Alternative solutions are needed to stem the tide of continuing infrastructure backlogs and poor funding choices at municipalities.

If municipalities cannot spend their capital budgets many parts of South Africa will remain undeveloped and unable to host the businesses needed to create the jobs the country is desperately trying to create.

Bridging finance should be harnessed for short-term public sector funding needs, while improved financing arrangements for vehicles, equipment and related office automation should be deployed over the medium term.

“These assets should be better assessed and valued rather than just being bought outright. They are going to be written off anyway and a strategy of renting them could, for example, be used,” says Standard Bank head of public sector Ben Pretorius.

Longer-term funding, aligned to the lifespan of the assets with funding arrangements is not yet being used efficiently. “Private sector funds are not being used optimally to help with service delivery,” says Pretorius.

Improved funding choices, however, can help improve service delivery and lead to higher levels of corporate governance.

Conditions at the moment remain dire, with rolling protests regularly reported across the country.  While protests recently erupted in Soweto when consumers were asked to pay for electricity using smart metres Local government’s procurement processes are complex and comprehensive and are subject to several pieces of legislation, including:

• Municipal Finance Management Act          
• Municipal Systems Act
• Municipal Structures Act
• Preferential Procurement Policy Framework
• Preferential Procurement Regulations

But Pretorius says the problem is less about the complexity of the legislation, but applying and fulfilling plans that are more suited to government’s priorities.

“If there is a plan in place it must be fulfilled, as the whole value chain is impacted negatively if it is not. The infrastructure backlog must be addressed, yet there is a disconnection between approved and unspent projects,” he says.

Reports that emerged a month ago stated that eight of the 21 municipalities in Mpumalanga are failing to spend their 2015 capital budgets‚ with some failing to spend any capital budget at all. Municipal projects need to align with Budget timing and integrated development planning at national and provincial level. Projects with a monetary cost of more than R1 million must use the competitive tender process. However, the appointment of consultants or advisors must always use competitive bidding.

“It is time to have a fresh look at procurement as the limitations and restrictions are a bit of a concern. A fresh approach to evaluating tenders and proposals is needed as value is different to price. At the moment the “best” pricing is not always a reflection of the best offer,” says Pretorius.

Two fundamental credit risks are the long-term sustainability of the municipality and the quality of management.

“You need to be able to take a view of how diverse that local economy is. For example, if it is centred on a mining town and the mine’s lifespan is over, then one could have a social and economic challenge. You need to assess these issues together with the quality of management to get a full picture before assigning an internal credit risk grade to a municipality,” he says.

The history of payment to creditors would be another input applied to determine the risk of a municipality.  “We would like to see that this is ingrained, that legislation is complied with and that debts are being collected,” says Pretorius.

The large infrastructure backlog across the country remains one of the most critical concerns for funders of public projects.

“If maintenance of infrastructure is neglected to the extent beyond repair it will place an additional burden on the cash flow of municipalities, therefore planned maintenance is no longer an option but a pre-requisite for sustainable Local Government. This point is critical when you want to come to market for funding.” According to Pretorius a potential problem is that a short-term vision is being applied, where quick wins trump long-term sustainability.

“You can’t measure performance around the term of an employment contract – accountability needs to be taken beyond five years,” he says.

Funding options should not be reactive. “There is a need for municipalities to be more proactive when it comes to improving capacity. It will partly be about improved knowledge, for example, you can’t hope to raise bond funding without knowing about how the fixed income market works,” he says.

Banks are willing lenders, but many municipalities do not have the requisite knowledge about how best to raise funds for a specific purpose.

“We don’t want to see municipalities going to market and over borrowing, but instead they need a decent blend of own funds, commercial funds from the private sector and government grants going forward. For example, they should not just use their own funds to fund long-term infrastructure projects, as this puts a lot of strain on rate payers to service the debt of future generations,” says Pretorius.