‘Tshwane’s deep-set financial trouble almost insurmountable’

Ratings Afrika analysed the recently published audited financial statements (for the year ended June 30 2016) of all eight metropolitan municipalities in South Africa and scored each with regard to financial stability. Moneyweb will publish its analysis of each of the metros in the coming days. Read Ratings Afrika’s findings on Joburg and Cape Town.

The latest Municipal Financial Sustainability Index (MFSI) from Ratings Afrika, based on the financial results for June 2016, reveals mixed results for the eight metropolitan municipalities in South Africa. The MFSI is a scoring model that evaluates the operating performance, liabilities management, budget practices and liquidity position of a municipality and scores these components out of 100.

City of Tshwane reflects the weakest financial metro profile and it continues to decline. Its financial stability score of only 21 out of 100 is the lowest of all the metros and decidedly lower than the score of 24 in 2015. This very low score indicates deep-set financial trouble which creates almost insurmountable challenges for the new administration.

Tshwane’s problems stem largely from its very weak operating performance. If the capital grants received from government (and earmarked for infrastructure development), are excluded from its income, the accumulated operating deficit, including interest payments, over the last three years amounts to R5.4 billion. It is made up as follows: 2014 – R1.4 billion, 2015 – R1.6 billion and 2016 – R2.4 billion; and it is getting progressively worse. It is clear that the operating costs of Tshwane are far too high for its current revenue base. This reflects severe deficiencies in its past budgeting practices and financial discipline.

Tshwane’s staff cost is one item that measures at a high 41% of operating expenditure. To rectify the situation Tshwane will have to cut its operating costs drastically, which would probably have a negative impact on service delivery. The spending on maintenance is in decline over the last three years which signals a weaker condition of its infrastructure and possible increase in service disruptions. Furthermore, there will be pressure on the administration to increase rates and tariffs to generate more income. This however could make the cost of their municipal services less affordable with an adverse effect on their ability to collect the revenue. However, the affordability level of the municipal tariffs seems not to be a concern at present.

These operating deficits impact negatively on Tshwane’s liquidity position, which is also becoming progressively worse. The liquidity shortfall, measured by the excess of its current liabilities over its current assets, has grown from R1.4 billion in 2014 to R3.2 billion in 2016. Apart for the operating deficits, the low revenue collection also contributes to its desperate liquidity position. At the current revenue collection rate of only 97.3% Tshwane is forfeiting some R600 million of cash per annum that is not being collected. The weak revenue collections over a number of years have caused the accumulation of bad debts (that are likely to be written off) to grow to R6.5billion. The concern of this desperate liquidity position is the potential negative impact it might have on its service delivery over the short  to medium term.

In spite of its liquidity position, Tshwane continued to spend large amounts on infrastructure development during the past year. Its capital spending has increased from R4.6 billion in 2014 to over R5 billion in 2016. This is on average R1540 per capita per annum which compares favourably with that of the other metros. However the level of capital spending over the last three years has forced Tshwane to increase its borrowings from R8.8 billion to R10.5 billion in 2016. This has raised its debt burden to 68% of the gross operating revenue – one of the highest ratios of all the metros. Although the intention of the capital spending is to enlarge the infrastructure for a broader service delivery base, it is increasing the financial risk profile of the metro. The very high level of borrowings has increased the debt servicing cost with interest payments now exceeding R1.1 billion per annum; which in turn affects its operating performance adversely.

The financial problems of Tshwane, the administrative capital of South Africa, are of great concern. It could adversely impact its service delivery with huge reputation damage to South Africa which the country can ill afford.

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