The aggregate size of the municipal budget in South Africa is substantial. In
the 1996-97 financial year, municipalities budgeted for total expenditure of
more than R48bn. This represents about 7,5% of South Africa's total gross
domestic product, and is equivalent to 20,97% of the country's total public
sector budget. Within this, municipal budgets vary enormously, from
metropolitan areas with budgets of several billions, to small rural councils
with negligible revenues.
Most local government revenue is generated by trading services (electricity,
water and sanitation). In aggregate, revenue from trading services accounts for
over 60% of local government revenue. Electricity, for example, constitutes the
largest revenue source for many municipalities. While the surplus derived from
the sale of electricity (i.e., the difference between revenue and total
expenditure) is not large, it remains an important source of income for many
municipalities. Alternative income from levies on electricity sales will be
generated once restructuring within the electricity sector results in
municipalities no longer playing a direct service provision role.
The major source of tax revenue for municipalities is property rates. These
generate around 20% of total revenue. The Regional Service Council and Joint
Services Board levies levied by District and Metropolitan Councils bring in an
additional 5%.
The total amount budgeted for intergovernmental transfers from the central
fiscus to municipalities in 1996-97 equalled more than R5,2bn, of which about
R1,2bn was for agency payments, R1,2bn was for capital grants (excluding any
receipts from the housing subsidy programme), and R2,2bn was for explicitly
(cash) operating subsidies. The balance consisted mainly of implicit (non-cash)
subsidies from national departments to the local level. In 1997-98 this total -
excluding
rollover funds - rose to R5,9bn.
1.2. The Constitution
A restructured system of municipal finance needs to be founded on the
Constitution.
Sections 229 and 230 of the Constitution grant municipalities considerable
taxation and borrowing powers, but subject these powers to national legislation
and regulation. Municipal taxation powers are also limited in that they cannot
"unreasonably prejudice" national economic policies and economic
activities. Borrowing powers are limited by the requirement that borrowings do
not fund budget deficits. This means that the Constitution effectively
prohibits deficit budgeting at the local sphere.
The Constitution addresses intergovernmental fiscal relations in two broad
respects:
-
Intergovernmental transfers: Section 227 entitles the local sphere to an
"equitable share" of nationally raised revenue in order that it may
"provide basic services and perform the functions allocated to it".
Municipalities may also receive additional grants from national or provincial
government on a conditional or unconditional basis.
-
Oversight and regulation of the financial affairs of municipalities:
Sections 139 (1)(a) and (b) and 155 (7) give national and provincial government
executive and legislative authority to oversee the performance of
municipalities with regard to their functions. Sections 229 (1)(b), (2)(b), 230
(1) provide for national regulation over the fiscal powers of a municipality.
In addition, sections 215 and 216 and other provisions of Chapter 13 grant
powers to the national Treasury to regulate the financial affairs of
municipalities.
The proposed Treasury Control Act required under Section 216 of the Constitution
will set financial controls for all spheres of government, and impose
responsibilities and penalties on accounting officers and chief executive
officers, as well as their political heads. Intervention in the event of gross
financial mismanagement is also allowed in terms of Sections 100 and 139 of the
Constitution. Sections 229 and 230 also provide for national regulation over
the fiscal (i.e., taxing and borrowing) powers of municipalities.
1.3. Policy objectives
In order to meet the objectives of Constitution, the system of municipal finance
will need to be restructured in line with a number of basic policy principles:
Principles for the new system
-
Revenue adequacy and certainty: Municipalities need to have access to
adequate sources of revenue - either own resources or intergovernmental
transfers - to enable them to carry out the functions that have been assigned
to them. Municipalities should be encouraged to fully exploit these sources of
revenue to meet their developmental objectives. Municipalities should have
reasonable certainty of revenue to allow for realistic planning.
-
Sustainability: Financial sustainability requires that municipalities
ensure that their budgets are balanced (income should cover expenditure). Given
revenue constraints, this involves ensuring that services are provided at
levels which are affordable, and that municipalities are able to recover the
costs of service delivery. No bailout will be provided to a municipality that
overspends its budget and/or fails to put in place proper financial management
controls. It is the responsibility of the political leaders to ensure that they
set realistic budgets. However, there is a need for subsidisation to ensure
that poor households, who are unable to pay even a proportion of service costs,
have access to basic services.
