Publications
Partners
Johannesburg - Investment by municipalities in infrastructure could contribute to faster economic growth, Finance Minister Nhlanhla Nene has said.
He was speaking at the Municipal Innovative Infrastructure Financing conference hosted by the South African Local Government Association in Johannesburg on Wednesday.
"Since all economic activity takes place within the boundaries of a municipality, the quality of municipal infrastructure matters for the performance of our economy," he told the conference.
"If we are to raise the pace at which our economy grows and eliminate the legacies of apartheid, we must fix municipalities, in particular their ability to build and maintain infrastructure."
If municipalities invest in infrastructure development, it could spur on economic growth, and in turn this will make it easier for municipalities to fund long-term investments to improve infrastructure, he explained.
He added that municipalities have a role to play in government reforms to stimulate economic growth. This is through the provision of "urban infrastructure services" like water and sanitation, electricity, waste removal, public transport and the building and maintenance of roads. Municipalities also contribute to the cost of doing business by connecting businesses to electricity networks, and transfer ownership of property.
"When municipalities carry out this regulatory and administrative function ineffectively and inefficiently, they retard economic growth," he warned.
Financing municipal investment
During his address, Nene also explained that the State transfers R40bn annually to municipalities to assist them funding their infrastructure investment. However, this is not enough, and municipalities must generate their own resources.
Essentially, there are four sources of capital finance for municipalities:grants from national government, public contributions and donations, internally generated funds and borrowing.
Government policy and legislation supports "prudent and long-term borrowing" by municipalities, as this is an "efficient and equitable" mechanism to finance investment by local governments, he explained.
Nene said that the Municipal Finance Management Act (MFMA) provides a sound legal and regulatory framework for municipal borrowing, which has worked well for large cities. "Last year, two metros issued bonds, and both were oversubscribed, demonstrating once again the appetite of investors for financing local government infrastructure."
But government is reviewing the Municipal Borrowing Policy Framework due to several factors which have changed.
This includes growth in investment needs. "There are huge backlogs also for the rehabilitation or replacement of aged infrastructure," Nene explained.
Other reasons for the review include the greater role municipalities are playing in spatial transformation, as apartheid spatial development constrains economic growth.
The maturing of the municipal borrowing market is another factor. Municipal borrowing remains below the levels projected when the framework was adopted in 2000. "Part of the reason for this is the surge in grant funding over this period," said Nene. Creditworthy metros continue to rely on conditional grants as the biggest source of funding infrastructure, he pointed out.
Nene also pointed out that the benefits of municipal borrowing have been concentrated in the metros which account for about 86% of all long-term municipal debt. "The national fiscus is constrained. Creditworthy municipalities must therefore look to debt markets and other revenue sources to fund a greater proportion of capital investment."
This, he argued, would free up a greater portion of the infrastructure grant to be used to fund municipalities that have less capacity for generating their own revenue.
* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER
