Auditor-general (AG) Tsakani Maluleke’s latest report into municipal finances paints a nightmarish picture of the viability of local government in SA. In her view, the situation in 28% of the country’s municipalities is so dire that there is “significant doubt” they will be able to continue operating as going concerns in the near future.
It’s a huge problem because municipalities cannot provide services — their raison d’être — if they’re overwhelmed by financial concerns.
This warning, contained in Maluleke’s 2020/2021 report into the state of municipalities’ finances, is not new: NGOs and municipal observers have been sounding alarm bells for years. And Ratings Afrika this month released its report on the slide of SA’s local government sector. But the AG report serves as official confirmation of the precariousness at the coalface of service delivery.
According to Maluleke’s report, released last week, local government finances remain under pressure due to nonpayment by municipal debtors, poor budgeting and ineffective financial management.
Of particular concern is the situation in the metros or large cities, where most of the population lives and which account for more than half of local government expenditure. Metros were collectively responsible for a budget of R247.48bn in 2020/2021, and for delivering services to 72% of SA’s households.
But by June last year, Tshwane, Joburg, Ekurhuleni, Cape Town and Nelson Mandela Bay — five of SA’s eight metros — had been downgraded to subinvestment level. And most are on review for further downgrades.
“The downgrades put pressure on some of the metros to raise funding for capital expenditure, and they had to use internal savings from operational budgets to fund shortfalls,” says the AG report.
“As cash-strapped consumers fall behind on paying municipal rates and taxes, credit-rating agencies are flagging an increased concern around the likelihood of metros being unable to meet their debt payments or source cash from capital markets to meet future obligations due to falling revenues.”
As it is, the metros are unlikely to recover 53%-88% of the debts they are owed.
“Though some of these metros have cash reserves, its further use to make up revenue shortfalls will reduce the metros’ capacity to meet future debt obligations as they fall due.”
Despite municipalities spending almost R12bn on finance units and financial consultants, just 16% achieved clean audits
— What it means:
Effectively, this means metros owe more money than they have in reserve. In part, that’s a reflection of the difficulties they’ve had in collecting revenue — in the form of taxes and payments for services — due to the economic downturn and the effects of Covid.
According to the AG, in the 2020/2021 period alone municipalities wrote off R41.28bn in debts that had not been paid to them. To understand the knock-on effects, consider that SA’s municipalities owe Eskom a total of R45bn, contributing hugely to the power utility’s ailing financial position.
But errant ratepayers are not solely to blame for the financial woes of local governments. As Maluleke notes, the municipalities are not playing their part either. For example, Buffalo City didn’t bill a number of customers for water during 2019/2020 as a result of “control deficiencies”.
That alone led to a financial loss of about R9.6m.
In the North West, the municipality of Matlosana failed to collect about R43m owed by a fresh produce market because of a lack of internal controls. Subsequent investigations by the municipality led to disciplinary processes against municipal officials and legal action to recover the losses.
Also gobbling up municipal budgets — or at least a large portion of municipalities’ financial allocation from the government — is salaries.
“With limited cash in the bank, municipalities prioritise the payment of salaries and councillor remuneration, which totalled R113.66bn in 2021 — 60% of the estimated recoverable own revenue and equitable share allocation,” the AG report notes.
“They then use what is left to pay municipal suppliers, including Eskom and the water boards, which are essential for the supply of basic services. At some municipalities, returns and payments to the SA Revenue Service are also delayed, and there are even municipalities that do not transfer their employees’ contributions to their pension funds.”
At the back of the queue, it seems, are those the municipalities must pay for goods or services. According to the AG report, 85% of municipalities take longer than the required 30 days to pay their creditors, while 51% take more than 90 days to do so. In 2016/2017, it took municipalities an average 139 days to pay their creditors — a stark contrast with the 240 days recorded in the most recent report.
Yet, in the face of their tight financial position, municipalities still don’t manage their money “diligently and carefully” — as is clear from R1.96bn that 193 municipalities incurred in fruitless and wasteful spending.
It’s no doubt contributing to municipalities’ parlous position. “Our assessment of the financial health of 230 municipalities and 18 municipal entities based on their financial statements showed increasing indicators of a collapse in local government finances and continued deterioration over the term of the previous administration,” the report says.
This year, the AG’s office has for the first time referred six municipalities that received disclaimed opinions to the Financial Intelligence Centre (FIC) for further investigation.
“A disclaimer says the most unflattering thing about the posture of the people who lead ... if you are unable to do the very basic thing of showing what you have done with public funds, it demonstrates that you have no commitment to live up to your moral obligation to serve as a steward,” Maluleke says. “It shows you have absolutely no will to drive transparency and no interest in demonstrating accountability.”
In total, the AG’s office considered the bank accounts of 10 municipalities that received disclaimers. In six, the AG couldn’t find where the money had gone, and so referred them to the FIC, which is tasked with identifying the proceeds of unlawful activities, combating terrorism and money laundering.
The FIC had not responded to questions by the time the FM went to print.
If you are unable to do the very basic thing of showing what you have done with public funds, it demonstrates that you have no commitment to live up to your moral obligation to serve as a steward
— Tsakane Maluleke
The municipal finance conundrum remains a key area of concern for the government as a whole. Problematically, just 16% — less than a fifth — of SA municipalities received a clean audit in the reporting period. This, Maluleke says, is a failure not just of municipalities, but of the entire government “ecosystem”.
And, it seems, of the reporting ecosystem.
Maluleke’s report indicates that in June 2017, eight municipalities were under administration or provincial intervention. That number was up to 23 by June 2021, and reached 33 by February 2022.
Despite this, Maluleke told the media last week that only 62 municipalities provided credible financial statements when the audit process commenced, with only 25% of municipalities having credible financial practices in place.
Yet salary costs for finance units amounted to R10.41bn. And municipalities spent R1.26bn on consultants in 2020/2021 — double the previous year.
“When combining the money spent on finance units and consultants, it is clear that financial reporting carried a substantial price tag in 2020/2021 of just over R11.67bn,” the report says.
Maluleke says municipalities paid little attention to planning for service delivery, monitoring the execution thereof and reporting on what they had done with the funds allocated to them. “Which is then no small wonder why we are unable to link municipal expenditure to service delivery on the other end.”
It’s not just municipalities. The department of co-operative governance & traditional affairs (Cogta) is supposed to streamline relations between tiers of government to ensure there are broader checks on accountability.
“Provincial Cogtas have a legislated responsibility to watch over the performance [of municipalities] ... if everyone in the ecosystem plays their role, we will get it right,” Maluleke says.
If provincial treasuries and Cogta departments were vigilant about carrying out this mandate, she adds, there shouldn’t be so many municipalities under administration. The synergy between the different tiers of government would force accountability.
“So an MEC for Cogta is supposed to give a report on local government and that report must say, what do the annual financial statements of these municipalities say? How is each municipality responding to the AG’s audit findings and audit reports? Every year they are supposed to do this and that report must go to the legislature and the legislature must debate that,” Maluleke said at last week’s media briefing.
“But what we find is that does not get done or it gets done so late, when it does get done, it goes to the legislature, the legislature sits on it so you don’t get the designed action coming into play.”
In her view, all government departments need to “engage with their duties as given in law” to strengthen accountability, and head off a future of municipal collapse.
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