A view of the Johannesburg skyline.  Picture: THE TIMES
Political leaders of our cities have influence and standing in their own right as leaders in their communities. Picture: THE TIMES

THE publication of the State of City Finances report last year affirms the role big cities should play in transforming a society such as SA. Coming at a time when the available resources for delivering services are clearly declining and at a premium, of looming fiscal austerity, a barely stable electricity supply and the spectre of water insecurity, the Club of Nine big cities of SA are expected to provide leadership in the face of these challenges.

This is the third State of City Finances report done under the auspices of the South African Cities Network, and it does a remarkable job in outlining the challenges our cities face, which range from the extent to which rates and tariffs are affordable to challenges over transfers and grants — especially the equitable share allocation — and the existence of unfunded mandates.

Between 2009 and 2013, the total capital investment of the nine cities — Johannesburg, Cape Town, eThekwini, Ekurhuleni, Tshwane, Nelson Mandela Bay, Buffalo City, Mangaung and Msunduzi — was more than R117bn, of which a quarter was spent on road infrastructure, with eThekwini leading the pack. This was funded through a mix of internally generated revenue and central government grants. Debt finance was minimal. There is a strong case for the cities to receive a far greater share of the country’s resources for dealing with poverty and inequality, which they experience as microcosms of South African society.

In classical economic literature, cities are regarded as the most productive spaces in the economy. As a concentrated labour market and an agglomeration of industrial activity clusters and the value chains of most processes, they provide economies of scale and efficiencies of production processes.

SA has experienced a prolonged economic slump, and the nine cities have without doubt been severely affected.

Yet, if there is to be growth and development in SA, the cities’ rate of growth and recovery must be faster and more intense than the rest of the economy.

However, some of the policies and powers that are necessary for this to take place are currently the preserve of national and provincial governments.

If SA’s cities are to drive the agenda for economic recovery, they need more say on policy, including the implementation of countercyclical measures such as infrastructure development initiatives, and the financing thereof, and the way the equitable share is distributed. In other words, the cities must be allowed to punch above their weight if they are to contribute to their potential. There is a need for more dialogue between the tiers of government, and more spirited engagement.

One area in which the report failed to live up to its theme of innovation was funding. While it implicitly recognises the funding gap that exists between infrastructure plans and allocations, it is mute on how to attend to this profoundly important matter.

And it pays only cursory attention to the question of the debt burdens adopted by cities, especially debt instruments such as municipal bonds.

The first municipal bond was issued by Johannesburg more than a decade ago, and the market has grown more than fivefold since 2004. By 2013, the municipal bond market had grown to more than R17bn from just less than R7bn when Johannesburg issued its maiden bond in 2004.

Other cities within the group of nine followed suit, including Cape Town, Ekurhuleni and more recently, Tshwane.

These issues are largely plain vanilla bullet-type bonds, with notational government guarantees. Typically, these instruments are secured by sinking funds to ensure payment at maturity. The instruments have provided significant resources for long-term capital projects in which public budgets are under severe strain, and although a fairly new asset class in the SA context, they have been surprisingly warmly embraced.

The first few issues of municipal bonds were substantially oversubscribed.

The weakness with municipal bonds as a financing mechanism is that size certainly counts — only a handful of the biggest cities are able to attract sufficient interest in their paper. This drawback could be remedied through a pooled funding vehicle that can be seen as an intermediate step between normal banking and a full-fledged issuer of a debt instrument. There has also been talk of pooled funding within broader local government circles, which is highly encouraging. But there is insufficient urgency — in the context of the current slump the process needs to be started without delay.

For such instruments to be viable, it is essential proper regulatory arrangements are in place. The tightening of banking regulation, particularly the Basle 3 measures, have reduced the room available to cities to manoeuvre. For instance, it is no longer easy to put securitisation structures and other collateralised debt obligations in place. The Municipal Finance Management Act and to some extent, the Financial Markets Act are two key pieces of legislation regulating the use of financial instruments.

The former serves to provide prudential and sustainability checks and balances by restricting borrowing to local currency, limiting the borrowing to that intended for capital expenditure only, and prohibiting other spheres of government from guaranteeing local government debt. While the Municipal Finance Management Act’s rationale is admirable, certain provisions cause difficulty for cities, especially the lack of clarity over credit-protection measures and creditor ranking in the event of default.

Recent developments on the macroeconomic management front in SA, specifically the imposition of fiscal austerity measures by the Treasury and the monetary stance taken by the Reserve Bank, places further onus on cities to engage with the national government on economic matters beyond narrow fiscal relations and the public finance realm.

As issuers of debt paper and other instruments in the bond market, the cities are directly affected by the stance taken by the monetary authorities with regard to interest rates. And as major retailers of utilities such as electricity, they have a stake in the manner in which administered prices affect inflation and its targeting.

Besides leveraging the resources under their control, the political leaders of our cities have influence and standing in their own right as leaders in their communities.

They constitute a formidable collective with a range of skills that can and should be taken seriously.

SA needs its cities and their leaders to punch above their weight if the country is to recover economically and create desperately needed employment. It is time for the South African Cities Network to revisit its membership base and incorporate other so-called secondary cities into their ranks.

It has always baffled me, for instance, that Msunduzi is part of the Club of Nine, but Emfuleni is not.

• Mahlangu is chairman of the Gaffney Group and a past chairman of the Municipal Demarcation Board