A comparative financial analysis of South Africa’s five largest metros highlights their overwhelming disregard for the National Treasury’s guidelines for municipal norms and standards. This is evident from their general underspending on essential infrastructure and maintenance — despite the huge increases in revenue they have gouged out of ratepayers in recent years.
The long-term study, by Prisma Contract Review Risk Management director Paul Nel, is based on 12 years’ worth of data drawn from the annual reports of the metropolitan governments of Joburg, Cape Town, eThekwini, Ekurhuleni and Tshwane (in descending order, based on their population size and annual revenue).
The two biggest takeaways from the study are: first, the extent to which the Treasury’s uniform financial ratios and norms, as set out in circular 71 of the Municipal Finance Management Act, are ignored; and second, the stark dichotomy between the performance of Joburg, the country’s economic heartland, and Cape Town, its smaller rival.
The Prisma study supports the findings of governance ratings agency Ratings Afrika, which has been warning about the “unabated destruction” of South Africa’s municipal financial sustainability over the past decade, with growing incredulity at the failure of the government to act.
“When you poke this thing with a stick it doesn’t smell good,” says Ratings Afrika CEO Charl Kocks. “Prisma’s numbers and ours indicate that, despite some pockets of excellence, there’s a huge problem across the board.”
Circular 71 states municipalities should keep their overall revenue and expenditure growth in line with the consumer price index (CPI). Compared with this benchmark, the Prisma study estimates that the five metros collectively overspent R137.3bn on remuneration over the 12 years to June 2020.
Over the same period, they collectively underspent R86.4bn on repairs and maintenance relative to the stipulated guidelines.
This seems to suggest that much of the budget for repairs and maintenance was diverted to pay higher wages. Or, put differently, if the metros hadn’t spent so much on hiking wages, they would have had more funds available to maintain essential economic and social infrastructure.
Municipal infrastructure is crumbling across the country due to inadequate repairs and maintenance. This, together with a lack of service delivery, is having a disastrous effect on households’ quality of life and the economic activity of resident businesses.
Capital expenditure
When it comes to capital expenditure (capex), Cape Town performs far better than its peers, while Joburg is the laggard of the group, especially with regard to investment in essential infrastructure. This is despite the fact that Joburg grew more rapidly than the Mother City (by 11.6% between the 2011 and 2016 census, compared with Cape Town’s 7%.)
Circular 71 stipulates that capex must be between 10% and 20% of total expenditure. The average capex ratio across the five metros was 12.8% over the 12 years. The best performer was Cape Town with 15.9%, followed by Joburg with 14.5% and eThekwini with 13%.
However, there was a significant deterioration in the average capex ratio in the final year of the study, the financial year ended June 30 2020. The biggest drop was Joburg to 9.82%, followed by eThekwini to 8.58%, which meant both failed to meet the 10% minimum requirement, as did Tshwane, which dropped from 9.88% to 9.51%.
In that year, Cape Town’s capex ratio also dropped (from 15.9% to 13.1%), but it still spent more on capex (R6.1bn) than the much larger Joburg metro (R5.9bn). eThekwini spent the least (R3.7bn).
Prisma also teased out how much of capex was spent on infrastructure essential for delivering basic services — roads, electricity, water, sanitation, stormwater drainage and sewer purification networks.
At just more than 70%, the large industrial metro of Ekurhuleni had the biggest essential infrastructure to capex ratio on average over the 12-year period. It was followed closely by Tshwane (70.2%), with eThekwini (62.3%) and Cape Town (61.6%) not too far behind. The big outlier was Joburg, which spent just 29.5% on essential infrastructure over the period.
The excessive expenditure and revenue increases have led to unaffordable service delivery and deteriorating liquidity for the metros
— Paul Nel
Repairs and maintenance
All five metros failed to achieve the required standard of spending on repairs and maintenance (R&M): 8% of the carrying value of property (including investment property), plant and equipment.
Cape Town came closest, with an average R&M ratio of 7.1% over the 12-year period. Tshwane was the worst with 2.8%, followed by Joburg with 3.1%.
