2.1 Municipal Budget Trends,FY 2002/03–FY 2005/06

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been working with municipalities to achieve fully integrated budgets,rather than merely aggregating the different budgets from the previous municipalities that were amalgamated.There has been considerable progress toward such integration,although the institutional legacy and capacity shortcomings have made it a complex task.The outstanding demarcation issues—especially the undoing ofcross-border municipalities—have also had to be dealt with. Table 2.1 provides a briefoverview ofmain local government budget trends. Municipal expenditure budgets have grown from R 54.9 billion in 1999/2000 to R 101.2 billion in 2004/05,and they are estimated to touch on R120 billion in 2005/06.6 Notable annual increases in budgeted income have occurred in several years,and budgeted figures for the increase from 2003/04 to 2004/05 were as high as 36.8 percent.There have been some encouraging trends on the local revenue side:budgeted income from property rates has consistently grown at over 8 percent since 2001/02.Although observers have expressed caution about the potentially dampening effects ofsuch increaseson local economic growth,the increases do indicate a positive trend in local revenue

TABLE 2.1 Municipal Budget Trends, FY 2002/03–FY 2005/06 (R billion)

Budgeted expenditure 2002/03 2003/04 2004/05 2005/06

Operating budget 52.7 72.6 84.1 93.3 Salaries 22.9 25.5 17.9 27.6 Bulk services (water and electricity) 17.1 19.1 13.7 20.5 Other (repairs, maintenance, provision for uncollected revenue, loans) 29.8 36.1 21.1 38.9 Capital budget 11.7 16.7 17.1 25.9

Total budgeted expenditure 64.4 89.3 101.2 119.9 Budgeted operating income 54.3 61.6 84.3 92.0 Property rates 11.5 12.5 15.7 17.0 Service charges (mainly water and electricity) 25.0 28.0 38.9 41.5 RSC levies 3.9 4.4 5.7 6.5 Intergovernmental grants 3.6 6.7 12.1 13.2 Others 10.3 10.0 11.9 13.7

Total operating income 54.3 61.6 84.3 92.0

Source: National Treasury 2003b, 2004b; National Treasury database. Note: Totals may not add to 100 because ofrounding, and the figures are based on estimates. The unusual increase in the revenue figures is yet to be revised, and it was not possible to ascertain at the time ofwriting what this increase could be attributed to.

Local Government Organization and Finance: South Africa 57

patterns.The National Treasury estimates that metropolitan governments now fund well over 70 percent oftheir budgets from property rates,and it also notes a marked upturn in collection ofuser charges in some areas.

Expenditure Budgets More than 80 percent oftotal municipal expenditure occurs in South Africa’s 23 largest urban municipalities,although basic service backlogs are more prominent in rural areas,where revenue potential is weaker and budget deficits occur frequently.The distribution ofnational transfers has attempted to account for this difference,with the bulk ofallocations going to more rural municipalities and cities experiencing significant declines in the level oftransfers.Metropolitan municipalities have been receiving less than 20 percent ofall transfers in the past few years,and this figure is projected to decline further over the medium term.

Estimated total operating budgets amount to R 52.7 billion for the 2002/03 municipal year and R 72.6 billion in 2003/04,with estimates for 2005/06 at R 93.3 billion.Table 2.1 shows that salaries take up the largest share ofmunicipal budgets,totaling R 25.5 billion in 2003/04,and they have been around 30 percent ofoperating budgets for a number ofyears.There have been some expectations that the amalgamation oflocal governments as an outcome ofthe demarcation process would bring down the salary component.However,transitional costs and the approach ofseveral amalgamating municipalities to synchronizing salarypackages upward—in line with higher-grade municipal posts rather than average or lower post levels—have thus far limited this potential effect.The National Treasury and DPLG are both attending to the issues and hope to redress it in the coming years.Table 2.1 also shows that R 17.1 billion was budgeted for expenditure for bulk purchases ofwater and electricity in 2002/03.Moreover,R 29.8 billion was budgeted for other expenditures in the same year (repairs and maintenance, general expenditure,and interest and redemption ofloans and provisions for undercollection ofrevenue ofthe municipal operating budget).

The extent ofcapital expenditure remains a source ofconcern.Although budgeted allocations for capital for have grown from R 11.7 billion in 2002/03 to more than R 25 billion in 2005/06,this growth may not represent an accurate picture ofthe actual levels oflocal development spending.First, some double counting occurs in capital budgets because ofintramunicipal transfers from districts to local municipalities.Second,past performance indicates that actual capital expenditure is less than budgeted,mainly because multiyear budgeting is not yet adequately practiced at the local level,

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so many municipalities prepare one-year capital budgets,have poor cashflow and implementation plans,and secure funding sources only after the tabling ofthe budget.This situation causes underspending and delays. Nonetheless,National Treasury (2003b) analyses showed that more than 80 percent ofthe amounts budgeted for capital budgets were targeted at general infrastructure,especially housing,water reservoirs,and reticulation; roads,bridges,and pavements;and electricity distribution.Some 11 percent was earmarked for other assets,6 percent for community infrastructure,and 1 percent for specialized vehicles.

Revenue

The national government’s determination to use local government as the agent ofservice delivery is evident from substantial increases in funds for capital expenditure.In the 2004 national budget,the provision for the MediumTerm Expenditure Framework until 2006/07 shows real growth in resources allocated to the local government equitable share and infrastructure grants, above the average growth in national resources going to all spheres ofgovernment.The equitable share is projected to grow by more than 8 percent over this period,and infrastructure grants are to grow by more than 7 percent,against a national average ofabout 4 percent for all resources.

Revenue budgets have also shown marked improvement in recent years, with the revenue from property rates increasing from R 12.6 billion in 2002/03 to R 15.7 billion in 2004/05,and income from RSC levies on business turnover and wages increased from R 4.4 billion to R 5.7 billion in the same period.The bulk ofthis income was generated in the six metropolitan areas,which accounted for about 70 percent ofall RSC levies and property rates.Local or category B municipalities raised the remainder ofincome from property taxes,but District (category C) municipalities do not have the power to impose property rates.They have been able to raise levies to which local municipalities have not had access.7 Table 2.2 gives some perspective on these revenues in local budgets over three fiscal years.

Certain qualifications need to be made about these revenue figures.First, property valuations are out ofdate in many municipalities,and a major priority related to reforming the relevant legislation has been to update these data and broaden the base ofthe property rates to also include development, not only land.Second,the substantial electricity and water components of the figures in table 2.1 for services income do not take account ofoverhead costs,such as salaries and administration,repairs and maintenance,capital