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Budget Speech 2022: A Push Toward Sustainable Municipalities and Energy Security

The overarching theme in the 2022 budget was supporting the recovery and building for the future. The President stated clearly; “the key task of government is to create the conditions that will enable the private sector – both big and small – to emerge, to grow, to access new markets, to create new products, and to hire more employees”.

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The overarching theme in the budget speech 2022 was supporting the recovery and building for the future. The President stated clearly; “the key task of government is to create the conditions that will enable the private sector – both big and small – to emerge, to grow, to access new markets, to create new products, and to hire more employees”. This means all units and spheres of government need to mobilise resources and direct efforts towards this endeavour. Specifically, the budget highlights four main pillars to drive recovery namely, energy security, aligning with the National Development Plan’s infrastructure goals, promoting industrial growth and strengthening enabling conditions.

2022 BUDGET SPEECH

Going into the budget speech 2022, South Africa was (still is) faced with recurrent power cuts and a multitude of dysfunctions in the delivery of basic services. Figure 1 illustrates just how bad the state of local governance is hence the inability to deliver on their respective mandates. This article seeks to unpack the provisions, efforts made by the 2022 budget to enable municipalities to provide basic services sustainably and ideas on how the same can create an environment that allows for economic growth.

Budget Speech 2022: Municipal Capacity Building

Insufficient capacity at local government is usually in two forms: financial and institutional resourcing. Financial capacity limitations stem from the unfunded budgets where the entity’s revenue collection does not match its expenses for a given budget period this gives rise to toxic debt (of which as of August 2021, 163 (58% of total) municipalities were symptomatic of financial distress). For context, municipal debt was sitting at R20 billion in 1999/2000 but now sits at R70 billion 2020/2021. The cumulative impact of these year-on-year deficits is the weakening of the balance sheet, leading the entity to dysfunction ultimately rendering it incapacitated to deliver. To this end, the budget:
  • increased its allocation to local governments by R30,7billion (R28.9 billion in the local government equitable share and R1.8 billion in direct conditional grants) spread over the mid-term (next three years). This should go a significant mile in the efforts to curb the rampant deficits across struggling municipalities.
  • updated the municipal borrowing policy framework. The proposed changes aim to increase the permissible term‐to‐maturity of borrowing, strengthen the secondary market for municipal debt instruments, and better define the role of development finance institutions to avoid crowding out the private sector.

Further to this we believe local government, in particular metros need to devise mechanisms through which they lower the cost of doing business in their respective locals to promote private sector investment inflows. This could take the form of special rates, preferential treatment in embedded electricity procurement, elimination of redundant red tape etc. Also, given that SMEs and the informal sector employs a great multitude, challenges such as licencing (vending, liquor etc.) should be alleviated through minimizing inefficiencies through excessive regulation. An attractive enabling policy environment will drive local economic growth. Furthermore, many local governments are faced with a dire infrastructure gap. This undermines the economic growth prospects. Local government should be in the fore front of driving private sector investment in strategic high impact infrastructure such as ICT and embedded electricity generation.

The institutional resourcing capacity challenge lies among senior municipal executives and technical managers responsible for advising political office‐bearers. This translates to weak strategic leadership, which also contributes to poor corporate governance and deficient financial management skills. While municipalities employ the services of consultants to close the gap, the reach of the interventions is limited. To this end, the budget indicates that a committee will be set up and its purpose will be to address this deficiency based on the following guiding principles:

  • A clear focus on developing capabilities
  • A problem‐led approach.
  • Inclusion of municipalities in system design and implementation.
  • An integrated approach across different supporting institutions.
It would be of keen interest to observe the progress of this committee in its efforts to address the challenges in this sector. Sector specialists with institutional knowledge have an opportunity to bring value to such a space.

Budget Speech 2022: Energy Security

Energy security is crucial considering South Africa’s economic growth ambitions. Municipalities are the effective distributors of electricity.  Revenue from electricity service charges constitute 55 – 65% of total municipal revenue. The electricity availability factor fell from 66.7 (2020) to 64.2 (2021), with power cuts continuing. Testament to the estimated 4000MW energy supply gap. The government has over the past year sought to enable the closing of the power supply gap through interventions such as lifting the registration threshold for embedded electricity generation to 100 megawatts (MW) and Renewable Energy Independent Power Producer Procurement (REIPPP). The interventions seek to deliver relief to the current energy supply strain while creating long-term energy generation capacity.

In October 2021, the government announced 25 projects for the fifth bid window of the REIPPP with a total contracted capacity of 2 583 MW. Proposals for the sixth bid window are expected to procure additional capacity of 2 600 MW. In total, the programme is expected to procure additional capacity of 6 783 MW, with investment of at least R128 billion over the medium term. Embedded generation projects in the mining sector alone can produce an estimated 4 000 MW and various municipalities are securing an estimated 1 400 MW of their own power.

While the plans are in place, the process from request for proposals to the commissioning of new power plants must be expedited. The key to unlocking the required efficiencies to deliver these projects expeditiously lies with transaction advisory. The Development Bank of South Africa (DBSA) is the default champion for this cause.  In this regard, we note that the DBSA has issued several RFPs for technical and transactional advisory, thus creating more capacity for deal structuring. One would hope such panels are then used to achieve three things:

  • expedite the adjudication process for independent power production.
  • provide oversight (through equity participation) in the proposed PPP deals.
  • leverage government’s energy budget allocation to creatively attract foreign direct investment participation in energy generation in South Africa.

 

As sector players, we commend the budget and its intentions bearing in mind that it takes the entire village to deliver on our common national goals. We continue to track the performance of municipalities through our Kettle Consulting Municipality Finance Index (KCMFI), identifying gaps and leading the implementation of the required initiatives pertinent to the resolution of the challenges faced by our local governments to deliver sustainable services and create smart cities.

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