-
Effective and efficient resource use: Economic resources are scarce and
should be used in the best possible way to reap the maximum benefit for local
communities. However, there are no mechanisms available to ensure that
municipal decisions will indeed lead to an effective allocation of resources.
It is therefore important that local residents provide the necessary checks and
balances. They can do this by participating in the budgeting process to ensure
that resources are being put to their best use. Efficiencies in public spending
and resource allocation will ultimately increase the access of the poor to
basic services.
-
Accountability, transparency and good governance: Municipalities should
be held responsible and accountable to local taxpayers for the use of public
funds. Elected representatives should be required to justify their expenditure
decisions and explain why and how the revenue necessary to sustain that
expenditure is raised. The fiscal system should be designed to encourage
accountability. Municipal budgeting and financial affairs should be open to
public scrutiny, and communities should have a greater voice in ratifying
decisions about how revenue is raised and spent. Community participation in
budgeting should aim to incorporate those groups in the community, such as
women, who face particular constraints in participating. It should also include
a capacity-building component to ensure that people understand the process of
prioritisation - why resources are allocated to one set of things rather than
to another. Accounting and financial reporting procedures should minimise
opportunities for corruption and malpractice.
-
Equity and redistribution: Municipalities must treat citizens equitably
with regard to the provision of services. In turn, national and provincial
government must treat municipalities equitably with regard to intergovernmental
transfers. Local government cannot be solely responsible for redistribution,
and national government has a critical role to play in this regard,
particularly with respect to subsidising the provision of basic services. The
"equitable share" of national revenue to which local
government is entitled will be directed primarily at this purpose. In addition
to targeted subsidies to poor households, funded from the "equitable
share", municipalities can cross-subsidise between high and low- income
consumers, both within particular services and between services. The extent of
this cross-subsidy is a local choice that needs to be exercised carefully,
within the framework of the municipal integrated development plan.
-
Development and investment: Meeting basic needs in the context of
existing service backlogs will require increased investment in municipal
infrastructure. Public Private Partnerships such as leases and concessions,
discussed in Section F: Administrative Systems, provide a mechanism for
attracting private investment in municipal infrastructure.
Macroeconomic
management: Municipalities form an integral part of the public sector in South
Africa, and their actions can substantially affect national policy.
Municipalities need to operate within the national macroeconomic framework and
their financial activities should not be such as to destabilise macroeconomic
fiscal policy.
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2.1. Local revenue instruments and policies
2.2. Intergovernmental transfers
In order to achieve the objectives outlined above, the municipal fiscal and
financial system needs to be restructured in four critical areas:
-
Local
revenue instruments and policies.
-
National-local intergovernmental transfers.
-
Gearing in private investments.
-
Budgeting, accounting and financial reporting systems.
Government's broad policy directions in each of these areas are outlined below.
In each case the specific measures that are taken will need to be formulated in
the context of government's overall macroeconomic and fiscal policies.
2.1. Local revenue instruments and policies
The power to tax is essential to sustainable and accountable local government.
There are four important areas of local decision-making with respect to
taxation:
-
The choice of tax to be imposed.
-
The definition of the
tax base.
-
The choice of the
tax rate.
-
Tax administration.
The choice of tax rate is the most critical means of promoting the
fiscal autonomy of local government. The freedom of municipalities to
vary the tax rate strengthens local accountability, and enables communities to
challenge municipalities about the value-for-money of services provided.
Any local tax policy must be seen within the framework of the total tax system
and the need for a coherent and transparent tax system. Further, taxation
policy must take into account any adverse consequences on the productive
economy. National legislation must provide a framework within which local
taxation policy must fit. The impact of property taxes and Regional Service
Council and Joint Services Board levies must be assessed in terms of this
framework and national macroeconomic objectives like job creation and the need
for competitiveness.
