Squeezed municipalities have little room to cut rates

There is a clamour of people calling for rates relief from municipalities — from online petitions to an opinion piece in the Financial Mail — as consumers inevitably start to buckle under the economic consequences of the Covid-19 lockdown.

The problem for local governments is that they have significant fixed costs — most notably employee-related expenses and bulk purchases — that need to be covered with already diminishing revenue and they will find no relief from the national fiscus beyond that already being offered.

Yet as salaries in the private sector are cut and employees are furloughed there is clearly a need to plan for and accommodate financially distressed ratepayers. Johannesburg for instance has already reported a drop-off in revenue collection levels in April and this is likely to only get worse notwithstanding the mitigating measures of social relief planned by it and other cities.

The problem with the recession and the Covid-19 economic shock is that it affects not only the poor and working class but also the core middle-class ratepayers municipalities rely on to cross-subsidise indigent services.

Online polling by Stats SA found that 93.2% of respondents indicated that they are very or extremely concerned about the effect on their personal finances of a possible economic collapse (caused by Covid-19) with more than two-thirds (69.1%) of respondents receiving a monthly salary 11.6% being self-employed and 8.1% unemployed.

Yet local governments are not well placed to extend financial support given their reliance on rates and utility fees (especially in the case of larger cities and metros) to cover sizable fixed expenses. Stats SA found that between the quarters ended December 2018 and 2019:

  • annual purchases of water grew by 10.5%;
  • annual electricity purchases grew by 12.4%;
  • employee-related costs — accounting for a sizable portion of municipal expenditure — grew by 7.4%;
  • grants from national government grew only marginally;
  • property rates from residential consumers were already seen to be falling;
  • electricity purchases were higher than the growth in sales (9.8%) as were water purchases compared to sales (3.1%) meaning local government was already eating into surpluses generated from electricity and water provision before lockdown; and
  • bad debt had risen by 23% while interest paid rose 10.3%.

In other words SA’s local governments were already in a tight spot financially before the arrival of Covid-19. Unless municipalities cut into their salary bills it is not apparent where they will find the budgetary space to forego rates or utility fees on any significant scale. Yet municipal unions remain a formidable adversary and there are additional logistical requirements to retain essential services. 

It is possible that a handful of municipalities could look to capital markets for support but the profile of a municipality that would be attractive to financiers would typically be those already providing rates relief (Stellenbosch for instance).

This limited room does not mean municipalities should not work to contain rates and utility hikes in the upcoming budget cycle as much as possible (as Cape Town is said to be planning) reduce non-essential spending fine-tune and expand indigent support programmes to allow flexibility in repayment bolster online billing options such as cellphone apps to clarify and query outstanding rates forego negligible income where it could offer significant relief to struggling businesses (for instance trading permits or rent) defer spending on large projects where feasible and promote an ethos of ensuring value for money for residents as well as accountability for misbilling (countering pervasive anecdotes of billing mistakes and an apparent indifference and lack of recourse).

It is bemusing that there are analysts who do not recognise that while consumers are billed directly for services such as water and electricity municipalities also provide services funded from rates such as street lighting the maintenance of municipal roads and — much as the public may sometimes question the value they receive — municipal salaries. While ratepayers may not be billed for such services directly foregoing rates would be catastrophic for the average municipality and would over a short period lead to the freezing of such services and the complete collapse of the municipality.

It could of course be argued that there are those municipalities that provide very little evidence of value for rates payments municipalities where service provision has already all but collapsed where potholed roads are almost impassible and traffic lights stopped working many years ago. These municipalities justify ratepayers questioning the value they are receiving for their money and demanding change.

With ratepayers less and less capable of funding unproductive municipal expenditure never before has every cent spent in a municipality needed to be accounted for as carefully or transparently. Municipalities must be attuned to the dire circumstances of residents and respond with extreme frugality.