In 2014, poultry company Astral Foods built a R200m animal feed mill in Standerton, a town on the Vaal River about two hours from Joburg. It was exactly the kind of investment the economy needs to trigger growth, create jobs and compete globally.
Astral, which sells more than 200-million chickens a year, is the town’s biggest employer, as well as its biggest customer for water and electricity.
So you’d think the local Lekwa municipality would do all in its power to keep Astral supplied with the water and electricity that are crucial to its operations.
Not so. Production at Astral is being held hostage by crumbling municipal infrastructure and an inept council.
It is only one of many such examples — representing perhaps the biggest threat to President Cyril Ramaphosa’s much-hyped "new dawn".
Astral’s share price last month plunged 10.7% — its biggest drop in almost two decades — due to the spluttering water and electricity supply from Lekwa municipality.
Water should not be a problem. The Vaal runs right through Standerton. Lekwa is the Sesotho name for the river. But there are other issues too, caused by the inept municipality, like acute pollution. Without a reliable water supply, the Astral plant will wither and die and hundreds of jobs will be lost.
Chris Schutte, the burly CEO of Astral who started his career as an assistant farm manager at Golden Lay farms back in 1984, fumes about the disconnect between the government’s pie-in-the-sky talk and the reality.
"I am flabbergasted that government structures are fixated on the concepts of a fourth industrial revolution, and now bullet trains and mega-cities, while they are unable to provide basic services to existing companies such as Astral, and many other established and successful businesses," he says.
Schutte points out that among other things Ramaphosa spoke about in his state of the nation speech, was a plea to buy locally made products. But to do this, you need a reliable municipal environment.
Schutte adds: "We are continuously bombarded with rhetoric about global competitiveness, the need for growth in rural agriprocessing, creating jobs in rural communities and ensuring food security, while Astral, the largest producer of affordable chicken in SA, is left to fend for itself with little more than a ‘bucket system’ supply of water," he says.
Astral will now go the legal route, to nail down which tier of government — local, provincial or national — is accountable for failing municipal infrastructure.
Schutte says Astral has "some plans" to resolve the water situation in Lekwa.
But he promises: "Astral will not rest until it has been clearly determined who is ultimately responsible to execute such plans."
Lekwa’s mayor is Linda Dhlamini — a man whose tenure has been so disastrous that his own party, the ANC, tried to recall him from the post last year, but failed.
This municipality is just one example of how SA’s fractured, dysfunctional local government is choking business and stifling investment, undermining Ramaphosa’s revival efforts.
The performance of local municipalities is an indicator of SA’s economic heartbeat, says Good Governance Africa, an independent think tank which ranks local government performance.
By this measure, SA is ailing: 62% of its municipalities are classified by national government as "dysfunctional".
Unreliable government services are killing companies, says Henk Langenhoven, chief economist of the Minerals Council SA.
"Nowhere are failures more apparent than in small towns, where delinquent local authorities are unable to create an environment conducive to running a manufacturing business. For many companies, this is where the rubber really hits the road," says Langenhoven, formerly chief economist at the Steel & Engineering Industries Federation of SA.
Astral knows this only too well. It is already fighting to compete with imports from Brazil. Now it is having to battle its own government to get the water to ensure hygienic production of broilers, and for cooling and refrigeration.
Thanks to Lekwa’s delinquency, Astral has had to slash production to keep products hygienic.
Andy Crocker, MD of Astral’s poultry commercial division, says the water supply problem has wiped R85m from the company’s profits.
He doesn’t have to point out that in rural areas like Standerton, where the unemployment rate exceeds the national average of 37% (using the expanded definition), this delinquency hurts SA deeply.
Astral has 2,425 employees at the Standerton processing plant, with a further 900 working in the agriculture supply chain.
These employees are working half of the normal hours due to a reduction from two shifts to the single shift allowed by the restricted water supply, says Astral. If the water crisis persists, many of those jobs will disappear.
Astral has even obtained a court order requiring Lekwa to supply a certain amount of water. But Dhlamini’s municipality apparently just ignores it.
SA Chamber of Commerce & Industry CEO Alan Mukoki says this problem is so pressing precisely because, in some smaller towns, there is an entire ecosystem of businesses and jobs that depend on a particular company.
"You cannot have a situation whereby Ramaphosa is encouraging businesses to step forward and assist the government in driving investment, while at the local level the municipalities cannot provide water or electricity," Mukoki says.
And when these companies struggle because of inept local leaders, their profits are hit, and the government’s tax collection falls further.
Economist Mike Schüssler says many municipalities are so badly run, they simply cannot pay for their own services.
"Municipalities owe Eskom about R17bn. As a result, these municipalities face threats of cut-offs. I have seen many businesses struggle as a result. An economy runs on reliable basic services," he says.
The extent of the issue is underreported, he adds.
"If you go to these areas, they really just cannot operate ... a number of companies choose not to go public with their problems. This is a huge problem right across SA."