Municipalities require access to adequate resources and budgetary powers to
fulfil their assigned functions. On average, municipalities have sufficient
revenue raising powers to fund the bulk of their expenditure, and finance 90%
of their
recurrent expenditure out of own revenues. Own revenues include rates
(19,89%) and trading services such as electricity (41,4%); water (11,8%); and
sewage and refuse removal (8,22%).
These aggregate figures hide the fact there are great variations between
municipalities across the country, and rural municipalities fund far less of
their expenditure from own revenues than urban municipalities do. In fact, many
municipal services are provided by national and provincial departments in rural
areas. A more accurate picture will only emerge when rural local government
becomes functional and assumes responsibility for the provision of these
services.
2.1.1. Property taxation
The major source of local taxation is the property tax (rates). This is
currently levied only in urban areas. The owners of property in municipal areas
have to pay a tax based on a valuation of their properties in order to finance
municipal services. While this tax is by no means the sole source of municipal
revenue, it is an important source of
discretionary own revenue for local government and enables it to
function effectively.
Rating in the country has historically been done differently in the various
provinces. Each of the former four provinces had its own legislation in this
regard. This legislation was never coordinated, despite the fact that the
relevant circumstances in the former provinces did not differ much. The present
system of property rating in South Africa is cumbersome, and a simpler and
uniform system of valuation must be found.
Section 229(2) of the Constitution, which came into effect on 1 January 1998,
states that the power of the municipality to impose rates on property may be
regulated by national legislation. The provincial ordinances currently
regulating property rating will, therefore, remain in force until they are
replaced by national legislation in this regard.
Government will need to address four main issues with regard to property tax:
-
First, the issue of bringing currently untaxed areas into the tax net. The
newly amalgamated urban municipalities (which bring formerly black and white
areas into one municipality) have decided in principle to extend the tax base
to previously unrated areas. However, some of the former black areas remain
outside the property tax net. Effective measures to integrate these areas into
the property tax net need to be determined and implemented. Currently, property
rates are still not being uniformly applied, and property valuations are often
disputed.
-
Second, there is the issue of variation in the rating system with regard to the
tax base. The property (assessment) rates levied should be based on the market
value of the property. The optimal method of valuation applicable to the South
African situation should be determined. Possible rating systems that need to be
reviewed are:
-
Site rating, or the valuation of land only.
-
The combined rating of land and buildings.
-
Differential or composite rating, where both land and buildings are rated
together but at different rate levels, and where the rate levied on land is
higher than that on improvements.
-
A rating system where a uniform rate is used for areas which were not
previously rated, irrespective of the value of the property. (This is often
called "flat-rating" in South Africa). The rate is usually lower than
the actual value of the property.
The key decision that needs to be taken is whether there should be a uniform
national system, or whether there should continue to be local choice in this
matter.
-
Third, the issue of valuation periods needs to be addressed. In many areas,
properties are not valued regularly. A process of regular assessments of
property values needs to be entrenched. Again, the question of national versus
local choice in valuation periods needs to be determined.
-
Fourth, there is a need to develop the criteria for evaluating alternative
property valuation systems, within the framework of alleviating and addressing
poverty. A municipality needs to develop a clear policy and set of procedures
regarding the full or partial relief to those who are genuinely too poor to pay
for rates. Any rebates or
grants-in-aid allowed on property tax (as prescribed in the relevant
provincial/national legislation) should be clearly indicated in a transparent
and consistent manner in the budget of a municipality.
It is important to note that local government should have the latitude to make
certain decisions concerning the nature of the property tax in their area of
jurisdiction, which reflect their unique circumstances and local economic
objectives.
2.1.2. Regional Service Council and Joint Services Board levies
The Regional Service Council and Joint Services Board levies, are a source of
revenue for Metropolitan and District Councils. Since their inception, the
Regional Service Council and Joint Services Board levies have been
controversial taxes.
The most serious problem with these levies is in the administrative costs of
collection. They are collected by municipalities themselves rather than by a
national collecting agency like the SA Revenue Services, and the scope for
evasion is high. A second and even more serious problem is that the levy is a
tax on staff or labour. This reinforces the bias against labour-intensive
firms.
Despite these problems, these taxes are an important source of municipal
revenue, and will need to be retained, at least until such time as a suitable
alternative, yielding the same net revenue, is introduced.
The effectiveness of regional and establishment levies as engines of development
will be assisted by the development of clear rules about the uses to which
municipalities can put these funds. It is proposed that District and
Metropolitan Councils should utilise the levies for the development and
maintenance of infrastructure linked to the needs of the community.
The uncontrolled use and increase of regional and establishment levies could
lead to sharp increases in the effective taxation of commerce and industry.
Vastly differing levy rates could cause negative inter-jurisdictional spillover
effects. However, as long as these levies are restricted to low levels and are
ultimately subject to national control, these potential negative effects can be
minimised. National oversight with regard to the determination as well as
utilisation of these levies is therefore required to ensure an optimal system
of Regional Service Council and Joint Services Board levies.
2.1.3. Fuel levy
Schedule 5 (Part B) of the Constitution determines that municipal roads are a
functional responsibility of the local government sphere. In this context,
consideration will be given to assigning a percentage of the fuel levy to local
government. The fuel levy represents a potentially important source of revenue
for local government due to its ability to grow, and the ease with which it is
administered.
The issue of a local government fuel tax needs to be seen within the context of
the national fuel levy. National government will develop a set of principles
that will provide a framework within which these funds will be spent. One such
principle is that fuel taxes are best suited for recovering the maintenance
costs of roads.
2.1.4. User charges
An important source of local own revenue are charges which are directly related
to the provision of public services. The majority of these are public utility
charges - such as electricity and water - which have contributed significantly
to the growth of revenue of municipalities.
Cost
recovery is an essential part of sustainable service delivery. However,
municipalities will not be able to meet all the costs associated with
addressing backlogs. National government has therefore provided a capital grant
package, the Consolidated Municipal Infrastructure Programme to assist
municipalities in meeting the capital costs of bulk and connector
infrastructure. The new system of intergovernmental transfers is aimed at
subsidising the operating costs of basic services to indigent and low-income
households.
Government and stakeholders have agreed on a set of principles to guide tariff
policy:
-
Payment in proportion to the amount consumed: As far as is practically
possible, consumers should pay in proportion to the amount of service consumed.
-
Full payment of service costs: All households, with the exception of the
indigent, should pay the full costs of the services consumed.
-
Ability to pay: Municipalities should develop a system of targeted
subsidies to ensure that poor households have access to at least a minimum
level of basic services.
-
Fairness: Tariff policies should be fair in that all people should be
treated equitably.
-
Transparency: Tariff policy should be transparent to all consumers and
any subsidies and concessions which exist must be visible and understood by all
consumers.
-
Local determination of tariff levels: Municipalities should have the
flexibility to develop their own tariffs in keeping with the above principles.
-
Consistent tariff enforcement: A consistent policy for dealing with
non-payment of tariffs needs to be developed. This must be targeted and
enforced with sensitivity to local conditions.
-
Ensure local economies are competitive: Local tariffs must not unduly
burden local business through higher tariffs, as these costs affect the
sustainability and competitiveness of such businesses and firms.
Municipalities need to develop a clear tariff policy, including a policy to
ensure that indigent households have access to basic services. Tariff
enforcement needs to be linked to improved credit control mechanisms.
2.1.5.
Credit control
It is vital to the long-term financial viability of any municipality that it
collects the revenues due to it for services rendered. This means that
appropriate credit control mechanism must be established.
As a first step, municipalities need to be able to measure the amount of
services that households consume. This means that metering of services such as
water and electricity must take place efficiently.
Secondly, households need to receive regular and accurate bills for the services
they use, in a format which is easy to understand. In some areas special
arrangements may be required to ensure that households receive bills regularly.
Thirdly, credit control measures will only be successful if targeted relief is
available for those households who cannot afford to pay for services.
Municipalities must establish accessible mechanisms to enable poor households
to apply for a rebate on service charges.
Fourthly, municipalities need to take strong measures to deal with those
households who can afford to pay for services but are not doing so. This means
that municipalities must keep a proper record of outstanding debtors, and must
take action against them after a given notice period. Such action can include
cutting off services or court action to recover debts. It is fundamentally
important that local government is able to retain the power to cut off
electricity to consumers as a credit control measure, and amendments to the
Electricity Act will be promulgated in this regard.
