The financing of city services in Southern Africa

The financing of city services in Southern Africa 25th May 2011

The financing of city services in Southern Africa • Background • Purpose and objectives • Participating cities • Approaches & methods • Roles • Expenditure responsibilities • Revenue powers • Staff numbers • Financials • Revenues (own, operating grants, capital grants) • Expenditures (personnel, capital, other) • Operating surpluses • Year-end cash balances • Issues • Functions & powers • Revenue effort • Human resource capacity

Background Project objectives • To promote sustainable city government finances for infrastructure development in Southern Africa; • To promote more effective planning and management of financial activities, including better credit ratings and the ability to access finance for investment purposes from banks or capital markets; • To provide credit assessment and credit enhancement services to city governments; • To provide capacity building targeted at improving city government financial management and creditworthiness. Project outputs • Shadow credit assessments of city governments in Southern Africa; • Capacity building programme to improve financial management and credit worthiness at one city government; • `Knowledge product’ on the financial position of Southern African cities; • Knowledge-sharing workshop; • `Knowledge product’ and update report on the state of South African city finances City selection criteria • Criteria included scale; SADC coverage; and potential for creditworthiness and borrowing. • Subject to budget , logistical and time constraints

Cities in Southern Africa + Nairobi Kigali + Bujumbara + Arusha + + Mombasa + Kinshasa + Dar es Salaam + Luanda Lumbumbashi + Kitwe + Ndola + Lilongwe + Lilongwe + + Nampula Lusaka + Lusaka + Blantyre + Blantyre + Harare + + Antananarivo + Beira Bulawayo + Port Louis + Windhoek + Windhoek + Gaborone + Tshwane + + Maputo + Maputo Mbabane + + Ekurhuleni Johannesburg + + Manzini Mangaung + + Msunduzi + Maseru + eThekwini + Buffalo City + Nelson Mandela Bay Cape Town +

Participating cities Arusha + + Dar es Salaam Ndola + Lilongwe + Lusaka + Blantyre + Port Louis + Windhoek + Gaborone + + Maputo

Approach and methodology Approach to collection of information • Reliance upon financial data provided by the city governments; • Actual financial results - preferably audited - not budget information; • City visits to interview City Manager, Head of Finance, Head of Engineering; • Structured questionnaire to systematically collect information across ten categories; • Captured data into IFRS format and credit assessment tool; • Generated assessments & prepared reports. Assessment categories • Financial & credit management • Management quality & capacity • Operational performance • Strategic planning & internal transformation • Human resources & private contracting • Customer relations • Support from government • Autonomy & accountability • External risks • Economic base.

International comparative city finance City finances are dependent upon • the national constitutional and legal framework; • Assigned expenditure responsibilities (mandates) (functions) • Assigned revenue sources (powers) • City revenue administration (performance) (effort) • Government grants – operational and capital (sufficiency & timeliness) • City operational (expenditure) efficiency, effectiveness & economy • City finance decision-making and approval processes (tariffs; valuation rolls; staff appointments; etc) Analytical framework • City government functions & powers • What are the city governments expected to do, and how are they expected to finance these activities? • Expenditure scale and composition • Spending per person • Staff costs • Other operating costs • Capital spending • Revenue scale and composition • Own revenues • Government operating grants • Government capital grants • Operational surpluses • Because this must finance capital investment and any expansion of services • Year-end cash position

Data considerations City financial data • Actual domestic currency values (no budget data; sourced directly from cities; rigorous accounting analysis) • Time series data – presented in domestic currency values. • Comparative currency calculations – done using exchange rate applicable at the end of the last month of applicable financial year. • Monthly exchange rate data from oanda.com Economic and demographic data • GDP estimates are for 2008, expressed in 2005 US$ (PPP basis); • Population data is for 2008 as far as possible • Source data is from World Bank’s Africa Development Indicators (ADI) online database data.worldbank.org • Detailed estimates (eg 40-sector) of the size of city economies do not appear to exist, so these are rough project estimates and subject to correction.

City populations (Vertical position = size of city economies US$b)

Populations of Southern African cities (Vertical position = size of city economies US$b)

City population & city GDP

City government roles: expenditure responsibilities Social services • Civil administration (registration of births, deaths and marriages) • Health care services (primary/ clinics/ vaccinations etc) • Educational services (pre-school) • Educational services (primary school) • Educational services (secondary school) • Housing rental • Social welfare (centres for orphans etc) • Business registration and licensing Built environment services • Town planning and building control • Municipal policing (by-law enforcement) • Supply of water • Sanitation (sewerage) • Roads and storm-water drainage • Traffic lights and street lights • Refuse collection and disposal; street sweeping • Environmental health services • Emergency services (ambulances, fire) • Supply of electricity and gas • Cemeteries, parks and sports facilities • Bus and taxi ranks; markets • Public transport services

