SACN PRESENTATION

LOCAL GOVT EXPENDITURE

REVIEW

Krish Kumar 2006-11-14

INTRODUCTION• Amalgamation of 843 municipalities into 283 must not be under-estimated in terms of complexity, HR rationalisation, disparate systems, policies and procedures - all in tandem with normal functioning of the Admin

• Apartheid legacy / rationalisation / legislative challenges

• Maintenance (operating expenditure) and renewal (capital expenditure)

- Added areas with no tax base and poor ability to pay

- Poor service quality / aging infrastructure inherited

• Budget allocations need to be linked to an assessment of actual needs and affordability

• Severe constraints on skilled and experienced resources

- acknowledge that capacity differs between municipalities

- metro / well-capacitated municipalities but still have the country’s poorest cities – urban migration

INTRODUCTION• Alignment of national priorities and provincial growth strategies with local IDP’s

- poor integration

• Alignment of functions and fiscal powers

- RED’s

- Housing accreditation

- Unfunded mandates

- National targets set for local government – water and sanitation & free basic services

• 2010 - during, beyond and legacy

“One machine can do the work of fifty ordinary men. No machine can do the work of one extraordinary man” – Elbert Hubbard

PLANNING & BUDGET ALIGNMENT• Need to establish integration structures that bring together national, provincial and local IDP’s

• Alignment of budgets with IDP

• Determine 3,10 and 20 year development plans, budgets and financial model

• Additional national funding / grants required to ensure backlogs eliminated

- Implications are greater with REDs & 2010 / tariffs stretched

- Local Government budgets / Revenue raising limited

- Capacity to borrow exists in certain municipalities, however, affordability and impact on tariffs significantly huge

“I skate where the puck is going to be, not where it has been” – Wayne Gretzky, professional hockey player

INFRASTRUCTURE BACKLOGS• Huge infrastructure backlogs inherited that requires integration and rationalisation

• Dynamic environment

- migration pattern / urbanisation rates

- growth and unemployment

- changing household formation

• Impact of asset management plans

- target level of service / standards

- life cycle costs of infrastructure

- sustainability

“We will receive not what we idly wish for but what we justly earn. Our rewards will always be in exact proportion to our service” – Earl Nightingale

INFRASTRUCTURE BACKLOGS• Funding constraints

- Municipal Infrastructure Grant insufficient

- Additional funding not affordable

- Impact on tariffs

“Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world.” – Albert Einstein

INFRASTRUCTURE / SERVICE BACKLOGS AS AT 30/06/2006

Infrastructure / Service Ethekwini (Rm) Ekurhuleni (Rm)

Cape Town (household)

N Mandela (Rm)

Water 562 80 4500 492

Sanitation 308 Incl in Water 45 000 477

Electricity/Basic Energy 1 180 950 49 100 56

Refuse Removal 0 77 44 130 11.5

Housing/Shelter 1 750 3 000 300 000 No figures

Access Roads, Sidewalks, & Footpaths, Public Transport Infrastructure & Services

2 940 3 727 1 100km 2 000

Stormwater Drainage 153 700 32% No figures

***Figures from Johannesburg and Tshwane not available

“Opportunity always involves some risk. You can’t steal second base and keep your foot on first” – Joseph Heller

UNFUNDED MANDATES• Fiscal dumping

• Unfair burden on municipalities

• Need to get commitment to relieve local authorities of this unfair burden

MUNICIPALITY HOUSING & HOSTELS (Rm)

HEALTH (Rm)

MUSEUMS (Rm)

LIBRARIES (Rm)

TOTAL

ETHEKWINI 151.9 244.4 29.4 120.9 546.6

JOHANNESBURG - 135 - - 135.0

EKURHULENI 113 215 0.2 63 391.2

CAPE TOWN - 170 9.4 145 324.4

NELSON MANDELA

- 2.8 2.8

TOTAL 264.9 767.2 39.0 328.9 1 400.0

***No figures available from Tshwane

IMPACT OF MUNICIPAL PROPERTY RATES ACT

• Huge implementation challenges

• Cost of preparation of valuation roll in respect of market value

• Impact of ratio of commercial to residential

• Impact of the shift in incidence

• Manage the implementation – big bang vs phased

“Often the difference between a successful man and a failure is not one’s better abilities or ideas, but the courage that one has to bet on his ideas, to take a calculated risk and to act.” – Dr Maxwell Maltz

