Report calls for review of local infrastructure financing in South Africa

In its annual report as part of the national budget process for 2015-16, the commission said municipalities are “compromising the delivery of key social and economic infrastructure” by failing to plan and spend their capital budgets properly. In addition, sources of municipal revenue for capital expenditure are under stress, “mainly because of the current poor economic climate”.

The report recommended that the National Treasury “explore a new funding and infrastructure delivery model for poorly-resourced rural municipalities”, and said  municipal capital expenditure is a “key component” of South Africa’s National Development Plan, the socio-economic blueprint up to 2030.

According to the report, there is “potentially a greater role for state-owned companies and other state agents” to deliver infrastructure. 

The report said the National Treasury’s dedicated PPP unit should maintain a “dataset of existing municipal PPPs”, evaluate the successes and failures of those partnerships and promote “good practice and awareness of risks”. The report recommended “quantifying” the uptake of partnership agreements and “assessing the existing bottlenecks that discourage the use of PPPs”.

The use of PPPs by local governments across South Africa to date has been limited, the report said, but the “use of PPPs remains a potentially untapped financing option for municipal capital investments”.

According to the report, municipalities currently rely on “four broad sources” for financing capital expenditures: intergovernmental transfers, own revenue contributions, external loans and public contributions and donations. While the contribution of municipalities’ funds steadily increased from 2006-07, reaching a peak of 22 billion rand (ZAR) ($2bn) in 2008-09, they then dropped “to below the level of capital transfers received from government”.

The report said this was due to the effect of the recession on revenue generation at municipal level and borrowing capabilities. Other “contributing factors” included municipalities substituting their own revenue sources for national transfers in financing capital expenditures.

The report said: “Clearly intergovernmental fiscal transfers are progressively playing a greater role in the financing of local government infrastructure. This raises issues around the sustainability of local governments’ own revenues for financing local infrastructure needs, as well as whether national government is able to finance the bulk of such expenditures.”

In 2009-10, infrastructure grants paid to local government were “insufficient to supplement municipal-own revenues needed to fund local government infrastructure needs”, the report said. “This vertical fiscal gap is likely to widen progressively, putting more pressure on national government to fund municipal capital expenditure through infrastructure grants.”

Potential solutions that could be used to help tackle municipal capital financing problems could include “informal taxation schemes”, such as used in Kenya, the report said. “Basically they are contributions that local residents make towards the construction and maintenance of local public goods, such as roads and water systems. The contributions can be in money and/or labour. Any payments fall outside the formal tax system but are coordinated by public officials.”

Other recommendations in the report include ensuring that municipal capital budgets “are realistic and financed, based on capacity to deliver and revenue assumptions”. The report said there should be “increasing interaction and partnerships” with other state entities, such as the national power company Eskom and water utilities.

In addition, the report recommended greater use of PPPs “including fully or partially outsourcing municipal services accompanied by effective contract management and appropriate risk transfer”.

A report released by the National Treasury in 2012 (16-page / 908 KB PDF) said that, in recent years, the government had sought to accelerate public infrastructure spending, while also encouraging greater private sector investment. The country’s public sector capital investment stood at 7.4% of gross domestic product (GDP) in 2010, while investment by private enterprises amounted to 12.2% of GDP.