Since 2011, governance ratings agency Ratings Afrika (RA) has warned of the “unabated destruction” of South Africa’s municipal financial sustainability, with growing incredulity at the government’s failure to act.
Its annual Municipal Financial Sustainability Index (MFSI) ranks the 104 largest local municipalities and the eight metros for the year ending June 2022. There is again evidence of a financial bloodbath, with the exception of the Western Cape.
It shows that the financial sustainability of most municipalities, and their service delivery capacity, continues to deteriorate rapidly because of “gross financial mismanagement and unsound governance”.
In addition, inadequate spending on repairs and maintenance is rapidly causing infrastructure to crumble. 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.
RA concludes that “the majority of municipalities are on the brink of becoming dysfunctional”.
Two key forces drive a municipality’s financial sustainability: the generation of operating surpluses and positive working capital (liquidity or cash) balances. Both indicators continue a steep decline.
In 2022, the aggregate operating deficits for the 112 municipalities surveyed rose to R33.7bn, from R23bn in 2021. Similarly, the sector’s aggregate cash or liquidity shortfall now exceeds R65bn. It was R54bn in 2021.
The effect of operating deficits is that municipalities don’t generate enough money to pay for service delivery or maintain and develop infrastructure. Over time, these losses have culminated in huge working capital (liquidity) shortfalls that mean they also lack the cash to pay service providers such as Eskom.
Contributing to the sector’s huge cash shortfall is a very low average revenue collection rate of 82.7%, reflecting municipalities’ unwillingness, or inability, to collect money owed for services.
The Western Cape municipal collection rate is 94.9%: the benchmark is 95%. The metros have an average collection rate of 85.5%. Cape Town is the exception with 93.1%.
“It’s no wonder that service delivery is breaking down in most municipalities and that infrastructure is crumbling at an unprecedented pace,” says RA principal Charl Kocks. “South Africa faces a calamity of major proportions if this lack of sustainability is not dealt with effectively and as a matter of urgency.”
He finds it “incomprehensible” that the government isn’t taking steps to confront the unfolding disaster.
Fortunately, some municipalities are still performing well. The top five are all DA-run, some in coalitions: Midvaal and Saldanha Bay (each with an MFSI score of 72 out of 100), followed by George (with 71) and Mossel Bay and Swartland (each with 70). All but Midvaal are in the Western Cape.
Saldanha Bay municipal manager Heinrich Mettler attributes the municipality’s success to conforming strictly to standard operating procedures. Any hint of irregular expenditure is investigated, borrowings are limited, and spending is conservative, leading to consistent budget surpluses.
With more than 60% of households on prepaid meters, and tight control over electricity arrears, its collection rates are about 96%-98%.
“We understand that people want services or they are not willing to pay,” says Mettler, “Once we realised that we started to think of the municipality as a business. We run a very tight ship.”
In terms of the metros’ performance, RA finds it “deeply concerning” that their aggregate MFSI score has dropped by eight points over the past five years, from 49 in 2018 to 41 in 2022. At the bottom of the heap are Mangaung and the City of Tshwane. Their MFSI scores of just 24 each should elicit “grave concern”, says Kocks.
Cape Town, with a score of 68, is the only metro that RA considers to be financially sustainable. Underpinning the city’s high score is an operating surplus of R1.8bn and cash reserves of R9.4bn — resources that can be invested in infrastructure and also provide a buffer to absorb financial shocks.
For the rest of the country, the only glimmer of hope is provided by the National Treasury’s plan to write off R57bn in municipal debt owed to Eskom — in exchange for compliance with strict financial management conditions. These include the requirements that municipalities adopt only funded budgets (no deficits or borrowing) and progressively raise their revenue collection rates to 95%.
These requirements will go a long way to improving the financial stability of municipalities. But much will depend on the political willingness to reform. Unfortunately, the trends monitored by RA show little evidence of any such awareness or commitment.
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