There’s a lifeline for municipalities, and they must grab it
It is widely acknowledged that municipal infrastructure across the country is deteriorating — in many areas water doesn’t flow when you turn on the tap and there is no proper handling of sewage and wastewater. And often the lack of proper maintenance extends to electricity substations, which worsens the load-shedding already being experienced.
Reasons for this gross deterioration include loss of skills, mismanagement, corruption and lack of political will. But the main reason is money, whether it is in relation to declining revenue, high debt or poor budgeting. The National Treasury says two thirds of SA’s 257 municipalities were in financial distress at the end of the 2021/22 financial year. And once they have reached that position rescuing them is extremely challenging.
To be fair to municipalities, not all the blame lies on their doorsteps. Other factors include illegal water and electricity connections and shortfalls in subsidies to indigent or otherwise vulnerable people for basic services. But it is always the municipalities that must solve the problem, and when debt is already crushing them this becomes an immense problem.
As we survey the municipal landscape, it is difficult to find examples of administrations that are succeeding in turning the tide. We found two municipalities that showed some success with projects that may point the way forward:
● Mbombela, Mpumalanga. Since 1999 the private company Silulumanzi has provided 120-million litres of water daily to about 400,000 residents in parts of Mbombela. Silulumanzi also managed to deal with the municipality’s wastewater issues as part of a public — private partnership and handle the municipality’s billing and collections.
● Dolphin Coast, KwaZulu-Natal. Siza Water has a similar, 30-year water supply concession with iLembe district municipality.
These two pioneer projects, both funded by Nedbank, have done exceptionally well. As we look at the problems facing municipalities
— especially the nationwide backlog in water and sanitation infrastructure
— it is time for frank conversations about how the government and private sector can work together to make progress in a way that works for all.
Funding is not the problem — banks are eagerly looking for similar projects to finance. In the past year Nedbank has approved over R8.5bn in funding in 2022/23, particularly to help with water and sanitation infrastructure. Unfortunately, only one of the approved projects has reached financial close, which points to a protracted procurement process that is rightfully robust but can be rigid and reactive rather than agile.
Therefore beyond funding financial institutions must play a larger role. They must take their lead from the co-operative initiatives between business and the government tackling crime and corruption, energy and logistics.
Financial institutions can lead engagements on behalf of municipalities’ source partners and bring relevant stakeholders into the room to come up with solutions. Then they can collaborate with their municipal clients in seeking approval — often from the National Treasury — for the innovative funding plan that they have developed.
The truth is that things are likely to become even more difficult before they get better. Municipalities need all the help they can get. Their best bet is to join hands with partners that have a proven track record in thinking laterally and identifying funding solutions for a range of circumstances. Often, joining hands means municipalities have to optimise the maintenance of their assets without putting in more money or taking on more debt, which is quite possible — the Mbombela and iLembe projects are showing us the way.
An intriguing aspect of the concessions is the mutually beneficial incentives built into them. Once Silulumanzi and Siza have reached a certain level of collections they are allowed to bank the rest as profit. In Siza’s case though, half of its profits go to the municipality.
“We do the work and we’ve done the investment, but in terms of the contract the shareholder must earn a real return — and we are sharing that with the municipality. So there’s the incentive to work hard and optimise,” says MD Shyam Misra. It is also interesting to note that when citizens receive a good service they are happy to pay for it.
On November 1, during the medium-term budget policy statement, it was encouraging to hear finance minister Enoch Godongwana announcing plans by the National Treasury to change regulations and municipal legislation to make it easier for companies and international finance institutions to invest in infrastructure projects at a local level.
The 2024 budget in February will provide details about a new mechanism to allow private sector investors to co-invest with the government in such projects. Godongwana said an infrastructure finance and implementation support agency would be set up to facilitate this.
The government’s new openness to accepting assistance from the private sector is more than welcome and long overdue. It will not only unlock funding; it will also enhance technical capabilities in municipalities and other tiers of government to help them reverse the loss of skills, which is part of the reason for the infrastructure crisis.
Because Nedbank contributes more than a third of bank funding for municipalities it has a detailed understanding of the challenges they face. These go beyond infrastructure backlogs, into the loss of electricity revenue due to load-shedding and the imminent arrival of a competitive energy market, as well as the need to maintain an electricity distribution network while losing the revenue required to do so.
These are challenging times for municipalities, and more than ever they will need the expertise of financial institutions and private sector operators to support them as they navigate uncharted terrain.
FUNDING IS NOT THE PROBLEM — BANKS ARE EAGERLY LOOKING FOR PROJECTS TO FINANCE
MUNICIPALITIES NEED ALL THE HELP THEY CAN GET. THE BEST BET IS TO JOIN HANDS WITH PARTNERS