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Urban Investment Partnership Conference | Johannesburg, South Africa

Needs and opportunities for urban investment

Lungisa Fuzile, Director-General National Treasury

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• An opportunity to capture an “urbanisation dividend” from an increasingly

young, economically active population clustered in cities

SA cities are increasingly important to national economic growth and development

• Urban growth requires

substantial investments in

• Social and community

assets

• Economic infrastructure
• Land and housing
• Transport services

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Population +26%, Households +36%

2001 - 11

• Metro economies accounted for 44.8% of GVA in 2012, from 39.9% in 1996
• Metro CAGR of 3.7% between 1996 & 2012 (SA = 3%)

Our metro economies must grow significantly faster than the national average

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• Metros have not yet

recovered to their pre- recession levels of economic

• Need to move onto a

growth path that is both faster and more inclusive

• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 5% 6% 7%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Annual Change in Gross Value Added (1997-2012)

8 x Metros Rest of RSA

Enabling faster, more inclusive growth requires a complementary focus on both universal access to basic services and investment in economic infrastructure

Significant progress by metros in addressing basic service backlogs, even with

• n-going population growth

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• Electricity and water

backlogs are decreasing throughout all 8 metros

• Sanitation backlogs have

declined in 6 out of 8 metros

• Success achieved despite

influx of population in cities

Large investments in urban infrastructure are needed to unlock growth potential of cities

Around R43 billion per annum is required for infrastructure development in metros until 2025 – compared to current metro budgets of around R28 billion

• n average over the MTREF (adjusted to 2014 Rands).

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Infrastructure investment requirement Budget (MTREF)

Investment is needed for expansion and renewal of infrastructure

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• 5

10 15 20 25 30 35 40 45 50 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2014 Rbillion Renewal Growth Backlogs

Metros need infrastructure mostly for growth and to renew existing assets, a smaller share is required to eradicate historical backlogs.

Expected infrastructure needs by category for metros:

… and the location of this investment matters as much as its scale

• Low density, segregated

cities are a reflection of the infrastructure investment and land use development choices we make

• This spatial form is a

structural constraint to economic growth: it transfers costs to poor households, the state and ultimately back to the real economy

• We need to build cities that

are inclusive and productive

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The “urbanisation dividend” arises from economies of agglomeration (“the triumph of the city”)

Metro municipalities now provide a strong institutional platform to support faster, more inclusive growth

• Single tier

authorities, with wide boundaries

• Broad built

environment functions (urban infrastructure, planning & land use management, housing and transport)

• A clearly

defined, well regulated fiscal framework

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South Africa has an established, globally recognised model of “strong” city governments, within a clear policy and regulatory framework

• Free Basic Services

(FBS) funded by National Government (NG)

• FBS funded by NG
• Above FBS

consumption paid by HH (and cross- subsidisation in tariffs)

• BS consumption

paid by HH (and cross-subsidisation in tariffs)

• HH makes small

contribution to muni rates for general services that benefit community

• BS consumption

and cross- subsidisation paid by HH

• HH contributes to

muni rates for general services that benefit community

The LGFF National Transfers 25% Local Government Own Revenue 75%

HH in informal settlement Poor HH in RDP house Employed HH in RDP house with improvements Middle to upper income HH

Rates and charges Charges

National Transfers 20% Local Government Own Revenue 80% National Transfers 80% Own Revenue 20% Composition of the local government fiscal framework in cities with substantial economic activity Composition of the local government fiscal framework in municipalities with little economic activity

• 8.6% average annual growth from

2009/10 to 2015/16

• Total capital expenditure of

R34.7 bn in 15/16 (7.7% avg annual growth)

• Operational spending pressures

from bulk services costs and wage bill leading to faster growth in operating expenditures

Metro performance has been consistently improving

Metros have large and growing budgets, totaling R214.5 bn in 2015/16

• Johannesburg has largest budget, R52.6 bn

Urban Investment Partnership Conference | Johannesburg, South Africa 9 50 100 150 200 250 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 Operating Capital Total

Total budgeted expenditures for all metro’s: 2009/10 to 2014/15 (R’bn)

Governance is improving

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Metro audit outcomes show steady progress from 2011

2011 2012 2013 2014 Johannesburg Qualified Qualified Unqualified Unqualified Tshwane Unqualified Unqualified Unqualified Unqualified Ekurhuleni Unqualified Unqualified Unqualified Unqualified Cape Town Unqualified Unqualified Unqualified Unqualified eThekwini Unqualified Unqualified Unqualified Unqualified Mangaung Disclaimer Qualified Qualified Unqualified Nelson Mandela Bay Unqualified Qualified Qualified Qualified Buffalo City Adverse Qualified Qualified Qualified

• Room for further

progress, where EOMs remain

• Active national

government engagement where qualifications persist

Adequate revenue performance

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Growing total revenues and improved collection rates, but debtors challenges remain

60 80 100 120 140 M01 M03 M05 M07 M09 M11 M01 M03 M05 M07 M09 M11 M01 M03 M05 M07 M09 M11 M01 M03 M05 M07 M09 M11 M01 M03 M05 M07 M09 M11 M01 M03 M05 M07 M09 M11 2010 2011 2012 2013 2014 2015

Average Collection Rate: All Metros (2010 - 2015)

