Pandemic impact on financial sustainability of Western Cape municipalities: collaboration with Hanns Seidel Foundation

Meeting report

Mr Graham Paulse, Head of Department: Western Cape Department of Local Government, explained that the research is one of many studies undertaken. Annually, the department does assessments on the financial performance of municipalities, on the rates that municipalities charge and comparative analysis of services. It has been found that smaller municipalities are charging higher tariffs. The department looks at the affordability of services both from a consumer and municipal point of view to see if the consumers are getting a good service from municipalities. At the onset of the pandemic the department had engagements with municipalities on their sustainability. The department also spoke to SALGA, Eskom, and Accountant General on the possibility of rebates. The Stellenbosch University, in collaboration with the Hanns Seidel Foundation, conducted the research study into Western Cape municipalities and the impact of the pandemic on their financial sustainability. The research came up with recommendations.

Prof Tania Ajam, University of Stellenbosch School of Public Leadership, pointed out there has been remarkable resilience in the short term in the Western Cape local and district municipalities despite pandemic-inducing financial pressures, but medium and long term financial sustainability threats loom. The pandemic amplified conditions which had prevailed before. It worsened conditions where there was financial and governance instability, and there was greater resilience where systems were in place with a stable political-administrative interface.

Municipalities that rely on remaining sustainable through selling their products and services engage in long-term financial planning, sophisticated data-collection and financial modelling, creative searches for making the right capital investments to remain sustainable, continually improve service delivery and support systems and reduce waste, and continually search for ways to increase productivity and adapt to changing circumstances.

While the pandemic has exerted short term financial and operational sustainability pressures, on the whole, sampled Western Cape municipalities have been more resilient than would have been expected. Larger municipalities with more buoyant and diversified rates and service user charge bases fared better than their smaller counterparts. Those municipalities dependent on agriculture fared better than those reliant on the tourism sector and drought related factors. If there were challenges prior to the pandemic, these were magnified. But municipalities with the systems and governance stability in place prior to the pandemic were more resilient during the pandemic.

For most local municipalities the growth of FBS costs and subsidised revenue costs over the MTEF is projected at below the growth rate of the LG Equitable Share allocation, but the assumptions about increases in indigent households might be under-estimates where targeting criteria have not been tightened. There has been increased reporting compliance during the pandemic. Rates and user charges were not as strongly undermined as they could have been, but smaller own revenue sources were hard hit such as fines, penalties, licences, rental of municipal property. The pandemic has made it more difficult to balance sustainability and affordability of tradeable services.

Debt impairment is expected to increase. Long-term sustainability factors – such as eroding electricity surpluses, increased employment costs and bulk services compared to the LGES – are more important than Covid-19 in the near term, although this could change, should the pandemic drag on. The most significant expenditure pressures are largely driven by systemic factors, not pandemic costs. These expenditure pressures include employment and bulk service costs increases, unaffordable national minimum norms and standards, increased costs of landfill services and court decisions on land occupation.

District municipalities were hit harder than local municipalities in the first quarter of the pandemic in their operating balances, but there was a recovery in the next two quarters until December 2021. Liquidity and solvency were impaired slightly but still satisfactory. The pandemic highlights the social development role of district municipalities in rural areas. Agency agreements appear to be ad hoc and do not create funding certainty over the MTREF but create pressures for expansion of roads function employment such as in Central Karoo.

When it comes to long term sustainability factors, Prof Ajam indicated there are hard decisions for municipalities on cost of employment, prioritisation of the capital programme, tariff setting for operating surpluses to build up capital reserves, optimising existing revenue sources and partially funded mandates. The Local Government Fiscal Framework (LGFF) has become unstable, reducing certainty and predictability. The Local Government Equitable share and conditional grants are no longer protected. The LGFF has remained unresolved for more than a decade. A fundamental review of the LGFF is required so that “finance can follow function”, not more incremental tinkering plus also a change management strategy.

