Where did it go wrong: How two ANC-run municipalities can be so different

There’s no question the Democratic Alliance (DA) does a better job than the African National Congress (ANC) at running municipal finances. This shows up in survey after survey.

There’s also no question the ANC has infested local governance with cadre deployments and the results have been catastrophic.

People with no proven aptitude for management are left to run municipalities into the ground. In any self-respecting country, they would be run out of town with pitchforks.

The latest Ratings Afrika Municipal Financial Sustainability Index (MFSI) survey leaves one with no other conclusion than that the DA is trying to show up the ANC, and is succeeding.

The DA-dominated Western Cape is leagues ahead of the ANC-heavy Free State and North West provinces when it comes to local government.

Most municipalities are so crippled with mismanagement that many will now become wards of National Treasury.

Local government was already in need of R30 billion to cover revenue shortfalls before Covid-19 came along, prompting national government to allocate R20 billion on an equitable share basis, roughly half of which will go to Covid-related costs.

This won’t be enough. The revenue picture in metros and municipalities has deteriorated sharply since lockdown started in March.

The question of what to do to fix the problem is going to need serious attention.

One of the suggestions is to merge successful municipalities with bankrupt ones, but this will be fought tooth and nail by those who have managed to keep their finances in some kind of order. Nor is it true that all ANC-run municipalities are failing.

Analyst Leon Claassen of Ratings Afrika, lead compiler of the MFSI, points to two neighbouring municipalities, Steve Tshwete (formerly Middelburg) and eMalahleni (formerly Witbank), which are both ANC-run.

The former is a relative model of financial prudence, the latter is a basket case.

The difference

“What Steve Tshwete has done well is to retain the original administrators and managers, and has largely avoided making party political appointees. This shows up in their financial and operational performance, which has been rather consistently good,” he says.

“The same cannot be said for its neighbour, eMalahleni, which is failing terribly in both operating performance and liquidity management. In this case, the old management was tossed out to make way for cadre deployments, leaving people often with no experience to run a municipality of more than 500 000 people.

“These two municipalities have very similar economic bases so their financial performance should be very close. But they are not.”

Claassen says it is wrong to think the entire local governance model needs to be reimagined.

“What needs to be done is to look at the successful ones, and there are plenty of them, and adopt those as templates for the ones that are failing. The critical failing is in the area of management skills.

“We have to get rid of political deployees and put in professional managers if we are going to fix the problem.”

The Ratings Afrika study takes a broad 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.

The largely DA-run Western Cape comes out on top with an average MFSI score of 59. Down at the bottom is the Free State (mostly ANC) with 21. The national average is 37 (or 31 if the Western Cape is excluded).

But that’s not to say all ANC-run municipalities are shockers. Steve Tshwete is an example of relative excellence.

What’s clear from the Ratings Afrika comparison of these two neighbouring municipalities is that basic financial management is much closer to National Treasury’s ideal at Steve Tshwete than is the case at eMalahleni.

For example, the debtors collection rate at Steve Tshwete is an astonishing 98% (the target is 95%), while it has slipped below 65% at eMalahleni. That in itself can mean the difference between solvency and bankruptcy.

Steve Tshwete has run consistent surpluses, while eMalahleni has clocked up deficits of R823 million for the three years to 2019.

eMalahleni has very little capacity to borrow, so has virtually no long-term liabilities, but its debtors figure has grown nearly four-fold over the two years to 2019 to R2.7 billion.

That’s likely no more than a bookkeeping entry since the Municipal Finance Management Act prohibits municipalities from writing down overdue debtors even when there is little chance of recovery.

Staff costs as an indicator

Another useful index of municipal efficiency is staff costs as a percentage of revenue: 27.5% at eMalahleni versus 34.6% at Steve Tshwete (which has a larger area to service, though its population of 336 000 is smaller than eMalahleni’s 526,000).

Steve Tshwete spends a larger portion of its total revenue on infrastructure development, which would account for the larger percentage of staff costs.

We previously drew attention to Steve Tshwete municipality and the pay increases it awarded itself during lockdown.

But in the larger scheme of things, it deserves credit where due.

Cash from operations as a percentage of total income is 8.7% at eMalahleni, compared with 16.2% at Steve Tshwete. This means Steve Tshwete is more efficient at charging for services such as electricity, water and refuse, and collecting property rates from residents.

“It’s not rocket science,” says Claassen. “There are centres of excellence in the municipal government arena, and we have to replicate those.”

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

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