He says the dysfunctional municipalities hurt approximately 38% of SA’s population, who live in rural areas. This pushes more people to migrate into straining cities.
"It hurts the small businesses in these small towns. You cannot have a restaurant without toilets. A hairdresser needs water. It is having a huge impact on our ability to grow and create jobs," he says.
The disconnect between Ramaphosa’s speech last week in parliament and his party’s apparent willingness to leave inept local leaders in place to thwart service delivery couldn’t be starker.
It’s not as if the ANC doesn’t know what’s going on. A year ago Zweli Mkhize, former minister of co-operative governance & traditional affairs (Cogta), presented a bleak report on the state of SA’s municipalities.
Only 7% of the 257 local government entities could be classified as well-functioning, he told the National Council of Provinces; 31% were "reasonably functional", while 62% were either "almost dysfunctional" or "dysfunctional".
For anyone who has followed the warnings of the auditor-general (AG) in recent years, the municipal meltdown is no surprise.
Just over a year ago, AG Kimi Makwetu sketched an equally grim picture of the municipalities.
Releasing the 2016-2017 audit results for municipalities, Makwetu lamented a lack of accountability and of decisive leadership. In particular, there were no consequences for those who flouted basic processes. But Makwetu’s red flags were ignored.
Of the 257 municipalities and 21 municipal entities audited in 2016-2017, Makwetu said only 13% could produce quality financial statements and performance reports. Irregular expenditure rocketed by 75%, from R16.2bn to R28.4bn.
Lekwa wasn’t even one of the 20 worst-performing municipalities in Good Governance Africa’s 2019 government performance index.
The NGO assessed 213 municipalities — 205 local and eight metropolitan municipalities — on several criteria, including administration, economic development and service delivery.
The top-performing municipality was Mossel Bay in the Western Cape, followed by Senqu in the Eastern Cape.
The worst was Msinga, in rural KwaZulu-Natal; uMhlabuyalingana, an area in northern KwaZulu-Natal, was second; third-worst was Port St Johns in the Eastern Cape; fourth was Ntabankulu in the Wild Coast region of the Eastern Cape; and fifth from the bottom was Nkandla, the home town of Jacob Zuma.
Each of these municipalities is a blight on Ramaphosa’s lofty goal of raising $100bn in investments by 2023.
InvestSA, a division of the department of trade & industry (DTI), is responsible for facilitating foreign and domestic direct investment.
Its job is to "create an enabling environment for investment", while reducing red tape for investors. You’d have to say that if this is the goal, it is failing.
"Investment, by its nature, is located in a specific municipality," says DTI spokesperson Sidwell Medupe. "Municipalities play a key role in delivering services to investors."
So has the state of the municipalities come up in discussions between the president’s special investment envoys (a group that includes former Standard Bank CEO Jacko Maree and former finance minister Trevor Manuel) and potential investors?
"Yes," says Medupe. "Issues are brought to the attention of InvestSA via the investment envoys. The role of InvestSA is to co-ordinate intergovernmentally, across the three spheres of government, as well as with relevant agencies to ensure investment projects are rolled out."
Those investors have flagged electricity connections, water supply to projects and waste-water treatment, among other issues.
Medupe says Cogta and the SA Local Government Association have dedicated programmes to build capacity and assist municipalities. With little success, it seems.
Nor is the municipal meltdown confined to rural areas. Some of the country’s heritage-rich cities are among those hamstrung by the municipal rot.
The Makana municipality in the Eastern Cape is home to Rhodes University, the National Arts Festival and the Eastern Cape High Court. Ageing and decaying water infrastructure has amplified the effects of drought, heightening the risk of a major health and sanitation crisis.
Residents and businesses go for days without water.
The Makana municipality, which also incorporates the small towns of Alicedale and Riebeek East, is not an isolated case.
In its 2017 infrastructure report card, the SA Institution of Civil Engineering (SAICE) gave the country’s infrastructure an overall D+ grade — an indication, it said, that the infrastructure was at risk.
"This grade reflects an ongoing and unchanged norm of poor maintenance and insufficient engineering capacity in the public sector," the institution said. The quality and the reliability of water supply have decreased in small towns and rural areas, it added.
SAICE said SA’s major water resources infrastructure is not only ageing but has been deteriorating because of insufficient maintenance and inadequate capital investment. This is why, it said, SA now faces a water resource crisis, similar to the electricity generation crisis of a decade ago.
Electricity is another bone of contention between companies and the more delinquent municipalities.
Pioneer Foods, one of SA’s largest producers of branded food including Sasko bread, Ceres fruit juice, ProNutro cereal and Bokomo rusks, had to go to court last year to demand a reliable electricity supply.
In Pioneer’s case, it had wheat and maize mills in two delinquent municipalities: the Walter Sisulu municipality in the Eastern Cape and Dihlabeng municipality in the Free State. Both municipalities failed to pay their bill to Eskom, so Eskom cut the power.