Discussion

Mr A Van Der Westhuizen (DA) wanted to understand the reasons for the differences between Stellenbosch Municipality and Drakenstein Municipality because the former seems to have a better income revenue than the latter while both are financially stable and semi-rural. Also, he asked the extent to which the research has considered the income revenue flow of the municipalities throughout their financial year. He asked if it is possible to get a correlation between the percentage of people receiving and paying municipal accounts and those adults living in poverty.

Prof Ajam explained there is a difference between Drakenstein and Stellenbosch. Part of the reason is external. Stellenbosch has experienced income revenue growth during the pandemic while Drakenstein has seen its revenue income shrinking. It is because of the different composition between these two municipalities. Drakenstein spent a lot on infrastructure. There are internal reasons as well. Seasonality is another factor because revenue payments differ throughout the year. Quarterly payments assessments are done year on year. An increase in property rates is always observed during the fourth quarter.

Prof Ajam indicated there is never a 100% correlation when it comes to indigent household and municipal income recovery because it is always a rough indicator no matter how you tweak the stats. The coverage is decreasing. As a result, national government is considering creating new entitlements like a basic income grant whereas it is not funding entitlements like basic services.

Ms M Maseko (DA) asked why the department is using the Living Conditions Survey of 2014/15 and not years like 2016/17 and 2018/19 to check the alignment of the recent unemployment stats and the registration of indigent households of 2019/20. She wanted to find out if there is an indication to show that municipalities did not have an appetite for indigent grant awareness campaigns because of revenue lost during the lockdown.

Prof Ajam stated even if you look at the recent updated data, you would still see the same story. Increased unemployment rate is not factored in the research report prepared for the Committee. On whether municipalities understand their communities, she replied municipalities are under severe cost-containment measures. It is not because they do not want to do more, but they have been cut to the bone.

Mr P Marais (FF+) asked if the research has pointed out the effects the municipal demarcation criteria had on the viability of rural municipalities and if there is still a need for re-demarcation. He asked if the study compared the efficiency of the disbanded regional councils compared to the current district councils because the rich have to help the poor. He asked if the reintroduction of regional council levies would help to solve instability at local level. He asked if big municipalities have failed to prepare for rapid urbanisation or rural municipalities have failed to develop growth points to stop rapid urbanisation.

Prof Ajam replied that demarcation is outside of the scope of the study undertaken. If it were undertaken, the methodology would be different. She stated the Financial and Fiscal Commission had done a study of this nature and it was discovered that when municipalities merge, service delivery stops for three years. So there is a need to be careful when thinking about re-demarcation to avoid having nothing happening for three years.

The regional council services levy was not constitutional and would need to be reformulated. District municipalities need to have their own revenue resources and not rely on national government grants that could be cut at any time.

On urbanization, she said both rural and urban municipalities have failed to create opportunities and plan to contain this. The last decade has been wasted because nothing was planned about urbanisation.

Mr P Maran (ANC) commented the matter raised about Stellenbosch and Drakenstein is similar to that of Kannaland and Laingsburg. He asked if the impact of drought was taken into consideration when looking at the income stream of rural municipalities because Stellenbosch has not experienced drought in a long time. He asked if the study looked at the impact of municipal higher tariffs on communities and if this is sustainable in ensuring people continue to pay their rates. Nothing was said about the impact of City of Cape Town Metro higher rates on poor communities.

Prof Ajam replied that there has been, even in 2019, a negative growth rate of 1% in Kannaland Municipality and 2% in Laingsburg Municipality. The outcomes have got to do with the economy of the two municipalities and how their municipal managers respond to issues. Laingsburg is seen as more resilient and responds better than Kannaland.

On the higher rates, the study did not look at affordability and that would have required going to communities to do a survey and there were no resources and time to do that. Increases came as a result of drought when it comes to water. The impact is massive in Cape Town and requires further study. Due to time constraints, the presentation could not include everything contained in the research.

