60 key municipalities in financial trouble

Four months before the countrywide local government elections Ratings Afrika found that service delivery is unlikely to improve as 60% of the country’s key municipalities are in financial trouble.

The financial sustainability of four of the eight metros is weak and the two metros with the highest household income, Joburg and Tshwane, are in the deepest trouble, Ratings Afrika found.

The weak financial sustainability of local government is detrimental to the South African economy and puts extra strain on government that has to provide financial support, Ratings Afrika says.

The agency has analysed the 2014/15 annual financial statements of the 100 biggest municipalities, as it did in each of the four previous financial years.

Measuring each municipality’s operating performance, liabilities management, budget practices and liquidity position it compiles a Municipal Financial Stability Index (MFSI), giving each municipality a mark out of 100.

Source: Ratings Afrika

While some municipalities have made good progress, the overall picture has not changed much over the past five financial years, Ratings Afrika found. As a result it questions the soundness of governance processes by councils who are the guardians of public funds as well as the efficiency of oversight by provincial and national treasuries.

Source: Ratings Afrika

The average score of all 100 municipalities has changed little over the five years and stands at 43, which Ratings Afrika says indicates inadequate financial management practices and discipline.

The worst performing municipalities were found in the Free State (25) and North West (26). Ratings Afrika says these municipalities have huge liquidity shortfalls and are probably commercially insolvent because they cannot sell their infrastructure assets to generate cash.

Gauteng (30) and Mpumalanga (30) are not much better off, the agency says.

The Western Cape (60) had the highest score in 2014/15, up from 46 in 2011/12. KwaZulu-Natal scored 59, unchanged from the previous financial year.

Ratings Afrika expressed its concern about the fact that 42 of the 100 municipalities scored less than 35 out of 100. This remained fairly constant over the last five financial years, as did the 60 municipalities below 60.

Source: Ratings Afrika

Ratings Afrika says the 60 measured municipalities scoring below 50% are in financial trouble. Due to their financial constraints service delivery is poor, which manifests in increasing service delivery protests.

The top scoring municipalities did not do as well as in the previous financial year and none scored more than 80 out of 100. KwaDukuza (Ballito) and Hessequa (Riversdale) did the best, each with a score of 78. According to Ratings Afrika KwaDukuza has been very consistent over the past five periods, while Hessequa has shown a lot of improvement.

Well-performing municipalities they say have well entrenched financial policies, budgets based on sound long-term financial strategies, they adhere to good budgetary practices, have strict financial control and good revenue collection.

Source: Ratings Afrika

The worst performing municipalities in 2014/15 were Thabazimbi and Madibeng (Brits) with only five out of 100 each and Matsjhabeng (Welkom) with a score of 8.

Ratings Afrika says these municipalities have very weak liquidity. They spend more than their income and this results in operating deficits. The quality of their infrastructure is deteriorating because of low spending on repairs and maintenance, which threatens their long-term sustainability. “It is difficult to contemplate whether they can operate as going concerns”, it says.

Source: Ratings Afrika

Ratings Afrika describes the country’s eight metros as large, densely populated, complex and rapidly growing cities. About 40% of South Africa’s populations live in these cities and they contribute about 60% of GDP. These economies play a crucial role in the economic growth and development of South Africa as a whole, Ratings Afrika says.

Source: Ratings Afrika

The average index scores for the metros increased from 40 in 2010/11 to 57 in 2013/14, but dropped to 53 in 2014/15.

Cape Town (75) had the best score and Ekurhuleni (70) showed the most improvement. Only four of the eight metros achieved a score of more than 50, which indicates that half of them have weak financial stability, which would impact service delivery and economic growth.

They say it is ironic that the two cities with the biggest income per household, Tshwane (24) and Joburg (37), have the weakest financial sustainability. This is the result of deficiencies in their budgetary practices and financial discipline, Ratings Afrika said.

Johannesburg has improved since 2011 as it started sorting out its billing problems, but has declined again since then.

Ratings Afrika says Tshwane is in deep financial trouble with a liquidity shortfall (excluding inventory) of R2 billion. This means it would battle to pay its creditors within 30 days as required by legislation. Its operational shortfall has increased from R1.4 billion in the previous financial year to R1.6 billion in 2014/15 and it spends more than its income.

According to Ratings Afrika the controversial prepaid smart electricity metering project has done the city more harm than good as its revenue collection rate dropped from 95.5% in 2013/14 to 94.4%.

Ratings Afrika concluded that decisive political leadership is needed to correct the bad state of municipal finances. Such leaders should look after the interests of residents and businesses rather than their own, root out corruption, appoint managers with the necessary skills and experience to implement the budgetary process and exercise financial discipline.

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