Tinashe Carlton Chigwata & Jaap de Visser | Mar 29, 2021

The financial impact of COVID-19 on district and local municipalities: A national perspective

On 29 March 2021, the Dullah Omar Institute convened a webinar on the financial impact of Covid-19 on district and local municipalities. The webinar was attended by close to 80 participants, drawn from government, civil society, the private sector and academia. The theme was unpacked with Prof Tania Ajam, professor in Public Policy, Economics and Finance at the Stellenbosch School of Public Leadership and Dr Mkhululi Ncube, Programme Manager of the Local Government Unit at the Financial and Fiscal Commission (FFC). The discussion was moderated by Prof Jaap de Visser, Director of the Dullah Omar Institute. What follows is an overview of Dr Ncube’s presentation to the webinar.

Background

Dr Ncube started his presentation by providing a background of the state of local government in South Africa prior to Covid-19. He stated that local government was already facing many challenges including poor service delivery and weak institutional governance capabilities. He indicated that around 63% of the 257 municipalities were already in financial distress, a third of the municipalities were dysfunctional while only 53, 7% of senior managers in local government complied with the minimum competencies prescribed for their jobs. He also highlighted inefficiencies in the sector. For instance, research has shown that rural municipalities could provide 60% additional services with the same resources. He further argued that the sector was characterised by “bad choices” and gave an example of a municipality where the remuneration budget consumes about 60% of the operating budget.

The other underlying challenges alluded to by Dr Ncube include: poor financial management, endemic profiting or corruption in the procurement process, poor asset management, and weak accountability and oversight. He also pointed at the instability at management levels and in coalition governments. Last, he spoke about the problem of rising municipal debt to Eskom and Water Boards which he stated could soon be accompanied by tax issues to SARS. Dr Ncube argued that interventions adopted to address these challenges have so far been ineffective and Covid-19 “simply amplified” some of the challenges.

District municipalities

Turning to district municipalities (DMs), Dr Ncube stated that DMs were already in a precarious situation. For instance, 61% of the 44 DMs were in financial distress. He spoke about the misalignment of the funding model for DMs which has remained unresolved for many years. He argued that the funding model (especially the Regional Services Council replacement grant allocations), “left a lot to be desired”. The fact that MECs in the different provinces can change what districts can do makes it difficult to establish a robust funding model for all DMs. Thus, prior to Covid-19, DMs were really in a dire position and now the proposal to add the district development model on top of this particular layer adds further uncertainty.

Impact of the pandemic

Dr Ncube stated that Covid-19 impacted adversely on municipal revenue sources – intergovernmental grants (transfers) and own revenue. Prior to Covid-19, the growth in national transfers was already decreasing due to national government’s fiscal consolidation. He argued that Covid-19 has added more pressure for government to tighten its fiscal consolidation measures. Some of the intergovernmental grants which were protected, such as the equitable share, are no longer as protected as before. In short, transfers are now under significant pressure. Own revenue sources - property tax and services charges - are also under pressure. Dr Ncube explained that the Covid-19 regulations impacted the sector in four areas namely governance, infrastructure, social and financial. On governance, Dr Ncube indicated that decision making was delayed at the detriment of service delivery, IDPs of many municipalities were “thrown off course” and public participation was disrupted. When it comes to infrastructure, he stated that the repairs and maintenance were often deferred and infrastructure projects postponed. The social impact was dire –inequalities, hunger and vulnerability intensified.

Financial impact

Dr Ncube stated DMs rely to the tune of 75-85% on transfers while own revenues account for the remaining 15-25%. Thus, DMs were fairly insulated from the financial effects of Covid-19 because the majority of their revenues were guaranteed in the form of intergovernmental transfers. This has however changed, given that intergovernmental grants are now vulnerable. Grants to local government will decrease by 2% over the medium term expenditure framework (MTEF). This is due mainly to the reduction in the equitable share, which the national government has historically protected to fund basic services - water, sanitation, electricity and refuse removal. The equitable share is going to fall by 4% while the general fuel levy sharing with metros will decrease by 1 % over the MTEF. According to Dr Ncube, fiscal consolidation will adversely affect municipalities especially those that rely heavily on transfers. DMs are thus now even more vulnerable. Overall, Dr Ncube argued that the progressive realisation of basic services is going to be affected in the medium to long term.

Impact of Covid-19 on municipal revenue and expenditures

Dr Ncube predicted that “with the uncertainties still lingering around” the gap between municipal revenues and expenditures may widen further going forward. Unfortunately, municipalities cannot count on transfers to close this gap (as they did before Covid-19) because of the fiscal consolidation measures explained above.

According to Dr Ncube, the impact of Covid-19 is differentiated. He stated that with regard to revenue, metros are more affected than others followed by the intermediate cities (B1). According to him, the B1 municipalities are the future engines of growth as such “these are the cities that we need to watch as they grow”.

Revenue collection

Dr Ncube stated that revenue collection levels declined across all municipal categories. He, however, noted some rebound in the intermediate cities but he was unsure of whether this will be sustained. Dr Ncube revealed that for some municipalities such a rebound may be difficult to realise because of the existing uncertainties particularly with the 3rd wave looming.

Impact of Covid-19 on revenue sources

Covid-19 impacted revenue sources to varying degrees. Revenue sources from water services were the most adversely affected. Sanitation-related revenues were significantly affected among B4s. Property rates were less affected as well as electricity revenues. Given the impact of Covid-19 on municipal revenue sources, Dr Ncube recommended that, after the pandemic, there is a need to diversify revenue streams. He revealed that the FFC has spoken about the need for this diversification so that we can avoid reliance on revenue streams that are particularly vulnerable to disasters.

Debt

On debt, Dr Ncube stated that Covid-19 affected consumers to the extent that some of them could no longer pay their bills. This in turn undermined the ability of municipalities to pay bulk services provides. Thus, it is not surprising that the number of municipalities failing to pay Eskom increased (according to Dr Ncube) from 24 before Covid-19 to 38 as of December 2020; for water boards, the number increased from 11 to 13.

Way forward

Covid-19 is seen as an obstacle to progress, but according to Dr Ncube “there are some opportunities within the pandemic”. He proposed a number of recommendations to promote post-Covid-19 recovery. These are:

  • the reprioritisation of resources,
  • the adoption of measures to enhance efficiency (“there is a lot that municipalities can do with limited resources”),
  • revenue enhancement measures (“municipalities should leverage the competencies of private partners”, “value for money must be the buzz-word”),
  • the capitalisation on opportunities to build local economies,
  • the development of new supplementary revenues (e.g business tax and land value capture instruments for cities)
  • driving infrastructure-led growth  (and repairs and maintenance should be prioritised to stimulate the recovery)

Last, Dr Ncube stated that there are Covid-19 related legacies that need to be sustained beyond the pandemic. For instance, he argued that there is a need to invest in the use of digital technologies to help ensure service delivery.  The move to remote working and digitally-enabled interactions saves resources and according to him, intergovernmental grants should respond to this.

 

by Tinashe Carlton Chigwata & Jaap de Visser

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