased use of borrowing to fund infrastructure. A new, integrated urban-development grant will be introduced to allow intermediate cities to blend grant funds with revenues and loans they raise themselves, the statement reads.  

“This new grant, alongside the public transport network grant, will include incentive components that promote good governance and increase investment of municipal revenues. Metropolitan areas and other large cities fund most of their operational budgets from revenues they raise themselves. There is ample scope for creditworthy municipalities with strong financial management to increase local capital investment by expanding municipal borrowing.” 

In 2017-2018, half of infrastructure spending by metros and large cities was still funded from transfers, primarily from national government.

In real terms, long-term municipal debt grew only 9.2% between 1996-1997 and 2017-2018. Municipal borrowing data published in the quarterly borrowing bulletin shows that municipalities are very cautious about long-term borrowing.

Metros account for most of this borrowing, because they can access more credit due to their higher revenues, according to the budget policy statement. However, many intermediate cities and smaller municipalities with reasonably sound revenue bases are not taking advantage of long-term debt finance to invest in infrastructure.