Why our cities’ finances need serious reforms

The latest State of City Finances report shows that cities face ever tightening budgets and are plagued by structural issues, including a shortage of professional staff and stagnating revenue.

South African cities face a shortage of revenue, skills, and stability, according to the latest State of City Finances report. Experts say reforms are needed.   

The report notes that local government revenue per inhabitant in many South African cities is either stagnant or declining when adjusted for inflation. Speaking at the report’s launch this week, experts attribute many challenges to structural issues.   

“I would say there are three important assumptions that underpin the idea of local government finance over the last 20 years that have proven to be not correct,” said Michael Sachs, a Professor at the University of Witwatersrand and formerly head of Treasury’s budget office. 

“It was widely assumed that electricity would remain cheap and that municipalities would then be able to piggyback, as they had been doing since the 1980s, on cheap electricity in order to finance themselves,” said Sachs. Cities historically generate revenue by buying electricity in bulk from Eskom and then selling it to residents.   

“Of course, we know now that electricity was being kept cheap artificially by running down the Eskom generation capacity, not reinvesting in the system until we hit load shedding.”

Sachs said the second assumption is that the local government would provide people with goods such as electricity and water, which people would pay for. However, “Cities have not actually exercised sufficient fiscal effort to ensure that those who can afford these goods pay.” 

The report highlights that non-revenue electricity, the difference in the amount of electricity bought by cities from Eskom and the amount sold to customers, increased in every city covered in the report over the last ten years. Some causes of higher non-revenue electricity include electrical theft, inaccurate billing and collection. 

Tracy Ledger, Director of the Energy and Society Programme at the Public Affairs Research Institute, pointed out another flawed assumption, “That there was not going to be any conflict between tariffs that were sufficiently hard to fund local government and tariffs that households could afford.”

Ledger points out that despite the number of people living in cities grappling with poverty increasing yearly, the payment exemptions given to indigent households are decreasing. Ledger explains this is because the funding for indigent households comes from national government transfers. However, some of these funds are redirected to the general budget.  

“This is not happening because city management is sitting around and thinking evil thoughts,” said Ledger. “But the bottom line is that this diversion of funding into general revenue, which is often necessary to try and end up with a funded budget, is essentially a tax on the poorest households.”

The last assumption highlighted by Sachs is that officials thought the economy would grow. “The combination of those three things not having materialised has led us into this situation now, where we face a generalised fiscal crisis of local government. And I would suggest. That we’re going to have to reform the system.” 

A need for stability and professional staff 

Although generating more revenue is a problem, experts agree that there are other issues, especially regarding stability. 

“We can see a direct correlation between political instability and financial management,” said Jan Hattingh, chief director of local government budget at National Treasury.

“It doesn’t make sense to develop long-term strategies. And in each term of office, when there’s a new group of political principles and we start afresh As a Treasury, we’re trying to advocate that this has to be uninterrupted.”

The report notes that high political volatility also leads to high turnover in senior positions which is one human resource issue together with the need for professionalisation. 

“Between 2015/16 and 2019/20, the number of professionals employed in the metros declined from 8000 to just 6600, and yet employee-related costs in cities continue to increase rapidly.”