The primary responsibility of local government is to make sure that any money collected through service fees is used for the provision of service delivery. This is how public funds are generated, which are then used to fund infrastructure upgrades and provide services to citizens and businesses. Furthermore, the provision of infrastructure upgrades can boost total revenue collection if implemented through strong governance and financial investment, according to assertions by Titus (2013)**, as well as Sewchurran and Davidson (2021). Infrastructure development is a crucial engine for boosting economic activity, but what is in question is whether it can indeed boost revenue collection, at least in the context of Durban. In order to explore this, the first section of this data story will discuss the relationship between capital expenditure and revenue generation. The second will provide an analysis that compares Durban’s capital spending to those of the main cities in South Africa, including the analysis of Durban’s capital expenditure and revenue collection performance. Importantly, this datastory is a summary of a full research paper which is available on request, and on the link provided at the end of the page. Nonetheless, the key questions that the paper seeks to investigate are:
1. What is the impact of infrastructure investment on total revenue collection? Or are we really improving City’s revenue collection by investing in public infrastructure?
2. What is the capital budget threshold for responding in comparison to other cities?
3. Given the two questions above, how should eThekwini be responding to its current infrastructure crisis?
SUMMARISED IMPACT OF DURBAN'S EXPENDITURE ON REVENUE COLLECTION
This report is designed to investigate the economic impact of eThekwini Municipality’s capital expenditure (infrastructure investment) on its total revenue collection. A time series econometric method; and in particular, the vector autoregressive (VAR) model of Sim (1980)** was employed for the analysis. The study used monthly time series data which covered the period 2015M1 to 2021M12. We discover that there is a positive relationship between capital expenditure and revenue collection.
As a result, for every 1% increase in CAPEX, 0.1% more revenue is collected after infrastructure repairs/upgrades. This only applies in the short run, so an increase of 1% in CAPEX will only temporarily raise revenue by 1%, implying that the increase will not be sustained indefinitely. The City must ensure that CAPEX routinely rises in the short term to maintain revenue growth.
A regular short-term expenditure on infrastructure repairs and upgrades will be necessary as a practical method of maintaining a rise in revenue. The operational expenditure in the model has a positive impact on the revenue collection. As the operational expenditure increases by 1%, the City’s revenue collection increases by 0.2% on average. This illustrates that as eThekwini Municipality allocates its resources to essential activities, such as internal system automation, improving competitiveness, and making it easier for businesses to operate, these directly have a favorable impact on revenue collection.
These results prove that there is a positive relationship between capital spending, operating expenditure, and revenue collection significantly supporting the notion that revenue collection is a necessary component of the City’s budgeting method.
SUMMARISED PERFORMANCE OF CAPITAL EXPENDITURE AND REVENUE
There is an ongoing steep decline in capital budget spending that emerged against a backdrop of man-made and natural disasters which required increased capital investment into infrastructure. The implication of the decline, coupled with the flood damage, is that the City is allocating/investing less of its capital budget in its assets and in the maintenance/repairs of the existing assets which are responsible for generating its revenue. This will have severely negative consequences for the City’s short, medium, and long-term revenue trajectory. The estimated net impact of capital expenditure on the City’s GDP between 2015/16 to 2021/22 is R44.9 billion, which is 10.6% of the annual GDP. On average, the City is estimated to have generated R5.6 billion a year. Also, have created/sustained a total of 21 825 jobs over 7 years. The lack of project implementation and other primary factors identified by project managers are the key causes of the City’s capital expenditures' downward sloping trend, causing a shortfall of R8,5 billion between 2015/16 to 2021/22. A benchmark for cities in South Africa, is to spend about 20% of their total budget on capital. While eThekwini was in line with this trend in 2015, with 18% of its budget dedicated to capital expenditure, this figure has fallen to 9% in 2022/23. The capital budget for eThekwini Municipality comes in third place, it is behind by R3.7 billion in other major cities. It’s crucial to emphasise that, despite their financial difficulties, most cities are seen to be spending less of the grant fund provided to them to carry out certain infrastructure projects.
The revenues collected from energy in 2021/22 increased by 2.9% (electricity rely more on tariff increases) and water consumption fell by 12.8% due to infrastructure damages during flooding. EThekwini’s debt levels have fallen over the years and remain well below the benchmark of 45% of its own revenue – hence the City has an under-geared balance sheet. Given the infrastructure crisis resulting from the flood and expenditure in infrastructure over the last six years, combined with the low and declining levels of borrowing that the City currently has, it is important that the City increases its current levels of debt to address urgent developmental priorities. As disaster-related funding slowly comes through, these can assist in further addressing the infrastructure investment shortfall resulting from years of under-investment or used to offset the debt. The danger of perpetuating the current approach which has resulted in disastrous levels of catchment pollution, an extremely delicate electricity network, and vulnerable water and stormwater infrastructure, is that the City will experience a sharp decline in revenue from disinvestment, project cancellations, and declining local property and capital. It is estimated that to address the immediate infrastructure shortcomings (in waste electricity, stormwater, and water) and halt the unfolding of further natural and economic disasters, the City would need to borrow approximately R2 billion of infrastructure funding, which is well within its capability.
To accelerate the completion of new infrastructure projects and maintain current infrastructure, it is necessary to package infrastructure funding requirements for all unfunded projects to secure external funding. This is a crucial factor in increasing the City’s revenue collection.
The Sakha iTheku Economic Strategy, which is a part of the eThekwini Municipality’s Economic Plan, recommends both the establishment of a company for economic development and the creation of public-private partnership models for large-scale infrastructure projects. This may serve as the solution to several problems that project managers have identified.
Ref: Siphesihle.Thusi@durban.gov.za (Economic Research Analyst)
**Full list of references available on request