To ensure their sustainability, municipalities need to bolster governance frameworks

The challenges facing municipalities call for a new compact between financial institutions and local government to accelerate the delivery of services to citizens.

The Auditor-General’s latest report on local governments highlights the fact that municipalities need to implement robust governance controls to ensure that they can continue to raise funding and deliver services and infrastructure long into the future.

Auditor-General Kimi Makwetu wrote in his report that most municipalities are “crippled by debt”. This is due to lacklustre revenue collection partly because consumers are under immense pressure. Further, the funds that municipalities do receive are sometimes misused or unaccounted for due to unauthorised, irregular, fruitless and wasteful expenditure.

As a result, local governments have become increasingly dependent on grants and assistance from the national fiscus that is already buckling under pressure.

This impacts the state’s capacity to finance municipalities, and financial institutions could become increasingly cautious about extending credit to local governments with inadequate governance. There is ultimately a risk that such municipalities will lose their access to funding – to the detriment of the communities they are tasked with serving.

To mitigate this risk, urgent steps must be taken to improve internal controls and governance processes. This refers to the preventative mechanisms, rules and procedures aimed at promoting accountability and preventing corruption. The aim is to reduce wasteful expenditure and free up resources for service delivery and infrastructure investments.

There may be an opportunity for municipalities to bolster their control processes by ensuring they have the right skills and also partner with the r private sector where relevant, as well as leveraging alternative funding mechanisms for infrastructure investments.

When extending project finance, for instance, a bank will leverage technical and legal skills in line with stringent compliance frameworks to ensure that a project is well designed and delivered according to specifications.

The guiding principle of project finance is that the funding is structured in such a way that specific risks are allocated to those parties best able to manage them. There are usually direct agreements between lenders and contractors, operators, off-takers and municipalities, for example, and extensive due diligence processes are followed.

Besides involving stricter controls, another advantage of project finance is that the debt can be ring-fenced – in other words, secured only against the project. Further, interest payments and amortisation of the loan only begins after the project starts to deliver revenues, which ensures a better alignment of cash flows. Loan tenors can be extended  by up to 15 years.

It is also possible to use a mix between traditional balance sheet lending and project finance. In this case, a loan is provided against a municipality’s balance sheet, but the principles of project finance are employed to de-risk the project.

Municipalities currently spend a small portion of their total budgets on interest payments, meaning they have room to leverage up in order to develop and maintain infrastructure.

And given South Africa’s massive infrastructure needs – for water alone, nearly R100 billion is needed just to rehabilitate existing assets – local government institutions should consider alternative funding arrangements such as these.

For the most part, the private sector is ready and willing to play a role in effective service delivery and in improving the lives of local communities.

National government has recognised this opportunity, having launched an infrastructure drive that aims to crowd in the private sector in order to transfer skills, mobilise additional funding, and capacitate the state.

The new district development model also points to a recognition for the need to collaborate. The model seeks to bring all stakeholders – national, provincial and municipal governments included – into one workstream to coordinate efforts, share skills and raise service delivery levels.

Standard Bank is considering how it can better support the public sector, and has been proactively engaging with municipalities to offer solutions to their service delivery challenges.

We have found that early-stage conversations can play an important role in structuring projects in a way that makes them bankable and mitigates future risks.

Overall, the shift towards a more collaborative model presents an opportunity to lift governance standards, raise service delivery levels, and ultimately improve the lives of local communities.

ENDS//

Notes to Editors:

About Standard Bank Group

Standard Bank Group is the largest African bank by assets, operating in 20 African countries and 5 global financial centres. Headquartered in Johannesburg, South Africa, we are listed on the Johannesburg Stock Exchange, with share code SBK, and the Namibian Stock Exchange, share code SNB.

Standard Bank has a 157-year history in South Africa and started building a franchise outside southern Africa in the early 1990s.

Our strategic position, which enables us to connect Africa to other select emerging markets as well as pools of capital in developed markets, and our balanced portfolio of businesses, provide significant opportunities for growth.

The group has over 50 000 employees, more than 1 100 branches and 9 000 ATMs on the African continent, which enable it to deliver a complete range of services across personal and business banking, corporate and investment banking and wealth management. 

Headline earnings for 2019 were R28.2 billion (about USD2 billion) and total assets were R2.3 trillion (about USD163 billion). Standard Bank’s market capitalisation at 31 December 2019 was R277 billion (USD20 billion).

The group’s largest shareholder is the Industrial and Commercial Bank of China (ICBC), the world’s largest bank, with a 20.1% shareholding. In addition, Standard Bank Group and ICBC share a strategic partnership that facilitates trade and deal flow between Africa, China and select emerging markets.

For further information, go to http://www.standardbank.com