The legacy of MUNICIPAL CAPITAL EXPENDITURE

The economist Thomas Sowell said there are no solutions in politics, only trade-offs. This statement cannot be more true in South Africa, where service delivery and infrastructure investment are the story of trade-offs between retaining political power and sacrificing sustainable municipal development.

By Burgert Gildenhuys*

There remains a strong focus on increased delivery through promises of improved municipal administrations and implementation capacity. With the 2024 elections approaching, one can expect this rhetoric to increase in volume and frequency. In this process, infrastructure investment will be portrayed as the Holy Grail for economic growth and job creation. The National Infrastructure Plan approved by Cabinet in 2020 is even tagged with a by-line, ‘The Flywheel to the Economic and Growth Recovery Plan’.

Before we turn to capital expenditure in local government, it is necessary to give a perspective of where local government fits into the national economy. Three elements are essential as measured through the national accounts:

• capital stock, which refers to the economy’s fixed assets

• depreciation, which is the rate at which the capital stock is consumed to produce goods and services

• capital formation, which refers to the extent of investment in the economy through capital expenditure to replace depleted stock and expand the base for production. The total capital stock reported in 2021 was R8.696 trillion, with the local government sector holding only 3.6% or R315 462 million of the total capital stock in the country. Interestingly, in 67% of the country’s municipalities, the local agriculture asset base exceeds that of the local municipality. These figures are important for two reasons. First, although the local government asset base is very small, it has proved to be a significant cog in the economic wheel of South Africa. Second, given its central control and intervention policies, the government does not have the leverage to effect economic growth and employment through the municipal asset base. However, the truth is that, irrespective of how small the municipal asset base is, inappropriate government interventions and policies can disrupt and stifle economic growth, as proven over the last three decades.

It is important to note how we deal with and treat our existing asset base. Much can be said about asset maintenance,

TABLE 1 Capital stock per sector as a percentage of total

but it might be worthwhile to put the position of local government relative to the national economy.

Fixed capital formation in the local government sector grew by 7.01% year-onyear over the past 27 years, while population growth averaged 1.99%. Based on this, one should expect vast improvements in economic conditions based on the extent of capital investment and the prosperity doctrine, and local government should have been flourishing. However, precisely the opposite happened. The first possible clue may lie in the table below.

The investment per household is a figure that represents all capital expenditures. It is, however, significant to note that in 1997 municipalities spent about 75% of their capital budgets on infrastructure services. This figure decreased to about 63% for FY 19/20, while metropolitan municipalities struggled to direct more than 45% of their budget to infrastructure. Table 3 shows that municipalities spent 28% less capital per household in 2020 than in 1997. Capex has indeed been diverted away from infrastructure to other asset classes.

‘Pro-poor’ and basic service policies

infrastructure policies were applied. (This figure again excludes roads, stormwater, electricity and refuse removal services.) The total capital budget for local government in FY 19/20 was R60.6 billion.

This legacy capital expenditure has left indelible marks on our municipalities that cannot be undone. Furthermore, the expectation of a future of coalition governments will require more and stronger trade-offs to maintain any power balance.

Municipal assets’ expected useful life (EUL) decreased by 67% between 1993 and 2021. There may be two reasons for this. First, the current infrastructure state implies little or no maintenance, drastically reducing municipal assets’ EUL. The lack of maintenance is evident in the condition of municipal assets. Furthermore, no asset renewal programmes countered this apparent consumption (depreciation) of assets.

It means that municipal assets are used until they collapse, which is evident in the high rate of fixed capital formation over the years. By implication, this means that money has been pumped into capital programmes in municipalities with no regard for maintaining existing assets. Second, there were increased investments in non-infrastructure assets with substantially shorter EULs.

The first is a well-established fact, while substantial evidence points to the latter.

The National Treasury Local Government Database and Stats SA data show the following.

A further complicating factor is how ‘pro-poor’ and basic service policies were applied. Since 1994, there has been a deliberate reprioritisation of investment to areas where people could not access basic services –that is, the concept of spatial targeting.

Redirecting capital investment is not wrong, but the problem is that more than basic services (the policy that still exists today) were provided. For example, between 1996 and 2016, more than 3.6 million households were provided with full water services and nearly 6.2 million households with waterborne sanitation, instead of communal standpipes and dry on-site sanitation.

Given the operating cost differential between a basic and full service for water and sanitation, and assuming that poor people do not pay for these services, the local government sector has burdened itself with an unfunded operating deficit of at least R12 billion per annum. (This excludes electricity and other services.)

Given the difference in capital cost, it implies that the local government sector diverted at least R100 billion between 1996 and 2016 in unfunded capital for water and sanitation services because of how

Long-term planning and considerations for the consequences of political trade-offs could be ignored to the extent that service delivery will hover on the brink of collapse for the foreseeable future. The mantra in South African politics, across every political party, is that one party will deliver better than the next. However, it appears that not a single party is contemplating delivering differently from its coalition partners or the political opposition.

The chances that any political party in South Africa will start telling their constituencies, rich and poor, that government cannot be the eternal provider of services is slim. Current legislation has various options for different municipal governance structures and service delivery models. However, the universal political theme remains centralisation. Even in the call for devolving powers to provinces, the underlying ideology remains for more and full government control, albeit at a different geographical level.

Conclusion

If South Africa does not get a ‘Great Reset’ in municipal government soon, South Africans will have to make peace with outdated and inadequate infrastructure. Residents of towns and cities will live with:

• a continuous decline in service delivery

• accept higher taxes

• reduced services

• an inability to attract new businesses and investments

• a workaround for stagnating and declining local economies

• live with a lower quality of life, higher crime rates and fewer job opportunities.

The reality is that the situation can be turned around. South Africa does have legislative and policy frameworks in place, but it must accept reality and live with the scares of abuse and mismanagement of municipal affairs for a very long time.

*Pr. Pln, MIAM (London), ILGM, B(TRP), BAdmin (Municipal Administration)