Insight: Why municipalities, except in the Western Cape, are failing miserably

Even before the coronavirus struck, South Africa’s municipalities were withering on the vine.

It comes as no surprise that Ratings Afrika’s latest Municipal Financial Sustainability Index (MFSI) outlines the ongoing deterioration at local government level.

It’s as if we have heard this story before. In fact, we have heard it before.

The 2019 Municipal Report by the Auditor-General (AG) suggests that 60% of revenue reflected on the books of municipalities will never be paid.

Only 8% of the 257 municipalities received clean audits in the 2017/8 financial year, and half of them had financial statements deemed “quality”.

Irregular expenditure totalled R32 billion and the likely financial loss from material irregularities came to R24 billion.

The Ratings Afrika study takes a broader look at financial sustainability, measured around six components: operating performance, liquidity management, debt governance, budget practices, affordability and infrastructure development.

Municipalities are then given a score out of 100.

Two reasons for Western Cape performance

The Western Cape yet again comes out head and shoulders above the rest.

Ratings Afrika analyst Leon Claassen identifies two primary reasons for this outperformance: “Most of the Western Cape municipalities are under DA control, and the party has taken a firm political decision to impose strict financial control and good governance.

“The second reason, flowing from this, is the Western Cape’s quality of management is overall better than rest of the country.”

The next best province for municipal governance is KwaZulu-Natal, followed by Northern Cape. But if we take the Western Cape (overall score of 59) out of the picture, the rest of the country scores an average of 31, according to Ratings Afrika.

The majority, comprising 63 municipalities out of the top 100, achieved a score of less than 40, “rendering them seriously unsustainable and perhaps even dysfunctional in terms of normal service delivery”.

“The weakest provinces are Free State and North West, with average scores in 2019 of 21 and 25 respectively. It is very clear that the majority of the municipalities in these provinces are in serious financial trouble and probably dysfunctional in key service delivery aspects,” says the Ratings Afrika survey.

Oversight ‘totally ineffective’

Claassen says it’s clear that the councils of these municipalities have failed miserably in their governance responsibilities by allowing them to sink into this desperate, unsustainable financial situation.

Furthermore, it seems that the oversight role by the respective provincial administrations, except the Western Cape, has so far been totally ineffective to improve the financial sustainability at municipal level, as the situation has been continuing over the last five years.

Only the Western Cape and KwaZulu-Natal have anything approaching decent operating surpluses.

Most municipalities are commercially bankrupt (current liabilities exceed current assets), with insufficient liquidity to cover operating expenses.

Just 19 of 100 municipalities measured have operating surpluses. This is due in large part to an average collection rate of 82%, well short of the benchmark of 95%. Only the Western Cape, at 94%, is close to this target.

The Western Cape municipalities have demonstrated that they can be sustainable entities.

Governance … and corruption

Narius Moloto, secretary-general of the National Council of Trade Unions (Nactu), says it is time to relook the entire system of local governance, but warns that any reforms will be defeated so long as corruption remains rife.

“It’s clear there are a number of reasons for poor governance at the municipal level. The first reason is lack of capacity of the elected people. The second reason is corruption.

“Most councils collect enough revenues to run their operations and provide decent services, but just don’t do so,” says Moloto.

“Most councillors want to run shady businesses on the side.”

The adverse effects of the lockdown will have further worsened municipal finances.

Covid-19 impact

The South African Local Government Association has warned that municipalities could see a drop in revenue of up to 5%. Aggregate billings in 2019 for property rates and service charges in the 100-municipality sample amounted to about R85 billion.

If the 5% decline in revenue is sustained for a year, the combined loss of revenue to them would amount to R4.25 billion.

National government has allocated additional funding of R20 billion to the municipal sector, of which R11 billion comprises an equitable share grant to cover the cost of free basic services and additional Covid-19-related costs to municipalities.

This additional funding is for the municipal sector as a whole.

“It is clear that this additional funding for the municipalities will be hopelessly inadequate to cover the loss of revenue by the municipal sector, since the local municipalities needed R30 billion before any adverse effects of the Covid-19 catastrophe.

“In addition, the metropolitan municipalities might need R10 billion to cover their losses in revenue caused by the lockdown,” says Ratings Afrika.

The hole the municipal sector finds itself in is about R45 billion deep.

The full impact of the lockdown will only become visible in a year or two. As it stands, only the Western Cape has any capacity to absorb the financial shock of the lockdown.

Consolidating municipalities to strengthen finance is one suggestion that has been proposed, but this will be resisted by those that are well-run.

This article first appeared on Moneyweb and was republished with permission.

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