Municipal financial distress: are we looking in the right place for answers? Dr Tracy Ledger 11 March 2019

THE BOTTOM LINE There is significant empirical evidence of the financial distress of a growing part of local government: COGTA’s list of unfunded budgets, the AGSA’s list of deficit municipalities. Recent work that we have completed suggests that the LGES needed to be some R56 billion – R68 billion higher in the current year for local government to be fully funded, a considerable portion of that being for operational expenditure Maintenance is being neglected – we will all get to pay for that Unfunded mandates Under-funding of basic services Under funding of basic capex requirements What has gone wrong?

THE POPULAR NARRATIVES - 1 LOCAL GOVERNMENT IS A SITE OF EXTREME FINANCIAL MIS- MANAGEMENT AND WASTE OF RESOURCES While any money lost to mismanagement or poor management of resources is to be avoided, reality is very different. F&WE: 0.45% of total expenditure R28.4 billion in irregular expenditure (8.6%). Most of this represents relatively minor compliance issues, and the AGSA is clear that in most cases goods and services are procured R12.6 billion in unauthorised expenditure (3.8%). This represents in large part poor planning, and not gross misuse of funds

THE POPULAR NARRATIVES - 2 CONSUMERS ARE NOT PAYING THEIR ACCOUNTS BECAUSE OF A ’CULTURE’ OF NON-PAYMENT Municipal accounts are simply unaffordable to a significant percentage of households: 80% of households cannot afford a nutritionally balanced basket of food The indigency waiver only covers a fraction of households who need it, and allocations are way too small for larger households Rapid increases in the cost of electricity Some households don’t receive accounts at all, due to factors outside the control of the municipality A significant number of municipalities find themselves in a situation where they are constitutionally obliged to deliver services to people who simply cannot afford to pay for them.

THE POPULAR NARRATIVES - 3 MUNICIPALITIES ARE NOT TRYING HARD ENOUGH TO COLLECT OUTSTANDING ACCOUNTS The main tool available to collect money is electricity disconnection (the White Paper recognised this and recommended that municipalities MUST retain the right of electricity disconnection). Eskom currently supplies electricity to 50% of South African households, effectively putting these households out of reach of this enforcement mechanism. The biggest loser is water accounts Other organs of state owe local government R8bn – no equitable share witholding for them! Some municipalities will never cover their operating costs, even if everyone pays their account

SO WHAT IS THE PROBLEM? Many of the most important assumptions made in the White Paper about the own revenue raising ability of local government have proven to be inaccurate. In addition, other critical assumptions about the functioning of local government have either not been implemented, or have not been clarified. As a result, estimates of local government’s ability to raise its own revenue made in 1997 can now be seen to have been wildly inaccurate. The White Paper had nothing to say about how we should deal with the situation we now find ourselves in: where so many households simply cannot afford to pay for services, and expenditure obligations have increased exponentially

SO WHAT IS THE PROBLEM? The White Paper assumed that the LGES would ALWAYS be sufficient to balance the books – thus financial viability was not a critical factor for demarcation It had nothing to say about what we should do when we find ourselves with a R56 billion hole in the budget This is not intended as a criticism of the White Paper itself: local government in post-apartheid South Africa represented a step into the unknown, and many assumptions had to be made without the benefit of empirical evidence. The problem is not the White Paper, but rather the ongoing omission to review it in the light of 20 years of empirical evidence.

CONCLUSIONS The correct place to look for the financial distress of municipalities is the fiscal framework foundation on which they have been built We need a new White Paper and a REAL commitment to financially viable local government: Eskom restructuring Powers and functions Regulatory burden Provincial and national failure to implement S 139 of the Constitution Outstanding accounts Maintenance and physical distribution losses require an emergency response.

Thank you