2010• Stadium funding

• Infrastructure

- Transport

- ICT

- Operating costs – fan parks, shade cloth, fencing, parking

- Upgrading / improvements/ City beautification

- Security costs

• Will have a major impact on local authority spending

• Future maintenance

“Every problem has in it seeds of its own solution. If you don’t have any problems, you don’t get any seeds” – Norman Vincent Peale

2010MUNICIPALITY IMPACT OF

NEW/IMPROVED STADIUM (Rm)

INFRASTRUCTURE IMPACT (Rm)

OPERATING COST IMPACT p.a (Rm)

ETHEKWINI 1 894 4 029 89

JOHANNESBURG 5 200 3 900 Not finalised

RUSTENBERG 140 4 Not finalised

MBOMBELA Not finalised 200 Not finalised

NELSON MANDELA

1 100 9.5

TSHWANE 97 88 Stadium owner to pay

CAPE TOWN 2 490 2 548 264

***Figures from, Polokwane and Mangaung not available

“The world is a great mirror. It reflects back to you what you are. If you are loving, if you are friendly, if you are helpful, the world will prove loving and friendly and helpful to you. The world is what you are.” – Thomas Dreier

MUNICIPALITY 2003/2004

%

2004/2005

%

2005/2006

%

AVERAGE

%

ETHEKWINI 90 97 93 93

JOHANNESBURG 90 93 94 92

EKURHULENI 89 88 89 89

CAPE TOWN 95 95 95 95

TSHWANE 98 94 101 98

NELSON MANDELA 92 95 96 94

AVERAGE % 92 94 95 94

CASH COLLECTION RATE Monthly billing versus payments

• Affected by increasing unemployment trend and urbanisation

• Notwithstanding the increase in debtors, the payment/cash collection rates have increased

• Debtor increase due to historical debt – interest and penalties

MUNICIPALITY TOTAL (Rm)

ETHEKWINI 353.2

JOHANNESBURG 17,5

EKURHULENI 91.4

CAPE TOWN 247.8

TSHWANE 938.5

NELSON MANDELA 87.9

TOTAL 1 736,3

GOVERNMENT DEBT • Very disappointing

• Why can’t National Treasury offset from equitable share?

DEBT & LIQUIDITY

S/TERM DEBT (Rm)

L/TERM DEBT (Rm)

TOTAL DEBT (Rm)

CASH HOLDINGS (Rm)

CASH COVERAGE (TOTAL DEBT)

CAPE TOWN 362.4 2 126.7 2 489.0 1 711.8 0.7

EKURHULENI 103.3 1 441.5 1 544.7 2 387.0 1.5

ETHEKWINI 606.4 3 737.9 4 344.3 2 762.2 0.6

JOHANNESBURG 671.8 4 536.9 5 208.7 2 695.5 0.5

NELSON MANDELA

17.8 427.3 445.0 1 379.4 3.1

TSHWANE 105.0 2 679.6 2 784.6 1 134.8 0.4

TOTAL 1 866.7 14 949.9 16 816.3 12 070.7 0.7

LOANS OUTSTANDING & PROJECTED BORROWINGS

LOANS OUTSTANDING & PROJECTED BORROWINGS

FINANCIAL STATISTICS

TOTAL INCOME

DAYS CASH ON HAND

NET CAPEX : TOTAL INCOME

TOTAL DEBT : INCOME

NET DEBT : INCOME

CAPE TOWN 9 097.7 74.5 8.9 27.4 8.6

EKURHULENI 7 731.6 133.1 9.3 20.0 (10.9)

ETHEKWINI 10 043.2 117.6 20.4 43.3 16.1

JOHANNESBURG 12 856.9 89.9 15.9 40.5 19.5

NELSON MANDELA

2 920.5 173.3 15.1 15.2 (32.0)

TSHWANE 8 110.6 59.2 20.5 34.3 20.3

WEIGHTED AVERAGE

N/A 98.2 15.2 33.1 9.4

BUSINESS LEVIES

• Need to ensure that local government autonomy and funding not compromised

• Need a growth related income stream that takes into account growth in the economy to replace business levies

• Local business tax must be given serious consideration

• 15% growth per annum

• Distribution must be equitable

“The weak can never forgive. Forgiveness is the attribute of the strong” – Mahatma Gandhi

IMPACT OF REDs

• The fundaments and necessity for RED’s appreciated, however, the institutional framework / public entity model is a concern

• Concern about whether we will achieve the redistribution we are trying to achieve with the 6 RED model

• SALGA / Constitutional challenges

• Will affect credit rating and gearing – impact on borrowing

• Contribution / surcharge only for 10 years in terms of blueprint – will seriously impact on the municipality’s funding

• Impact on cash flow if local government does not do collections

• Need to have urgent clarification on these issues due to the major consequences

• Would have preferred the 6 + 1 RED model – less impact on Metros

• Why not create Water & Sanitation as a public entity at the same time?

