Tania Ajam, Johan Burger, Geo Quinot, Melissa Botha, Deyana Isaacs & Johnny Douglas | Oct 25, 2021

The impact of the Covid-19 pandemic on local municipalities in the Western Cape

The School for Public Leadership at Stellenbosch University in partnership with the Hanns Seidel Foundation conducted a research study on the impact of the Covid-19 pandemic on municipal fiscal sustainability in the Western Cape (WC) province, which completed in April 2021. The local municipalities (LMs) in the sample included Stellenbosch, Drakenstein (large municipalities), Bergrivier, Hessequa (medium sized municipalities) and Swellendam, Kannaland and Laingsburg (small municipalities). This article aims to distil the key findings from that study.

While the pandemic has exerted short-term financial and operational sustainability pressures, sampled WC municipalities, on the whole, have been more resilient under the circumstances than would have been expected. Their resilience is largely a function of the resilience of their tax bases and the agility of the pandemic responses by their management.

Size and diversity of the revenue base is an important factor for resilience: larger municipalities with more buoyant and diversified rates and service user charge bases fared better than their smaller counterparts. The composition of the local economy also played a major role: those dependent on agriculture where the drought had broken fared better than those reliant on the tourism and hospitality sector. Similarly, those municipalities with a higher proportion of industries designated as essential (such as financial services) and with more skilled residents who could take advantage of working from home arrangements. Smaller municipalities, such as Laingsburg, were placed under severe cashflow pressure with unspent conditional grants virtually the only funds in their bank accounts.

If there were challenges prior to the pandemic, these were magnified during the pandemic. But municipalities with the systems maturity, governance stability, business continuity risk management and financial management capacity in place prior to the pandemic were better placed to respond agilely during the pandemic. Proactive strategies included: working from home, opening revenue offices early in the lockdown, intensifying pre-pandemic revenue enhancement strategies (e.g prepaid meters, e-billing, changes to tariff structures to include flat-rate connection fees) and existing cost containment measures.

The hardest hit were the capital budgets of LMs: The uncertainty occasioned by the pandemic caused LM’s to adopt more conservative borrowing strategies with increased reliance on internal funds and capital transfers, some ceasing long-term borrowing altogether. The drawing down of internal funds will have operational consequences in the future, as well as additional pressure to raise tariffs to engender future operating surpluses to replenish capital reserves since borrowing for that purpose is not permitted.

Rates and user charges were not as strongly undermined as they could have been, but smaller own revenue sources were hard hit by the lockdown: fines, penalties, licences, rental of municipal properties, etc. The pandemic has made it more difficult to balance sustainability and affordability of tradeable services in the face of large-scale loss of jobs and livelihoods. Debt impairment is expected to increase.

Long-term sustainability factors appear to be more important than COVID-19 in the near term, although this could change, should the pandemic drag on. These include Local Government Equitable Share (LGES) increases, employment increases and bulk service increases, eroding electricity surpluses. Most significant expenditure pressures are largely driven by systemic factors, not pandemic costs primarily, including unaffordable national minimum norms and standards, increased costs of landfill services, and increased incidences of land invasion.

Cost containment strategies have been stringently applied, and there is decreasing scope for savings as expenditure is pared to the bone. Personnel budgets have the most significant scope for savings.

For most LM's the growth of Free Basic Service provision costs and subsidised revenue costs over the MTEF is projected at below the growth rate of the LGES grant, but the assumptions about increases in indigent households might be under-estimates.

There has been an increased reporting compliance during the pandemic, due to the special reporting requirements by National Treasury as well as the Auditor-General.

The transition to Municipal Standard Chart of Accounts (MSCOA) remains a challenge as evidenced, for example, by the number of negative balances in the Section 71 quarterly reports where correcting journal entries have been processed. The interviews conducted as part of the research study reflect that MSCOA is not seen as a value add by high capacity municipalities and there are perceptions of insufficient support by the lower capacity municipalities.

The pandemic has also seen innovation from sampled LMs such as Drakenstein’s small scale yet rapid and flexible emergency food security programme through partnering with an NGO, where e-vouchers were sent to recipient’s mobile phones for redemption at local shops. This was a safer and more creative response than the national Department of Social Development’s slower food parcel response which exposed recipients to infection by the virus in long queues.

The research revealed that WC municipalities have shown remarkable resilience up until April 2021, even after the devastating drought and amidst the most devastating pandemic and concomitant lockdown restrictions. This is partly attributable to strong and resilient financial and service delivery positions prior to the pandemic, and the competence, cohesion, continuity and experience of their management teams. In addition, the most resilient municipalities also ascribed their favourable financial and operational sustainability to executive maturity and stability and good working relationships between the officials and politicians.

There are nevertheless serious concerns about longer-term operational and financial sustainability, mostly as a result of factors outside the control of the municipalities. It is possible to interpret the generally positive financial and operational sustainable position of most sampled municipalities as an indication that they will always cope (and complain) and therefore the status quo can be maintained. Such interpretation can be fatal. Most LMs in the WC sampled in the SPL study on municipal sustainability, with the exception of the smallest, have so far succeeded to remain sustainable through their resilience and agility. However, there is a sense from the majority of respondents that the status quo will not be tenable in the future. The pandemic may have just accelerated the inevitable, namely that externally induced constraints, the current basket of services for local and district municipalities and arrangements between them, the current business model by which these baskets are operated, the current grant allocation models, the current arrangements around agency services and even possibly the current demarcation of boundaries, especially in the case of small municipalities, may need fundamental reconfiguration.

 

By Tania Ajam, Johan Burger, Geo Quinot, Melissa Botha, Deyana Isaacs and Johnny Douglas; Stellenbosch University (School of Public Leadership and the Department of Public Law)

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