Mr Marais asked Prof Ajam about her views on the success of metros and if this model was suitable for South Africa. Was it necessarily efficient in bringing government closer to the people, or was it just taking the government away from the people?

Prof Ajam replied that it is important to discriminate between the democratic and economic aspect. From a democratic point of view the metros are further away from the people, but from an economic point of view, the metros are efficient. A study indicated that the City of Cape Town as a metro is efficient. Considering that we are moving to the digital stage, everything is going to be done much cheaper at metro level.

From an economic aspect, Mr Marais asked how the adjacent or surrounding municipalities could benefit from the metro income because most people come to the metro to spend their money.

The Chairperson suggested the question from Mr Marais should be considered for further research. The presentation made it clear there is correlation between good governance and financial stability and this has been evidenced by the 2020 audit outcomes of the Western Cape municipalities. He asked if there is a direct link between reduction in Local Government Equitable Share and slowness in registering indigent households. He asked if the research encountered a relationship between maladministration and vacancies in technical posts. He asked what the latest information is on employment changes when looking at the pandemic. Improvement in employment in the Western Cape will encourage people to pay for services.

Prof Ajam admitted there is a link with LGES reduction, wage bill increases and bulk service costs increases. Municipalities have no incentive to expand the indigent base and the ability to do it is compromised. On vacancies, functions like supply chain management (SCM) are compromised if there are critical vacancies, including the absence of town engineers. Rural municipalities are struggling to attract suitably qualified skills. It’s all about regulations because most municipal managers in urban areas have stated there is no reason for them to move to a rural municipality for the same position and more responsibilities.

On employment, Prof Ajam indicated there is an upswing in commodities. Advanced economies are recovering faster and this means we could do better in tourism, if everyone in the country is vaccinated.

Ms N Makamba Botya (EFF) asked if the municipalities of Drakenstein, Mossel Bay, Overstrand, Stellenbosch, Saldanha, and Swartland have resources to participate in the Municipal Energy Resilience (MER) Project introduced last year by the Western Cape Treasury and Department of Local Government.

Prof Ajam said the question was not part of the presentation, but could be responded to by the department.

Mr Paulse replied that his department is working with the Department of Economic Development and Tourism, Small Enterprise Development Agency (SEDA) and the French Development Agency on infrastructural matters to make these projects bankable.

Mr Marais remarked the research report is based on Covid-19 and its impact, and he wondered what would happen if the pandemic continues for the next five years.

Prof Ajam indicated no one knows what the duration of the pandemic would be. If you look at the research findings, you will discover the pandemic is not the major challenge. Systematic issues in the local government framework are of major concern. It would be better if more attention is paid to bulk service costs, local government equitable share than the pandemic per se. The country has got to learn to live with the pandemic. Vaccination is not a magic bullet. Problems are structurally deep and depend on what is done at national level.

The Chairperson asked what could be extrapolated from the research findings about municipalities not covered by the research. Do the findings apply to the municipalities not covered by the study?

Prof Ajam replied that they could generalize. The findings were presented to the municipal managers’ forum and municipal mayors. Things differed from municipality to municipality. There was an engagement with the Financial and Fiscal Commission. The Western Cape has done well compared with other provinces.

Ms Marlene Barnard, Hanns Seidel Foundation Senior Project Manager, said the discussion has helped them to better understand problems faces by municipalities. It had been a good idea for the Foundation to support the study to make local government more effective and efficient in future.

Resolutions
- The Committee would request the full research report from Prof Ajam. Thereafter, it would engage with the department on the systemic challenges identified in the research report.
- The Committee would request a detailed report from the City of Cape Town Metro about the impact of the higher tariffs on poor communities.
- The Municipal Energy Resilience (MER) plan should be forwarded to it for a read-through.

The minutes of 31 August and 7 September 2021 were adopted.

Meeting adjourned.