LOCAL GOVERNMENT INFRASTRUCTURE NEEDS vs DEVELOPMENT CHARGES

Introduction South Africa’s 27 largest municipalities face enormous demands for urban infrastructure investment, estimated at some R257 billion over the next 10 years (World Bank Research, 2009) Unlike smaller urban and rural areas, the drivers of this investment need are infrastructure expansion and rehabilitation related to economic and population growth (expansion) and continued service to the customer base(rehabilitation) Cities consist of a complex of overlapping infrastructure networks: from streets that carry commuters to work and goods from factories to water pipes that deliver reliable water supplies on demand for homes, hospitals and factories, sewerage networks and electrical systems As the economy grows, and as urban populations grow these networks must be constantly and continuously expanded 2

Outcomes of Census 2011 and implications to services required from municipalities census reveals significant changes in both the number of people living in South Africa and where they live Number of households has grown in all municipalities faster than population growth, but metros experienced the fastest growth This means that pressures on household services (provision of housing and basic municipal services) is even greater than the growth in pressure on other services like health and education Sufficient revenue is required to meet these service delivery pressures

Infrastructure requirements in municipalities 4 Municipal infrastructure investment requirement, 2009 The demand for municipal infrastructure is spread across all municipalities, but is greatest in the metros and secondary cities About R250 billion is required for the development of new infrastructure in the metros and secondary cities to support growth and rehabilitate infrastructure (World Bank, 2009) Source: World Bank (2009 Municipal Infrastructure Finance Synthesis Report)

Revenue per municipal category 5 The highest revenue is generated from the services charges followed by property rates

Electricity is a major source of municipal revenue 6 Electricity is a major source of revenue in municipalities Rapid increase in bulk tariffs has impact on this revenue This has exhausted historical cash reserves Implications on future funding of municipalities as their ability to use electricity as general source of revenue is diminishing

Budgeted electricity revenue and expenditure as a percentage of total budgeted revenue and expenditure Budgeted electricity operating revenue as a percentage of total budgeted operating revenue,2006/ /13 R' million2006/072007/082008/092009/102010/112011/122012/13 Operating revenue Category A Category B Category C Budgeted electricity operating expenditure as a percentage of total budgeted operating expenditure,2006/ /13 R' million2006/072007/082008/092009/102010/112011/122012/13 Operating expenditure Category A Category B Category C

Most municipalities do not use the cost reflective tariffs, therefore they operate at a loss 8 An analysis of the 17 non-delegated municipalities 2012/13 MTREF found that 8 municipalities budgeted for a cost reflective tariffs, others applied an incremental approach

Options for funding capital expenditure needs in large cities Raising required revenue can take number of forms including- –Expansion of own revenue sources (introducing new municipal tax) –Increase in grant funding from national government –Improved borrowing (limited scope) –Use of Development Charges 9

Development Charges What are development charges ??????? Development charges are one-time fees applied to offset the additional public-service investment cost resulting from an intensification of land use. Development charges are an important component of a sustainable system of municipal infrastructure financing. The general concept of a development charge is that the urban growth and expansion of new land use development creates the need for additional infrastructure services. These services, which are an essential part of land use development, are a direct cost generated by that development and should therefore be paid for by the land developer. This will avoid the financial burden being imposed on municipalities or existing communities. Development charges can and should cover a significant portion of the costs of providing infrastructure that supports economic growth. They are a strategic and efficient source of capital finance to pay for new infrastructure that supports economic growth The funds collected cannot be used for operation, maintenance, repair, alteration, or replacement of existing capital facilities and cannot just be added to general revenue. NB: According to World Bank study, South African municipalities are under charging development charges 10

Development charges…….. Challenges At present, the performance of development charges is undermined by various factors: An inadequate determination of the true costs of infrastructure Inappropriate accounting practices Unsatisfactory planning and budgeting systems A confusing and inconclusive legal base (various legislations are used) 1

Development Charges What has been done National government has embarked on the process of developing the policy and legal framework that enables the improved levying of development charges. In particular, policy is intended to assist in ensuring that these charges are levied in a transparent, equitable and efficient manner via a common standard, and in support of national development objectives To effectively implement this policy, municipalities will be required to build the capacity. This includes the ability to design, promulgate, manage and account for a development charges scheme Clarity on the legal basis for the charge need to be prioritised this will be done through the amendment of the Municipal Fiscal Powers and Functions Act 12

Principles underpinning Development Charges draft framework Equity and Fairness Development charges should be reasonable, balanced and practical so as to be equitable to all stakeholders Predictability Development charges should be a predictable, legally certain and reliable source of revenue to the municipality for providing the necessary infrastructure Spatial and economic neutrality A primary role of a system of development charges is to ensure the timely, sustainable financing of required urban infrastructure. They should be determined on identifiable and measurable costs Administrative ease and uniformity The determination, calculation and operation of development charges should be administratively simple and transparent 13

Development charges.. Way forward National Treasury has already appointed a service provider who will be responsible for the draft amendments to the Municipal Fiscal Powers and Functions Act and draft Regulations with regard to Municipal Development Charges National Treasury will consult all appropriate stakeholders on these reforms 14

2 The End