FINANCING PRESSURES OF A DISTRICT MUNICIPALITY SALGA NATIONAL MEETING WITH MUNICIPAL MANAGERS 28 FEBRUARY 2011 Cacadu D

1. FINANCING PRESSURES OF A DISTRICT MUNICIPALITY SALGA NATIONAL MEETING WITH MUNICIPAL MANAGERS 28 FEBRUARY 2011Cacadu DM Municipal Manager Ted Pillay 1

2. CONTENT • BACKGROUND • ORIGINAL BUSINESS MODEL • CURRENT STATUS QUO REGARDING THE BUSINESS MODEL • FINANCIAL PRESSURES • CONSEQUENCES • MATTERS FOR CONSIDERATION

3. BACKGROUND • There was a significant reduction in the revenue stream of the CDM with the creation of the Nelson Mandela Metro. The revenue base was reduced by 94% in 2001. RSC levy income reduced from R155m to R15m. • Operations were downsized to ensure financial sustainability in the long term. The staff establishment was reduced from 255 to 56. • In 2001 it became evident that CDM had to develop a credible business strategy to remain relevant and add value in the District. • Numerous functions and activities were outsourced in the process in an effort to reduce operating expenditure. • There are 9 local municipalities in the District, as well as significant DMAs. The total area of the District is 60000 square km - the population is approximately 400 000 spread over 30 small towns plus 16 settlements.

4. ORIGINAL BUSINESS MODEL • The CDM took a conscious decision to adopt a business model which would enable it to operate effectively in spite of limited financial resources. • The roles originally adopted included • - CDM as a district wide integrated development authority • - CDM as an infrastructure development agency • - CDM as a technical and institutional capacity resource to LMs • - CDM as municipal services provider of last resort • The District Municipality effectively adopted a development facilitator approach

5. IMPLEMENTING THE BUSINESS MODEL • It also became quickly evident that a staff of 56 was inadequate to provide effective services or to make a difference in the District. • Furthermore it became clear that the discretionary funds from equitable share, RSC levy income (and later the levy replacement grant) would not be adequate to finance the operating budget of the CDM to be able to implement its business model. • It needed additional revenue sources • Conditional grants were an option but unsustainable. It must be highlighted that the CDM was very successful in obtaining conditional grants to assist the 9 LMs both in infrastructure services as well as institutional development • It became inevitable that the CDM began to utilize interest revenue earned on its reserves to finance its budget • Interest earnings during the period 2002 to 2008 was significantly high • One can say that the development facilitation role was effective

6. FINANCIAL PRESSURES • When environmental health was given to district municipalities, the CDM appointed the LMs to be its agent in line with its business model. • All 9 LMs in the District are Water Service Authorities and Providers in line with our philosophy that services should be closest to the communities • The fire services responsibilities of S84(1)(j)(ii) will go the same route • Section 78 assessments were done on environmental health, water and fire services and it is apparent that additional funding is necessary for an acceptable level of service. • There was a cutback on certain conditional grants especially from the Province • Interest rates started to decline very sharply • With the introduction of new accounting standards and various other legislative prescripts the cost of compliance for both DM and LMs became very exorbitant. 6

7. FINANCIAL PRESSURES • Manyquestions arose - is the district municipality effective in its area of jurisdiction? Is it making an impact with its limited discretionary revenue. • It was very apparent that the MIG allocation to LMs in the District would not be adequate to meet their capital infrastructure spend • In addition the lack of a sustainable own revenue base in many of the LM areas placed them in a very precarious position and they therefore become dependent on the DM and Province to financially assist them • What would be the acceptable level of service with regards to water provisioning especially when communities expect equitable services throughout a municipal area? • The CDM was faced with a dilemma – do we hope that the MIG allocation to the LMs increase significantly to meet their infrastructure requirements? • Will there be also be a reworking of the equitable share and levy replacement allocations to rural district and rural local municipalities? 7

8. CONSEQUENCES • There was pressure to start utilizing the accumulated surplus • Over the past two years there was significant transfers from accumulated surplus to finance capital projects in the LM areas • The situation was not helped by a prolonged drought in the District • What we are not seeing though is a concomitant increase in equitable share and the levy replacement grant to the institution. • However a continuation of utilizing contributions from accumulated surplus will clearly result in the District Municipality experiencing cash flow problems in the next two to three years

10. MATTERS FOR CONSIDERATION • Many local municipalities are unsustainable, hence there is always pressure on DMs and the Provinces to continually assist them. • DMs have become almost entirely dependent on grants • The financing of District Municipalities (and LMs) needs serious revision in the present environment • All stakeholders must be aware of the risks faced by local government institutions for not meeting with legislative prescripts both on service delivery and institutional compliance. • The policy review must be concluded to ensure sustainable institutions.

11. THANK YOU 11