MUNICIPALITY 2004/2005 INCOME ACTUAL (Rm)

2005/2006 INCOME ESTIMATE (Rm)

% < > 2004/2005 EXPEND

ACTUAL (Rm)

2005/2006 EXPEND

ACTUAL (Rm)

% < >

ETHEKWINI 9 617 10 273 >6.8 9 146 9 374 >2.5

JOHANNESBURG 13 149 14 331 >9.0 11 869 13 115 >10.5

EKURHULENI 8 162 8 712 >6.7 7 975 7 726 <3.0

CAPE TOWN 9 293 10 497 >13.0 8 926 10 338 >15.8

TSHWANE 7 214 7 995 >10.8 6 616 7 602 >14.9

NELSON MANDELA

2 920 3 086 >5.7 2 987 3 013 >0.8

TOTAL 50 355 54 894 >9.0 47 519 51 168 >7.7

GROWTH IN INCOME & EXPENDITURE

OPERATING

MUNICIPALITY 2004/2005 ACTUAL (Rm)

2005/2006 ACTUAL (Rm)

% < > 2005/2006

ACTUAL (Rm)

2006/2007 EST (Rm)

% < >

ETHEKWINI 2 403 2 528 >5.2 2 528 2 847 >12.6

JOHANNESBURG 1 861 2 722 >46.2 2 722 3 193 >17.3

EKURHULENI 918,4 849.0 <7 849.0 1 077,4 >26.0

CAPE TOWN 951.5 1 521 >59.9 1 521 2 686 >76.6

TSHWANE 1 195 1 568 >31.2 1 568 1 725 >10.0

NELSON MANDELA

455.5 631.5 >38.6 631.5 1 374.2 >118.0

TOTAL 7784,4 9819,5 >26.1 9819.5 12 902.6 >31.4

GROWTH IN EXPENDITURE

CAPITAL

PERSONNEL

• Attraction and retention a major challenge especially in engineering, town planning, valuations, IT, and health fields

• Salaries of municipal managers need to be market related

• Need to ensure that we pay a fair rate for any given job – do not compromise on qualifications, especially technical and senior management level

• Agree that there should be a common public sector pay curve, pension benefits, etc, across the sector, but, this needs to be phased in

• There needs to be focused attention on capacity building with assistance / co-ordination from National Government

• Skills SETA not effective – there needs to be a focus on public sector as a priority project

• Once staff are trained by the public sector, they are snapped up by the private sector

• Employment equity targets are difficult to meet as there are not enough graduates

GENERAL• Cost of compliance

- legislation

- fund business plan requirements is onerous

- MFMA reporting onerous for smaller municipalities

• Eliminate duplication and effort by municipalities – National Govt should set up a Small Municipalities Legislation Compliance Network to get economies of scale

• Ensure that information requested is being utilised to inform stakeholders and decision-makers

• Targeted support for struggling municipalities

• Further rationalisation of grants and subsidies

THE WAY FORWARD• All spheres of government need to work, plan and implement in an integrated manner

• Need to address funding gaps

• Need to take cognizance of the different capacities / abilities to spend

• Need to carefully analyze municipalities carefully in terms of effectiveness, ability to spend and focus attention on key areas of intervention (similar to the restructuring grant)

- set clear targets

- monitor / regulate

- provide feedback and mentorship

• Need focused attention on capacity building with regard to key / scarce resources with a nationally co-ordinated programme to identify, train and retain skilled staff

CONCLUSION : KEY ISSUES• Impact of REDs – prefer 6 + 1 model

• Replacement of business levies with a local business tax for Metros and Category B municipalities

• Creating a single consolidated public sector needs careful analysis

“Learn to separate the majors and the minors. A lot of people don’t do well simply because they major in minor things” – Jim Rohn

THE END

“Keep in mind that you are always saying ‘no’ to something. If it is not to the apparent, urgent things in your life, it is probably to the most fundamental, highly important things. Even when the urgent is good, the good can keep you from your best, keep you from your unique contribution, if you let it” – Stephen Covey