Narrowing the municipal funding gap : a metropolitan perspective in South Africa.
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Metropolitan municipalities play a vital role in service delivery at grassroots level. South Africans suffered from a lack of basic municipal services during the Apartheid era. Accordingly, post-apartheid municipalities underwent a radical transformation to start delivering such basic services as housing, water and electricity to all. Metropolitan governments were established to cover much wider areas to remedy the fragmentation and selective forms of service delivery of the past. However, a concomitant increase in the share of tax revenues has not been forthcoming to metropolitan municipalities to help them provide these services in a financially sustainable and viable manner. Accordingly, this study seeks to find out whether there is a funding gap in metropolitan councils, if so, what the quantum of the gap is, and what can be done to address such a funding gap. This is one of the most important issues facing local government today as it has a direct impact on service delivery, as well as the long-term sustainability and viability of municipalities. The study found that there is a huge funding gap in the three metropolitan councils namely, the City of Cape Town, Ethekwini Municipality, and the City of Tshwane. The key findings arising from the research indicate that: migration and urbanisation are having a huge impact on service delivery in metropolitan councils. The ever- increasing informal households are leading to growing service backlogs. Accordingly, whilst excellent progress has been made in rolling out service delivery, the influx of informal residents undermines the achievements made. This also impacts on the unemployment rate for the three metropolitan councils which is at an average of 24.3 % and is a major cause for concern and will continue to escalate if growth and job creation are not prioritised. Notwithstanding this, metropolitan councils are contributing significantly to the National and Provincial GDP at an average of 10% and 56% respectively. It is apparent that Metropolitan councils are the engines of growth in the economy and there needs to be due support given to them. In addition, there is very little scope to increase the current funding sources, service charges, (electricity, water, refuse and sanitation), rates, and grants as these have been maximised. There is also a major issue of affordability of further tariff increases. In addition the collection rates for all three metropolitan councils are above 95% Therefore, additional or new sources of revenue streams need to be explored, in particular development levies and a local business tax. As regards capital expenditure, a similar challenge of affordability and sustainability exists in meeting the service delivery backlogs and investing in new areas for growth. Whilst borrowings can be increased, this will impact on tariff increases and the affordability by consumers. A further key funding is that not all metropolitan councils are recording backlogs, rehabilitation, replacement and maintenance in a uniform way thus making comparisons difficult. Accordingly a financial model has been developed to ensure appropriate benchmarking using norms set by the World Bank. The model has also assisted in quantifying the funding gap. Accordingly, this study provides a major breakthrough in terms of an enhanced understanding of the funding of metropolitan councils and informing discussions by National Treasury and the Fiscal Finance Commission around the national fiscus, especially with regard to the funding gap and the need to review funding sources including grant funding that goes to metropolitan councils in future. The study found that whilst there is scope for improvement in terms of economies, efficiencies, value for money and productivity and an improvement in collection rates. new sources of revenue need to be identified. However, as recommended by the Fiscal and Finance Commission (FFC) and the South African Local Government Association (SALGA), a local business tax would be the most appropriate funding mechanism to make a meaningful impact on the funding gap as it has good reach and impact. Municipalities should re-look at Public Private Partnerships (PPP’s) as an alternate source of funding and reducing the cost to municipalities, development levies, additional grants, as well as alternate sources of funding as suggested by the FFC. Improved alignment of integrated development plans (IDP’s) to budgets, as well as ‘Smart City’ investments to stimulate growth and investment are also key issues that need to be taken cognisance of to ensure future viability and sustainability of metropolitan councils.