The financial sustainability of SA’s eight metropolitan municipalities, which house 40% of the population and contribute 60% to GDP, has weakened steadily over the past five years, to the point where the sector is nearing the minimum threshold for viability.
This was the bleak picture even before the coronavirus pandemic hit. Given that most metros have been operating at losses, the big hit to revenue caused by the Covid crisis could be "disastrous" for these rapidly growing cities.
So says the annual municipal financial sustainability index (MFSI) report, published last week by local governance ratings agency Ratings Afrika (RA). It describes the metros as "the engines that drive the economy", and argues that their declining financial sustainability, and the knock-on effect on service delivery, could have extremely adverse effects on SA’s economic growth.
According to RA principal Charl Kocks, the expected 5% decline in metro revenue this year due to the Covid crisis will wipe R10bn off their combined balance sheet. He considers the additional R20bn the government has allocated to the entire local government sphere, which is made up of 257 municipalities, to be "hopelessly inadequate" to cover these losses.
Kocks is alarmed at the potentially explosive combination of widespread hunger caused by the pandemic and the inability of municipalities to deliver services.
"There is no bailout coming," he says. "Who is going to put R100bn on the table? And I don’t see the SA Local Government Association [Salga] or Cogta [the department of co-operative governance & traditional affairs] having the wisdom, focus or ability to sort this out. We have a weak department right in the maw of the crisis."
The RA report echoes the annual auditor-general (AG) report on the state of municipal finances, released in June. The AG found that audit outcomes continue to regress, with irregular expenditure increasing to R32bn in 2018/2019, from R25.2bn in 2017/2018. Only 20 municipalities managed to obtain clean audits (down from 33 previously), 13 of them in the Western Cape.
According to RA, only Cape Town has significantly strengthened its financial sustainability and has the financial capacity to successfully weather the Covid crisis. At the opposite extreme, the financial sustainability of Mangaung has deteriorated to the point where the metro could be termed "dysfunctional".
The eight metros’ average financial sustainability score of 48 (based on their June 2019 financial results) is the lowest in the past five years, and close to the threshold of 45, which is considered to be the minimum for a municipality to be viable.
Crucially, this was before Covid-19 struck.
Cape Town leads the pack with 74 points, up from 64 in 2015, followed by Nelson Mandela Bay, which rose from 51 to 56 over the same period. Joburg stayed roughly constant, at 47. The biggest drops were in Buffalo City, Ekurhuleni and Mangaung, with the latter’s score, a mere 28, placing it at the bottom of the chart.
The MFSI scores six financial components of a municipality out of 100: operating performance, liquidity management, debt governance, budget practices, affordability, and infrastructure development.
It defines financial sustainability as the financial ability of a municipality to deliver services, develop and maintain the infrastructure required by its residents without unplanned increases in rates and taxes, or a reduction in the level of services. A municipality should also have the capacity to absorb financial shocks caused by natural, economic, political and other adversities without external financial assistance.
When it comes to the metros’ operating performance, Cape Town is again the outlier with 55 points, though Joburg has done well to more than double its score from 17 to 36 over the past five years.
Nelson Mandela Bay, on the other hand, has more than halved its score from 25 to 11. All the other metros also experienced declines of at least six points.
"The downward trend in the average operating performance scores [from 25 to 20 over the past five years] indicates future financial problems for most of the metros," notes the report.
"Cape Town is the only metro whose operating performance is at an adequate level to provide sufficient funds from its operations to cover its operating expenses, to provide the funding capacity for infrastructure development and to build the necessary reserves to absorb financial shocks."
The sector’s liquidity management also indicates "a very concerning trend", with the average score dropping from 54 in 2015 to 39 in 2019.
Mangaung is singled out for its "disastrous" financial management, particularly its operating performance and liquidity management, as reflected by its scores for 2019 of 2 and -17 respectively. The report says this is due to inadequate budgeting processes, financial indiscipline and a low revenue collection rate of 80%, against the benchmark of 95%.
According to the AG, SA’s culture of nonpayment for municipal services has become endemic. Consumers owe municipalities more than R181bn. Even government departments routinely fail to pay their municipal service charges, and now contribute a whopping R11bn towards this debt.
Cape Town (94) and Nelson Mandela Bay (79) are the only metros that achieved good scores for liquidity management.
The report attributes Cape Town’s strong liquidity position to the city having sustained operating surpluses for several years, well-managed revenue collection averaging more than 95%, and sound cash management policies and practices.
"Cape Town has for many years had similar pressures to most other metros, but it smelled the coffee," says Kocks.
"Consistent, careful management and hard work has made this possible. We could see when the change in political ownership happened how Cape Town slowly managed to whittle down its bloated debtors’ book."
However, DA co-operative governance spokesperson Cilliers Brink warns that "even a city that has the compounded benefit of 14 years of good government is not invincible", noting how the lockdown is eating into Cape Town’s reserves.
Nelson Mandela Bay, where a DA-led coalition held control from 2016 to April 2018, delivers a mixed performance. In 2018 it joined Cape Town as the only other metro with a AAA credit rating (on Moody’s SA scale) and was ranked the second-most trusted metro in the country on the SA customer satisfaction index, up from second-last in 2016.
However, after DA mayor Athol Trollip was removed in a no-confidence motion, Brink says the "highly competent" city manager Johann Mettler was suspended, and other senior managers were driven out of their jobs. Now, as the city told parliament’s Cogta portfolio committee a few weeks ago, there is only one official with the necessary qualifications to act in the post of municipal manager.
"Unless a competent mayor and municipal manager are returned, I expect financial collapse to follow the collapse in the city’s management and governance," Brink says. "The same is true of Mangaung, which is currently under provincial administration by an equally inept Free State provincial government."
Only Cape Town and Joburg realised operating surpluses in 2019. Joburg did particularly well, turning its deficit of R672m in 2018 into a surplus of R3.3bn in 2019. (Operating surpluses form the base for building the cash reserves required to absorb financial shocks, such as pandemics.)
The operating deficits realised by all the other metros indicate a weakness in matching operating revenues and expenditures, notes the RA report. If this is allowed to continue, it will wipe out the liquidity surpluses that a few metros still retain.
In short: if metros are to survive, we need tough leaders who can make tough decisions
— Cilliers Brink
Thanks to the pandemic, RA expects most metros to realise larger operating deficits in the 2020 fiscal year, which will negatively affect their liquidity positions and, eventually, service delivery.
It argues that before Covid the situation could have been turned around in most metros — with the possible exception of Mangaung — given focused effort and strict financial management, as most have large-enough revenue bases to have traded themselves out of trouble.
The lockdown has changed the situation dramatically. RA expects the impact on municipal finances to linger long after the lockdown is over, though it says the full effect on financial sustainability will be visible only a year or two from now.
Many metros’ 2020/2021 budgets factor in only a five percentage-point drop in revenues due to the virus. But the decline could be far more severe than this, so all will have to tighten their belts in the year ahead.
"Municipal unions simply have to understand that the SA people can’t afford another round of above-inflation pay increases," says Brink. Credit action will need to be taken against consumers who fail to pay, and in-sourcing will have to stop, as will "the prodigious waste of money" due to tender fraud and corruption.
"In most metros I simply don’t see this happening before the 2021 local government elections; ANC factional interests have become too embedded in municipal operations," he adds.
"You will need new political and administrative management — exceptionally strong mayors and municipal managers who can make unpopular decisions and whose political survival is not dependent on crooks in council or in the officialdom.
"In short: if metros are to survive, we need tough leaders who can make tough decisions."
Salga and Cogta had not responded to the FM’s queries at the time of going to press.
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