Nature & scale of city government roles

City expenditure mandates Social services - built environment full S, minimal BE moderate S, moderate BE minimal S full BE moderate S, moderate BE Minimal S, moderate BE full S minimal BE moderate S moderate BE moderate S minimal BE

City government staff and spending

City staff (vertical position = staff/ 100 000) moderate S moderate BE moderate S moderate BE full S, minimal BE minimal S full BE full S, minimal BE moderate S moderate BE Minimal S, moderate BE moderate S, minimal BE

Sources of operating revenues • Property taxes - universal • Business taxes, licences & fees – universal • Government operating grants – universal except Windhoek • Fees for use of bus stations, markets & other social amenities; outdoor advertising – widespread • Personal levies – Lusaka, Ndola, Maputo • Commercial undertakings – Windhoek, Lilongwe, Blantyre • Services charges – only significant for cities with significant services - Windhoek

Sources of capital finance • Reserves and annual operating surpluses • universal for small capex • seldom geared by borrowing (except Windhoek) • Government capital grants - universal (except Windhoek) • International donors – Lilongwe, Blantyre, Maputo • Township development – only Windhoek

City spending & billing as % of city GDP

City comparisons

The financing of city services in Southern Africa • Background • Purpose and objectives • Participating cities • Approaches & methods • Roles • Expenditure responsibilities • Revenue powers • Staff numbers • Financials • Expenditures (personnel, other opex, capital) • Revenues (own, operating grants, capital grants) • Operating surpluses/deficits • Year-end cash balances • Issues • Functions & powers • Revenue effort • Human resource capacity

City spending in 2009 (US$ m)

City spending in 2009 (US$ m)(excluding Dar es Salaam & Windhoek)

City revenues 2009 (US$ m)

City revenues 2009 (US$ m)(excluding Dar es Salaam & Windhoek)

Own revenues as % of total revenues

Spending per person and share of spending supported by own revenues

Operating surpluses (deficits) Dar es Salaam Port Louis Lusaka Windhoek Gaborone

Operating surpluses (deficits) Arusha Lilongwe Blantyre Ndola Maputo

Debtors days

Year-end cash balances – months of expenditure

Reasons for these patterns? • Constitutional allocations of expenditure responsibilities and revenue powers • Political economy of city revenue policy and administration • Expenditure-side pressures • National fiscal conditions and pressures • International financial crisis • Management and organisational capacity • Other

Issues in city government finances • Under-empowered & under-resourced • Trend has been to strip powers from city governments • Decentralisation by name, centralisation in practise • Limited built environment mandate • City governments operate at a small scale and spend very little • Limited decision-making authority • Senior staff appointments are often lengthy national processes • Tax and tariff increases; new valuation rolls; similarly • Limited infrastructure financing • If it happens on scale it is grant or donor funded

Issues in city government finances • Under-performing revenue administration • Despite the overwhelming shortage of resources • Much of the tax base escapes being billed/invoiced • Debtors balances outstanding are often high • Weak revenue relationship with residents and businesses • Significant human resource capacity constraints • Skills shortage is universally acknowledged as serious/critical • especially in key technical areas • Long period `acting’ appointments are universal • Yet little serious effort (possibility) to address the gap?

Concluding propositions (1) • Cities require effective urban services to fulfil their role as critical sites/drivers of social and economic development; • City governments should have clear and substantial built environment mandates; • City governments should be able to finance much of their built environment services through appropriate local revenue resources, provided they have sufficient local revenue powers; • City governments need to develop and maintain a social contract with city households and businesses;

Concluding propositions (2) • City governments need an adequately funded capital investment plan, ideally from own-revenue sources • Intergovernmental fiscal arrangements should provide strong incentives to maintain capital assets. • Good financial management and creditworthiness can together improve access to capital infrastructure funding. • City government administration and service delivery, together with an effective city social contract, should be able to create the correct environment and platform for social development and economic growth.

City financial strategies • All cities can take steps to improve their financial performance, such as through a city financial strategy. • City leadership with political stature and maturity • Dedicated management team • Internal reform programme • Administrative and financial and revenue reforms • Objectives and targets, `war room’, accountability for performance, etc • External reform programme • Improve effectiveness of relationship with national government • Address aspects of the inter-governmental fiscal relations • Customised capacity building for senior management • Targeted at programme objectives

The financing of city services in Southern Africa 25th May 2011

Approach to capacity building Approach & methodology • Change management intervention aimed at senior city management • Specific operational as well as capacity-building objectives • Programme of workshops , with substantial supporting work • Management team takes responsibility for tasks between workshops • Outcomes: • operational objectives achieved • Capacity of management team enhanced • change momentum strengthened Seven-step programme • Introduction to financial management and creditworthiness • Shadow credit assessment • Medium- and long-term capital investment planning • Funding the capital investment plan • Launching the reform agenda • Preparing to approach the capital market • Finalising a loan agreement and managing the loan

The financing of city services in Southern Africa