DO CITIES matter? It is a question that is high on the global agenda right now because next year, for the first time , more than half the world’s people will live in urban areas. It’s high on the local agenda too, because cities account for two-thirds of SA’s economic activity — and house about 40% of its poor people. That makes for a challenging environment for the cities. But a new report finds that they are under threat as never before, with their financial ability to address their challenges set to be undermined by a range of policy changes the government plans to implement, or has implemented already. The abolition of the regional services council (RSC) levies last year removed a tax that was important for the cities, and it is not clear when, or with what, it will be replaced. Then the cities stand to lose about a third of their revenue base if the controversial regional electricity distributors (REDs) take over municipal distribution. Added to that is the danger that they will lose skilled and committed managers if the government goes ahead with plans for a single public service.

The State of City Finances Report 2007 is published by the SA Cities Network, which brings together the nine largest cities (the six metros plus Mangaung, Msunduzi and Buffalo City), the Development Bank of Southern Africa and the Institute of Municipal Financial Officers. It was authored by two former metro financial managers, Roland Hunter (formerly Jo’burg) and Philip van Ryneveld (formerly Cape Town), and municipal accounting expert Alan York.

It shows that the overall operating surplus rose to 7% of total revenue in financial 2006, from 2% in 2003, and that though the bad debt total still stands at R25,5bn, payment levels have stabilised or increased over the past few years. City revenues have increased and capital spending has grown from 13% in 2004 to 17% last year, over half of which was on essential infrastructure . All nine cities now have investment-grade credit ratings and, say Hunter and Van Ryneveld, their financial position probably hasn’t been stronger at any time in at least the past 20 years. That reflects significantly better management of city revenues, as well as favourable economic trends and increased grants from central government. But the trouble with the happy financial position is that it is, in part, because the cities have spent a lot less than they should have, particularly in areas such as housing. The report says the nine cities would have to spend just under R32bn over the next 15 years to build the 1,5-million housing units needed to tackle the housing backlog. And paradoxically, the more they succeed in providing housing to the poor, the more it will cost them in the long term because of the free services that go with providing those houses.

It is that kind of challenge the cities face. But it is not only service delivery to the poor they have to worry about. The report argues the cities are having to perform a difficult balancing act. Not only must they address poverty by providing services to the poor, often free, but they must also fund new growth, investing in the infrastructure crucial if they are to support SA’s higher rates of growth — growth that is happening, in large part, in the cities. And it is not just a question of putting in new infrastructure but also of replacing ageing infrastructure and of maintaining assets that have not had nearly enough attention. One of the worrying findings of the report’s financial analysis is how little the cities spend on maintenance. And one of the problems is that, while they are receiving more and more grant funding from the central government, most of this is for pro-poor spending. So it is difficult both to find and to fund the balance between spending on the poor, supporting new growth and maintaining existing assets.

Add all that up, says Hunter, and despite the financial strength of the cities, they could be in trouble. What is more, it is exactly at this point that their financial position is at risk of being weakened. In 2005-06, the nine cities raised R5,1bn (about 9% of total revenue) through RSC levies. That has been replaced, to a large extent (though not entirely), by direct grants from the central government. But the real issue, the report suggests, is as much about local level accountability and incentives as it is about money. The levies weren’t an efficient tax, but they were a form of tax on local business, and that is important to give cities an incentive to create a favourable environment that promotes the growth of enterprises and economic activity, as well as to make them accountable to local businesses. The treasury has said it will look at a new tax to replace the RSC levies, though introducing this now could be difficult.

The move with a much bigger potential to undermine city finances, though, is the long-discussed implementation of the six REDs, which would take over the distribution of electricity across SA. Electricity revenues make up nearly 30% of the nine cities’ revenues overall, ranging from as little as 20% of the budget (Cape Town) to as high as 38% (Ekurhuleni). The road to the REDs has been long and tortuous and the cities are still a long way from agreeing to hand over their electricity assets. The government has now promised that they will be compensated for the loss of revenue, through a surcharge they will earn on the electricity that the REDs distribute. But again, the money alone is not the point. Customers receive a single bill for electricity and other charges, including rates and water. Municipalities can’t cut off water and it is difficult to repossess properties for non-payment of rates. But they can cut off electricity for nonpayment, and the leverage that gives them has been crucial to improving revenue streams in recent years. If electricity goes, the cities will not only be smaller financial entities but their ability to collect other revenue streams could be affected.

And with both the RSC levies and electricity gone, the report calculates, the aggregate income of the cities would have been almost 30% lower than the actual total of R57,4bn last year. Rating agencies have already sounded some alarm bells and any downgrades in their ratings could make it more expensive for the cities to borrow.

A third concern the report raises is that the single public service could undermine the cities’ financial strength by stripping them of some of their best and most specialised officials. Managing cities is more complex than many national or provincial government jobs. It also often depends on localised knowledge and commitment. With the single public service, the government wants to make it easier to redeploy people around the system, from municipal to national or provincial. That might be good for the national interest but, the report’s authors argue, it stands to undermine the cities.

That tension between local and national is a key underlying question in the report. Should we accord cities a special political status because of their central role in growth and development, such that their interests should prevail over national interests? It is a debate that is playing out to some extent in the discussion about the role of the provinces and of local government that is going on within the government and in the ANC. But that doesn’t necessarily distinguish between big cities and smaller local authorities.

Similarly, SA’s cities don’t have a meaningful political presence in national forums — all they have is one vote each at Salga, the body that represents all 283 local authorities. In many countries, cities and their leaders are a political force in their own right. Not so in SA, and the report suggests that’s partly their own fault. The cities have been too timid in advancing their own financial agendas and have not raised their collective voice loudly on policy measures that could threaten these. They clearly should.