The upshot was that over the 12 years, Joburg spent less on repairs and maintenance at R20.1bn than Cape Town (R28.4bn), eThekwini (R24.2bn) and Ekurhuleni (R21.7bn). Tshwane managed only a dismal R14.6bn.
Revenue and operational expenditure
Instead of complying with circular 71’s specifications, the average growth in the metros’ revenue and operational expenditure exceeded 200% over the 12-year period — far more than CPI, which grew 96.52%.
This meant that metro residents were charged R501.9bn in excess of CPI over the 12 years to support an “extraordinary” increase in operational expenditure of R502.7bn above CPI.
“The excessive expenditure and revenue increases have led to unaffordable service delivery and deteriorating liquidity for the metros,” says Nel. “This occurred under the oversight from councillors, the department of co-operative governance and the Treasury and is neither sustainable nor acceptable.”
However, in fairness to the metros, they have had to cope with significant population growth as well as an influx of migrants from rural provinces and neighbouring countries during the period under review.
In terms of circular 71, a municipality may not operate at a deficit. The five metros built up a combined surplus of R129bn over the 12 years. However, Ekurhuleni operated under a deficit in five of those years, while Tshwane sank into a huge R2.8bn deficit in 2020.
Cape Town generated the most accumulated surpluses (R44.6bn), followed by Joburg (R40.6bn) and eThekwini (R26.4bn). Ekurhuleni achieved a dismal R5.3bn surplus after 12 years.
If the five largest metros had kept their revenue increases to CPI over the 12 years to June 2020, ratepayers would have saved R500bn
— WHAT IT MEANS:
Bulk electricity and water procurement
A big part of the problem is that the electricity and water bulk procurement charges imposed by Eskom and the water boards on the metros increased significantly faster than CPI.
Some metros have stopped providing their net profit margins on the distribution of electricity and water, but for the three that did (Cape Town, eThekwini and Tshwane), average net profit was 8.9% on electricity and 5.5% on water for the five years from 2016 to 2020, according to figures supplied by Ratings Afrika.
Kocks says there is no rule as to what net margin is appropriate, but the larger the metro, the higher its distribution costs are likely to be. Also, a metro that has neglected to maintain water pipelines and electrical service stations could experience large day-to-day costs due to constant breakdowns.
There was little variance in the metros’ net margin on electricity, with Tshwane the lowest with an average of 6.7% over the five-year period, followed by Cape Town (9.4%) and eThekwini (10.6%).
But on water, the variance was extreme. On average, Tshwane achieved a net profit of 24.2% from 2016 to 2020 and Cape Town earned 9.2% while eThekwini made a mounting loss, which grew from -3.2% in 2016 to -31.2% in 2020.
“A municipality has to survive, or it won’t be here to service consumers tomorrow,” Kocks says. “So, it has to pass on the Eskom and the water board increases — but in so doing, it needs to balance its own need to survive against the needs of residents and their ability to pay.”
Prisma estimates that if Eskom and the water boards had held their tariff increases down to CPI, the metros would have saved a collective R212bn on bulk electricity purchases and R30.4bn on water over the 12 years.
Kocks thinks it’s time to go back to the drawing board on the system of local government as it’s “highly unlikely” consumers can continue to afford municipal service charges that increase at these rates.
And yet it doesn’t appear that anyone is taking a hard, strategic look at how to reconfigure the present system, whereby tax revenue is distributed from national to local government via an equitable share formula.
“The current system doesn’t work,” concludes Kocks, “We’re not serving the population well, and we need a real rethink of how much money should go to the municipalities because this is where the people live; this is where the tyres are burning in the streets.”
Nel sees the solution in better monitoring, internal controls and adherence to the guidelines and principles laid down by the constitution: that the government’s priority should be to serve the public. However, for those municipalities that have become dysfunctional, the only solution might be liquidation or business rescue.
“The South African public, taxpayers and consumers of electricity, water and municipal services have been robbed by the ruling party, which should not be in charge and control of public finances, municipalities and state-owned entities,” he says.
However, much will depend on the political willingness of the municipalities themselves to reform. Unfortunately, observed trends show little evidence of any such awareness or commitment.
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