2.1.6. Financing municipalities in rural areas
Measures to improve the financial viability and revenue base of rural local
government are required. A substantial portion of the share of the national
fiscus reserved for local government will be directed at rural municipalities.
In addition, the institutional restructuring of existing municipalities will
result in increased financial viability. Directing sectoral funding for
housing, water infrastructure and so forth via rural municipalities will also
strengthen local capacity. However, other mechanisms to improve the financial
viability of rural local government are required.
One option is the extension of the property tax to rural areas. Because property
is immobile and allocation thereof cannot be distorted, property tax is an
ideal local tax. The acceptability of extending property taxes to rural areas
would be increased if the revenue raised is spent in the area where it is
raised, with visible benefits for local communities. Revenue generated from
property tax could be used primarily (but not necessarily exclusively) for
rural infrastructure purposes, e.g. road infrastructure and maintenance of
roads in rural areas. Although a property tax could be an important source of
revenue for rural municipalities, the total amount raised would be limited.
The rate at which the property tax is extended should be approached cautiously.
The rate should either be equal or less than the
average rental return on land ratio. The rate should also be high
enough to cover the costs of administering the tax, and ensure that a
reasonable return is yielded. When considering the applicable tax rate, the
relation between the rural property tax and other local taxes (e.g., Regional
Service Council and Joint Services Board levies) will have to be considered.
A combination of revenue-generating options, including betterment taxes, will
need to be explored further to secure the financial viability of rural local
government.
In addition to the above categories of revenue (property tax, metropolitan and
district levies, user charges, and fuel tax) municipalities derive revenues
from capital grants as well as intergovernmental grants for operating
expenditure. Given local government's pivotal role in delivery and development,
further consideration should be given to adding to the revenue-raising powers
of local government.
2.2. Intergovernmental transfers
Intergovernmental transfers are important to the fiscal relationship between
national and local government. There are three basic types of transfer:
-
Agency payments paid by provincial governments to municipalities for services
rendered by the latter on behalf of the former.
-
Grants to subsidise the capital costs of investment in municipal
infrastructure.
-
Grants to support the operating budgets of municipalities.
2.2.1. Agency payments
Agency payments are fees rather than grants and there is no necessity for any
change to this aspect of the transfer system. However, it is imperative that
municipalities ensure that payments received from provinces are sufficient to
cover the full cost of the services which municipalities deliver on their
behalf.
2.2.2. Capital transfers
During 1996-97 a process of rationalising the various capital grants flowing to
municipalities into a single funding channel, the Consolidated Municipal
Infrastructure Programme, was initiated. Some further rationalisation of
capital transfers flowing to municipalities - particularly those in rural areas
- is required. In general, however, the Consolidated Municipal Infrastructure
Programme has successfully begun to deal with the problems of fragmentation and
duplication that characterised the capital grant programmes of the past. It is
therefore not anticipated that there will be any major changes to this
programme in the foreseeable future.
2.2.3. Transfers to fund operating costs
The current system of operating transfers, however, is highly problematic and
requires urgent policy attention. In general, the current problems include:
-
The grant system is inconsistent and inequitable.
-
Grants are unpredictable - there is no certainty as to what any municipality
will receive in any given year.
-
The grants are not based on objective, rational policy criteria.
-
The incentives in the current system sometimes encourage poor financial
management behaviour by municipalities.
In order to address these problems, and so as to comply with Section 214 of the
Constitution, government will fundamentally restructure the system of operating
transfers to municipalities and - in so doing - will introduce an
"equitable share" of national revenue for local government, beginning
in the 1998-99 fiscal year.
The new system of intergovernmental transfers will need to address two key
issues: the "vertical division" of revenue - the total share of
revenue going to local government, and the "horizontal division" of
this revenue - how the total amount is divided between municipalities.
The vertical split will be decided via the national budgeting (medium-term
expenditure framework) process, taking into account the factors put forward in
Section 214 (2) of the Constitution.