0% 5% 10% 15% 20% 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16

Annual growth in own revenues: All metro's (2010 - 2015)

2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 2010 2011 2012 2013 2014 2015

Collectable debt (2010 – 2015)

Nelson Mandela Bay Mangaung eThekwini Ekurhuleni Metro City Of Tshwane City Of Johannesburg Cape Town Buffalo City

Metros’ capital spending capacity is improving

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• Variations remain across metro’s
• Performance weakens when budgets grow more rapidly

Roads Pavements Bridges Storm Water 19% Water Reservoirs and Reticulation 10% Electricity Reticulation 16% Sewerage Purification and Reticulation 8% Housing 2% Other Assets 37% Community Assets 8%

Composition of Metro Capital Expenditure (Budgets: 2014/15)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2010 2011 2012 2013 2014 2015

All metro capital expenditure growth rates and performance (2010 - 2015)

Annual growth rate Expenditure performance

Capital investment is financed from transfers, internal income, external loans and development charges

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Reliance on grants has been steadily reduced from 2012/13

• Grant reliance declined to under

45% of total funding in 15/16

• Capital spending from internally

generated revenues has consequences for intergenerational equity and efficiency

• Growing borrowing requirement
• Scope for more effective use of

development charges

R R 5 000 000 R 10 000 000 R 15 000 000 R 20 000 000 R 25 000 000 R 30 000 000 R 35 000 000 R 40 000 000 2009/10 20010/11 2011/12 2012/13 2013/14 2014/15 2015/16

Metro sources of capital finance: 2009/10 - 2015/16 (R'm)

Transfers Development charges Borrowing Internally generated funds

Municipal infrastructure is an opportunity for long- term investment

Key players in the private sector:

• Banks have experience in lending to cities.
• Long-term investors can offer longer term investment.
• Developers invest in large-scale construction and can guide spatial transformation.
• Jointly the private sector, cities and national government can explore profitable

urban investment options.

Brings long-term returns and can reasonably be financed over a 20-30 year horizon.

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Municipal borrowing has taken off significantly since 2007

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• Municipal bonds now account for 45% of metro borrowing
• Average interest rates have begun to decline

15

15 20 25 30 35 40 45 50

Development of Long Term Borrowing for SA (R’bn)

Remaining challenges are opportunities for new partnerships

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* JHB - TSH - EKU - ETH - CPT - NMA

16

20 40 60 80 100 120 140 160 Debt service and revenue of cities* in million Rand

Actual Debt service Revenue

Opportunities:

• Improving effective demand

through robust financial preparation

• Intermediation to extend debt

maturities, enhance liquidity and expand participation by institutional investors

• Tools to match infrastructure

costs to beneficiaries (land value capture, development charges)

Challenges from municipal financial and capacity pressures, and from market developments (BASEL III)

Metros National Government Private Sector

We need a partnership with shared responsibilities

Metros:

• Building local infrastructure and delivering

services

• Raising funds, planning and implementation
• Meeting the needs of people and firms

Private sector:

• Providing investment
• Selling goods and services and earning fair

returns on investments National Government:

• Providing a stable and predictable

intergovernmental fiscal regime

• Enabling cities to achieve national targets of

productive employment, low rates of inequality and shared prosperity

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Government is committed to continue support to metros

• National Development Plan and Integrated Urban Development Framework

provides direction on devolution of functions and clarifies leadership role of metros in managing urban growth and development

• A credible and effective municipal framework has been established to provide

clarity and certainty:

• Municipal Borrowing Policy Framework
• Constitutional Amendments
• MFMA (2003)
• Division of Revenue Acts

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An enabling policy and legal framework to support urban development

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The Cities Support Programme provides:

• Fiscal and financial frameworks for urban development

– Review of the grant system and the equitable share aim to better complement private sector and own-revenue investments of cities – Financial management reforms through the MFMA, to improve transparency and credibility of information, (including MSCoA) – Support to revenue value chains, from revenue administration to clarification of regulatory framework for development charges

• Policy and regulatory reforms to improve the efficiency of infrastructure

delivery – Strengthen the role of the DBSA as an intermediary that assists in the growth of the municipal market

• Support to cities to plan and execute investment programmes

– Built Environmental Performance Plans that create a line of sight between plans, investment programmes, budgets and projects – The Cities Project Preparation Facility supports cities in developing a pipeline of catalytic, spatially integrated infrastructure projects

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This fits with our broader discussions

Key issues identified include

• Availability of projects to invest in
• Need for efficient, effective (procurement) processes that allow investors to access investment
• pportunities
• Need for financial intermediation to allow access of new players, new finance instruments or

new approaches for a wider pool of finances Two sectors adopted to track and assist with specific problem-solving

• IPPs – economic infrastructure case
• Student accommodation – social infrastructure

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Task Team on private sector financing of infrastructure formed in 2013 to work through general issues affecting increased private involvement in the financing of infrastructure projects; identify blockages; and better understand investors concerns

Next steps for the partnership

• 1. Set up a working group on urban financing with members from the private sector,

cities and national government to focus on – Policy and regulatory environment for public-private collaboration on urban investment – Deepening a suite of municipal infrastructure finding – Expanding opportunities for private finance in urban development programmes

• 2. Increase project preparation support through

– Showcasing good practices – Joint governance of available project preparation facilities

• 3. City-level engagements

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