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

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Outcomes of Census 2011 and implications to services required from municipalities

3

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

1996 2001 2007 2011

A

B1

B2

B3

B40.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

A B1 B2 B3 B4 TOTAL

Population 1996-2001 Population 2001-2011

Households 1996-2001 Households 2001-2011

• 2011 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

50

100

150

200

250

300

Metros and secondarycities

Town based municipalities Mostly ruralmunicipalities

R b

illi

on

Growth Backlogs Rehabilitation

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

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2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 -

5000000,000

10000000,000

15000000,000

20000000,000

25000000,000

30000000,000

35000000,000

Total municipal budget per category

Metros

B1

B2

B3

B4

Metropolitan municipal revenue sources- 2007/08 to 2010/11

Audited Outcomes

R'thousand 2007/08 2008/09 2009/10 2010/11

ALL METROS

Property rates 15 506 643 15 869 286 18 720 155 20 602 530

Service charges 33 254 116 39 394 751 49 222 489 60 365 695

Investment revenue 2 222 821 2 208 005 1 234 524 849 679

Transfers operational 11 547 541 13 625 947 14 535 536 15 996 832

Other own revenue 8 038 567 8 927 478 10 679 509 11 426 770

Capital transfers and grant 8 286 526 10 274 695 9 161 062 7 986 340

Total revenue 78 856 214 90 300 162 103 553 275 117 227 846

Source:Local Government Budget Review 2011

The highest revenue is generated from the services charges followed by property rates

Electricity is a major source of municipal revenue

6

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014

Service Charges Vs Transfers

Service charges- electricity revenues Service charges- water revenues Service charges- sanitation revenue

Service charges- refuse revenue Service charges- other Capital transfers and grants

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,2006/07-2012/13

R' million 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

Operating revenue

Category A 28.68 24.09 23.39 29.06 32.58 32.89 37.03

Category B 53.55 50.59 33.69 28.50 27.32 28.53 28.10

Category C 0.29 0.32 0.27 0.13 0.13 0.06 0.05

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Budgeted electricity operating expenditure as a percentage of total budgeted operating expenditure,2006/07-2012/13

R' million 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

Operating expenditure

Category A 15.92 15.25 15.60 20.10 22.62 23.90 27.94

Category B 34.49 30.77 22.96 20.04 19.63 21.70 22.85

Category C 0.69 0.79 0.83 0.29 0.08 0.07 0.08

Most municipalities do not use the cost reflective tariffs, therefore they operate at a loss

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R thousand Surplus Deficit Surplus Deficit Surplus Deficit Surplus Deficit Surplus Deficit

MetrosCity of Johannesburg 316,093 468,649 (48,656) 736,086 City of Cape Tow n 579,618 54,464 218,202 (734,796) 117,488 eThekw ini 440,385 (152,613) 52,849 (209,244) 131,377 Ekurhuleni 207,820 76,730 325,611 146,406 756,568 City of Tshw ane 34,852 (329,966) 52,045 (468,760) (711,829) Nelson Mandela Bay (79,399) (15,388) (87,283) 14,901 (167,169) Mangaung (167,845) 43,385 138,117 (18,718) (5,061) Buffalo City (132,739) (86,916) (35,798) (26,098) (281,550)

Secondary CitiesMsunduzi LM 297,742 (276,613) 56,729 57,329 135,188 Rustenburg LM (45,247) 22,021 1,869 (6,549) (27,905) uMhlathuze LM 19,535 (60,207) 12,539 (23,046) (51,178) Mbombela LM 93,828 18,831 2,947 9,104 124,710 Polokw ane LM (56,281) (13,694) (8,193) (18,772) (96,941) Sol Plaatjie LM (8,748) 18,914 261 (1,924) 8,503 George LM (365) 18,833 33,749 58,833 111,052 OR Tambo DM (203,041) (203,041) Mafikeng LM (14,628) (5,239) (32,542) (52,408)

Total 1,989,872 (490,623) 721,829 (1,153,065) 894,920 (136,512) 286,574 (1,589,105) 2,120,971 (1,597,083)

NotesSecondary costs have been includedEquitable share for Free Basic Services has not been factored in

Trading Services Consolidated

2012/13 FY Electricity Services Water Services Waste Water Services Waste Management Services

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

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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

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Development charges……..

ChallengesAt 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)

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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

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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

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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

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The End