It should be noted that the "equitable share" covers only those
transfers to fund the operating costs of municipalities. Capital transfers, for
example, are classified as "additional conditional grants" in terms
of the Constitution. The "equitable share" in other words should not
be confused with the total amount of national revenue flowing to
municipalities. The amount of the "equitable share" component of
national-local flows can only be properly determined with due regard to the
other transfers to municipalities. As certain subsidies to municipalities are
phased out, the equitable share will need to expand.
The horizontal division of the equitable share between municipalities will need
to be driven by five key objectives:
-
Equity.
-
Efficiency.
-
Ensuring a basic level of administrative capacity in the most resource-poor
municipalities.
-
Predictability.
-
Incentives for proper financial management at the local level.
In order to achieve this a transparent, formula-based system will be phased in
over a period of four years for urban municipalities and seven years for rural
municipalities. The dominant principle underlying this system will be equity -
it should enable all municipalities to provide a basic level of services to
low-income households in their areas of jurisdiction at affordable cost. A
secondary principle will be effective administrative infrastructure: the system
should ensure that even the most resource-poor municipality is able to build a
basic level of administrative infrastructure to allow it to govern its area
effectively. Many municipalities are already in a position to provide this
without financial assistance from the national fiscus. Therefore, this aspect
of the formula will need to have an equalising dimension to it.
A formula-based approach by its nature removes discretion over the allocation of
funds to municipalities. The funds will therefore best be allocated directly
from the central fiscus to municipalities rather than via the provinces. In
order to ensure certainty it is also important that transfers are allocated to
those municipalities which have actual expenditure responsibilities in respect
of service provision and governance.
2.2.4. Targeting intergovernmental transfers
One of the key goals of restructuring the systems of intergovernmental transfers
is to assist the indigent to access services. When fully operational, the new
system of intergovernmental transfers will enable all municipalities to deliver
a package of basic services to all low-income and indigent households in their
areas. This funding will be complemented by capital grant funding channelled
via the Consolidated Municipal Infrastructure Programme.
With a few exceptions, it will be difficult to ensure that intergovernmental
transfers effectively reach particular target groups, such as the poor.
Intergovernmental transfers are primarily intended to subsidise the provision
of local public services, and it is difficult to pinpoint which particular
individuals and groups will utilise such services. Unless the entire geographic
community happens to be members of the target group (e.g. a poor rural
community), transfers are unlikely to benefit only the intended target group.
Transfers from national government to municipalities are therefore a blunt
instrument to reach the poor, unless the individual municipalities use these
transfers to provide those local services that impact positively on the lives
of the poor. The actual targeting of these intergovernmental transfers, and
ensuring that only eligible households have access to subsidised services, will
therefore be the responsibility of individual municipalities.
2.2.5. Local government participation
Given the monitoring and oversight powers of provincial governments with respect
to local government, provincial MECs responsible for local government should
also participate in forums and processes related to local government finance.
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3.1. Borrowing and investment powers of municipalities
3.2. Credit enhancement
3.3. Concessional loan finance
Previous government studies - such as the Municipal Infrastructure Investment
Framework - show that in order to meet infrastructure backlogs and secure
access for all to basic services, additional investment in municipal
infrastructure from the private sector and public sector financial
intermediaries is required. There are three key areas of municipal finance
which support additional investment in the municipal sector, namely:
Borrowing and investment powers of municipalities.
Credit
enhancement.
Confessional
loan finance.
Private sector investment can also be encouraged through the regulation of
public private partnerships and the establishment of a system to monitor the
financial position of municipalities, which are discussed in Section C:
Cooperative Government and Section F: Administrative Systems.
3.1. Borrowing and investment powers of municipalities
The Local Government Transition Act (Second Amendment Act) extended and
introduced broad uniformity into the borrowing powers of municipalities.
Consideration should be given to further expanding municipal borrowing powers.
There is also a need to define the exact nature of the regulation of these
powers by national legislation. The Second Amendment Act also liberalised the
regulatory framework for municipal investment, and this trend may need to be
extended.
