Simpiwe Seti explores the impact of the 2010 World Cup and other factors on local government spending

Delivering the 2006 medium term budget policy statement, Minister of Finance, Trevor Manuel revealed that yet again, more money would go towards local government. According to Manuel “transfers to local government remain one of the fastest growing categories of public spending”. Of the additional R80 billion available for government spending in the medium term budget, it is proposed that provinces will receive R28 billion and local government will be allocated R19 billion.

To compensate for the scrapping  of RSC levies, R7 billion will be added to the local government equitable share in 2006/2007, with an overall top-up of R24 billion over the 3-year MTEF period. In the same budget speech, it was proposed that provinces were to receive R176,7 billion whilst R26,5 billion went to local government. R18, 1 billion was to be distributed through the municipal equitable share formula.

At local government level there are two key spending priorities over the budget period, namely, service delivery especially the provision of free basic services, and capacity building.

How additional resources will be spent

Of the additional funds directed towards local government R5 billion has been allocated for the equitable share in order to help accelerate the delivery of free basic services. A further R1, 4 billion will be allocated for bulk water and sanitation infrastructure, and R400 million for the eradication of the bucket system .

Free basic services

Government claims an overall improvement in the provision of free basic services in most provinces. In the Eastern Cape all 39 municipalities are said to be providing free basic water , while 31 are providing free basic electricity. In Limpopo all municipalities claim to provide free basic water, while 21 out of the 26 municipalities were providing free basic electricity. Rollout of free basic services has been faced with severe  infrastructure backlogs in rural and informal settlements as well as lack of municipal technical capacity to plan for and manage infrastructure investment and service delivery. The additional R1, 4 billion for bulk water and sanitation infrastructure is geared towards  addressing these backlogs.

Eradication of the bucket system

Continued use of the bucket system has also been highlighted as one of the challenges hindering the roll-out of free basic sanitation in some areas. In February 2006 the reported target for adequate sanitation was the removal of  45 000 bucket toilets by 2007. This target will become more feasible due to an extra R400 million geared to “the eradication of the bucket system”.

Expenditure trends in local government

The Local Government Budget and Expenditure Review for 2001/02 to 2007/08 published in October 2006 indicates that the combined local government budget has nearly doubled over the past four years, from R64 billion in 2001/02 to R119 billion in 2005/06. The importance of the major urban areas is revealed by the fact that the six metropolitan municipalities alone constitute 57, 4 % of the combined budget of municipalities whilst the local and district municipalities account for 34, 1% and 8, 5% of combined municipal budgeted expenditure in 2005/06.

The review also reveals that the longstanding problem of inadequate capital spending may be changing. Projected investments in capital show faster growth rising at average annual rate of 22% against a 17% growth rate in operating expenditure.
The 2005/06 review indicates  that municipal operating budgets comprised 78% of the combined municipal budgeted expenditure of which 26% or R24,3 billion are funded by electricity sales,  property rates contribute R17 billion (18%), grants and subsidies contribute R13,2 billion (14%) and water tariffs of R11,2 billion (12%). The remaining income of R28 billion (30%) comes from sanitation, refuse removal, levies and other income.  These figures are significantly shaped by the metropolitan municipalities – outside of this category there is a significantly higher dependence on grants and subsidies.

Budgeted capital expenditure is reported to have grown at an average annual rate of 12% between 2001/02 and 2004/05, increasing from R12 billion to R17 billion and currently standing at R26 billion. Growth in capital expenditure is mainly attributed to increases in national capital grants which rose from R2,3 billion in 2001/02 to R6,4 billion in 2005/06.
Capital budgets follow a familiar allocation pattern favoring basic infrastructure i.e. R6 billion for water and sanitation (23%); R4,2 billion for roads and storm water (16%); R5,3 billion for housing (20%); and R2,5 billion for electricity reticulation (10%), whilst the remainder is spread across community facilities and related assets. Additional sources of funding for capital budgets include internally generated income of R5, 9 billion (23%) and loans of R4, 4 billion (17%). The review points out that metropolitan cities of Johannesburg, eThekwini and Tshwane are some of the larger borrowers.

2010 Soccer World Cup

The additional resources proposed for the next three years will be directed mainly at the 2010 FIFA World Cup. These will mainly go towards construction of new stadiums and upgrading of existing stadiums as well as infrastructure projects. Manuel announced that national government would provide a total of R15 billion for infrastructure related to the tournament. Of this amount R8, 4 billion is for the stadiums and R6, 7 billion is for public transport initiatives and supporting infrastructure . National Treasury has already allocated R1, 9 billion to the City of Cape Town to build a 68 000-seater stadium in Green Point for the 2010 World Cup. Local municipalities that host matches are the main beneficiaries and are expected to provide some matching finance. The City of Cape Town for example has already indicated that it will provide R400 million and the province R100 million, to top up the R2, 43 billion already available. This still leaves the city with a potential shortfall of  R60 million .

With already tight budgets some host cities might have to borrow  to complement the disbursements from National Treasury. However, spending on the 2010 World Cup will play a major role in improving infrastructure for local government, particularly the big metros that will be hosting matches.
The 2010 World Cup will provide a temporary respite to what is generally regarded as an unhealthy pattern i.e. local municipalities spent an average of 35% of their operating expenditure on salaries, 24% on bulk services, only 7% on repairs and maintenance, and 34 per cent on other “categories of expenditure”.

Outstanding consumer accounts are also a concern for both metropolitan and local municipalities and within the local category have increased from R5, 7 billion in 2001/2002 to R9, 9 billion in 2004/05. For metropolitan municipalities outstanding accounts increased from R12 billion in 2002/03 to R23 billion in the 2004/05 financial year.

The Local Government Transformer, Dec 2006/Jan 2007