Pioneer got a court order in 2017 stopping Eskom from cutting the power — but the utility ignored the court. In March this year, the South Gauteng High Court ruled that Eskom had breached the court order.
A few weeks ago, Pioneer’s finance director Felix Lombard told the FM: "In both those municipalities it’s mismanagement that led to their nonpayment to Eskom. So they got switched off — but it wasn’t a result of us not paying. Our money never reached Eskom, it would seem."
Pioneer has three maize mills and five wheat mills across SA — the power outages erased more than 25% of its maize output and 15% of its flour output. "We pay our bills diligently and we’re still getting cut off, and that isn’t right," said Lombard.
(Nor do those municipalities seem to care about their implosion. This week, even the website of Walter Sisulu municipality appeared to be under the control of Brazilian hacker Rulezz, who posted "thanks for this, stupid webmaster" on the front page.)
Astral has had similar headaches. In 2017, the chicken producer took Eskom to court for implementing "scheduled interruptions" in the Lekwa municipality, to recover money owed by the municipality.
Lekwa, at the time, owed Eskom R300m — and it had breached two earlier acknowledgments of debt dated 2015 and 2016.
To make it worse, Astral did not owe the municipality a cent for electricity — and it accounted for more than 50% of the electricity supplied by Eskom to Lekwa.
Astral and Eskom eventually reached a deal, which became an order of court, allowing Astral to pay Eskom directly for power.
Small businesses are beginning to make their anger felt about poor service delivery by launching joint legal challenges against wayward municipalities.
In 2017, the Brits Industrialists Association in North West instituted legal action against the Madibeng municipality after the power supply was cut off.
Madibeng, which includes the tourist area of Hartbeespoort, is a poster child for incompetent local governance. In May this year, the North Gauteng High Court ordered Madibeng to pay R45m in water levies to the department of water & sanitation. It is among 44 municipalities to have forfeited municipal infrastructure grants due to failing to spend the money budgeted. Its R60m grant was reallocated to other municipalities.
It was an awful own goal, since municipal infrastructure grants are used to finance infrastructure for services such as water, electricity, refuse removal and roads.
Little wonder that the North West government placed it under administration.
In his state of the province address in February, North West premier Job Mokgoro said 19 out of 22 municipalities were on the brink of collapse.
"Sadly, the performance of our municipalities and provision of basic services have been in decline over the years. Our municipalities have also been regressing in terms of audit outcomes, their response to community needs and execution of their legislative responsibilities," Mokgoro said.
Municipalities are not only badly run, they’re also increasingly debt-ridden. SA’s consolidated municipal debt now stands at R162bn, according to the National Treasury.
Households account for the bulk of that (R120bn), followed by commercial entities (R24bn) and state organs (R10bn).
The Treasury says municipalities with large amounts of outstanding debt usually have weaknesses in their ability to manage the revenue value chain.
"Any weakness in the value chain process will compromise the municipalities’ ability to effectively collect what was billed."
The Treasury puts much of it down to poor budgeting, overspending, weak fiscal discipline and poor financial management.
To address this, the Treasury is developing new budgeting, reporting, monitoring and engagement systems for local government.
Yet there are, amid the doom and gloom, pockets of good service delivery at local government level.
According to Good Governance Africa’s performance index, about 60% of the country’s top 20 municipalities are in the Western Cape. What is it that the Western Cape municipalities are getting right?
Jobs and investment are at stake as municipalities fail to provide the right environment for businesses
— What it means
Tim Harris, CEO of Wesgro, the official tourism, trade and investment promotion agency for the Western Cape, says a study commissioned two years ago explored this question. The study, which spoke to investors in markets such as the US, UK, France, China, the Netherlands, Germany and SA, was meant to understand barriers and opportunities for investment in the Western Cape.
The answers weren’t rocket science: investors listed factors such as "ease of doing business", "a business-friendly environment that reduces red tape", "provision of reliable basic services" and "world-class infrastructure" as considerations that ranked highly in where they placed their money.
Harris says municipal governments are critical to this. "Landing an investment or securing an expansion requires ensuring confidence and certainty around access to electricity, water and other basic services."
Wesgro’s investment promotion unit has held more than 80 meetings with local and district municipalities in the Western Cape in the past two financial years to stimulate investment.
"Our key objective is to assist municipalities in becoming investment-friendly and ready," says Harris.
On Tuesday, water & sanitation minister Lindiwe Sisulu issued a stinging rebuke to Lekwa, saying she’d send her deputy, David Mahlobo, to Standerton.
"Officials of the national department must be problem solvers. They must be hands-on and bring stakeholders together to solve problems. We have very good policies, it is time for these policies to be implemented and our most experienced and most senior staff must lead," she said.
Sisulu said that Astral was a big employer in Lekwa, and it had offered to help fix the problem.
"It is our responsibility to now get everybody around the table and find long-term solutions for the people of Lekwa and the businesses," Sisulu said.
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