Ultimately, a vibrant and innovative primary and secondary market for short and
long term municipal debt should emerge. To achieve this, national government
must clearly define the basic "rules of the game". Local government
will need to establish its creditworthiness through proper budgeting and sound
financial management, including establishing firm credit control measures and
affordable infrastructure investment programmes. Finally, a growth in the
quantum, scope and activities of underwriters and market facilitators (such as
credit-rating agencies and bond insurers) will be required.
If private investment is to be encouraged, greater clarity needs to be achieved
with respect to the security of loan investments. This will be facilitated by
the development of a framework for monitoring the financial position of
municipalities, building on current laws and practices (such as Project
Viability). National government's approach emphasises the importance of
achieving financial discipline through decentralised market relationships
(between borrower and lender), rather than the direct, centralised control of
local government. This is in line with the fiscally decentralised orientation
of the Constitution.
The rules governing intervention in the event that municipalities experience
financial difficulties need to be clearly defined and transparently and
consistently applied. It is critical that municipalities, investors, as well as
national and provincial government, have a clear understanding of the character
of their respective risks. Risks should not be unduly transferred to national
or provincial government.
3.2. Credit enhancement
Measures to enhance credit
National government will not provide sovereign guarantees of municipal debt.
However, there are a range of other mechanisms which can be considered to
enhance the credit of municipalities, including:
Municipal
bond insurance.
Treasury
trusts.
Interception
of intergovernmental transfers.
Debt
syndication.
Bond
banking.
Other measures which may indirectly enhance the credit of municipalities include
introducing better municipal accounting systems, the provision of relevant and
reliable information, a clear framework for supervision by other spheres of
government, procedures for intervention when failure occurs, establishing
fiscal certainty (grant flows, ownership of local tax bases, etc.) and
clarifying the role of concessional loan finance.
3.3. Concessional loan finance
Although municipalities have fairly extensive borrowing powers, current
conditions at local level and in the capital market effectively constrain the
ability of municipalities to raise loans. Concessional loan finance - offered
through a public sector financial intermediary - can play an important role in
enabling municipalities that cannot gain access to credit from the capital
market to borrow at an affordable price.
Specialised institutions for providing concessional loan finances to
municipalities are not intended to replace the existing commercial financial
institutions, but rather to complement them. Commercial and public sector
financial institutions should play complementary roles.
Objectives of concessional loan finance
Public sector financial intermediaries are designed to achieve a range of
objectives, including to:
Make credit accessible: One of the major obstacles facing municipalities
is securing loans on the private capital market, and financial intermediaries
have the potential to provide municipalities with access to credit.
Mobilise additional resources: Financial intermediaries can be granted
sufficient powers to enable them to pool funds from various sources - including
the domestic capital market - and then on-lend these funds to the various
municipalities.
Provide technical assistance: Apart from the primary goal of ensuring
municipalities have access to long-term capital financing, financial
intermediaries can promote municipal capacity in order to improve the use of
resources.
Financial intermediaries generally provide long-term credit financing for
municipal investments, and could potentially play a critical role in funding
municipal infrastructure.
It should be noted that:
Where public sector financial intermediaries are involved, care must be taken to
ensure that government does not subsidise the borrower in a manner which is not
transparent or clearly quantified so that the subsidy is not absolutely clear.
Public sector financial intermediaries should not "crowd out" or
discourage private sector investment. In fact, they are key agents to support
the development of an effective market for municipal debt and to enhance the
overall level of investment in the municipal sector. Within the framework of
the RDP, public sector financial intermediaries should actively support
financial markets and endeavor to engage the private sector in these markets.
Concessional finance sources could introduce the discipline of loan finance to
municipal institutions which find it difficult to access private markets. This
discipline in the way municipalities conduct their financial affairs should be
a basic principle of concessional loan finance so that, in the long term, such
municipalities will be able to satisfy the requirement of the markets and so
gain access to private sector investment.
Public sector financial intermediaries clearly have an important role to play in
making loan finance available to municipalities. The role of such institutions
should be constantly monitored, refined and streamlined in relation to the
private sector's role in the municipal sector. Through targeted loans and
technical assistance they can support the development of a municipal debt
financing system.
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