According to the National Treasury, effective disaster finance is increasingly important as part of the transition towards a climate-resilient economy and sustainable infrastructure.
A recent diagnostic report by the Treasury and the World Bank estimated the average funding gap for financing disaster response in South Africa at R2.3bn.
Redesigning on- and off-budget financing can reduce fiscal costs by about R100M, on average, per shock event and R7.5bn in the case of large shock events, the report stated.
The Treasury said in its Budget Review for 2023 that it is intensifying its strategic role and coordination on climate responsiveness after Covid-19, flooding and drought, and public violence in certain areas – had highlighted inefficiencies in disaster response, and an over reliance on post-event budget allocations.
It recommended several reforms to strengthen risk financing, including developing a national disaster risk financing policy and strengthening municipal capacity to finance disaster risk, including through municipal insurance pools.
Meanwhile, the Minister of Finance Enoch Godongwana stated in his recent Budget speech that in relation to the recent floods and the national disaster declared in various provinces, R695m is now available for immediate relief. A further R1bn will be available next year, he said.
“The emergency response also requires provinces and municipalities to re-prioritise existing allocations to cater for the immediate needs of affected communities, such as temporary shelter and social assistance,” Godongwana added.
The State of Local Government Finances report of 2022 found that 169 municipalities across the country were in financial distress at the end of the 2021/22 financial year. The report noted a continued pattern of decay, as only 66 local councils were in similar situations a decade ago.
Recent events of natural disaster and public unrest had further deteriorated municipalities' fiscal capacity to cope, as revenue collection remained under pressure. The growing shortfall, Treasury said, remained the major contributing factor to their financial distress.
According to the latest Budget Review, outstanding municipal revenues are owed mostly to households, followed by commercial interests and other organs of state.
Local government, in turn, owed water boards more than R15bn, and Eskom approximately R39.8bn at 30 June 2022.
At the end of December 2022, municipalities owed Eskom R56.3bn, Godongwana said in his speech, and the debt is rising.
“Undertaking a debt-relief of this magnitude without addressing this risk would be counter-productive. We are working with Eskom to provide a solution to this problem, wherein Eskom will provide incentivised relief to municipalities whose debt is unaffordable.”
The relief, however, comes with conditions.
“To avoid a repeat of debt build-up over time, the relief will attach measures, including the installation of prepaid meters, to correct the underlying behaviour of non (1)payment and operational practices in these municipalities,” Godongwana added.
Eskom’s long-term financial viability depends on its customers paying their dues, and the culture of non-payment, not only by municipalities but by all organs of state and individual household customers, is concerning, the minister said.
“Such behaviour undermines and cripples our institutions and makes it impossible for them to deliver services. To change this, the National Treasury is exploring ways to encourage all to improve their behaviour and do the right thing.”
Furthermore, the Treasury stated in the Budget Review that many municipalities fail to adopt fully-funded budgets, which makes some forms of financial distress inevitable. Over 250 municipalities are currently managed on underfunded budgets, according to Treasury data.
Unfortunately, elected councils are responsible for determining municipal priorities and ensuring their budgets balance. Treasury can only act in an advisory capacity, and it stated in the Budget Review that “national and provincial engagements with municipalities are only “used to identify areas for improvement in these budgets, and advisers from the National Treasury-funded Municipal Finance Improvement Programme provide in-person assistance.”
The Municipal Finance Management Act (MFMA) does, however, mandate provincial intervention when a municipality, as a result of its own financial crisis, is unable to meet its obligations to provide basic services or fulfil financial commitments. “If the provincial government cannot or does not adequately intervene, then the national government is obligated to do so,” Treasury stated.
At present, 43 municipalities are in such a crisis, with the most situated in the Eastern Cape and North-West, according to the Treasury.
The Treasury said that “public trust is rapidly eroding as a result of substandard municipal services, failing infrastructure and perceptions that public money is wasted.”
It said that a series of inductions is already under way to educate new council members about financial interventions, and that 14 financial recovery plans would soon be on its way.
Furthermore, the Treasury and the Department of Cooperative Governance and Traditional Affairs will work with their provincial and municipal counterparts on reviewing the MFMA, the Municipal Property Rates Act and Municipal Systems Act to improve consistency in financial policies, reduce incidents of unfunded budgets, strengthen revenue collection and management, and address irregular expenditure. This is expected to be completed during the 2024/4 financial year.
The National Treasury is also developing compulsory national norms and standards to regulate municipal surcharges on electricity and identify alternative revenue sources to replace them.
The process currently followed is on each and every municipality’s own accord and remains unclear and incomparable across the board. Some local councils had even been legally challenged when they levied such charges, the Treasury said.
Electricity remains the largest component of service charges from local governments to generate their revenue, but it’s a source that has been declining over the years as prices increased and reliability of supply declined. Moreover, the gradual shift to renewable forms of energy by households and business will have significant implications on local councils.
During the past year, embedded energy generation regulations have been loosened, giving Municipalities and private firms more freedom to generate power and implement off-grid solutions.
In the meantime, the National government has increased the direct transfers to the country's 257 municipalities by R14,3bn to help address their various spending pressures.
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