SA’s metros still facing financial strain

While the financial sustainability of South Africa’s eight metropolitan councils has improved slightly, their average score from Ratings Afrika is a mere 43 out of 100, which the agency says is concerning.

If one discounts Cape Town, which is once again the top performer with a score of 70, the average is only 39 out of 100. 

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“At this level of financial sustainability, the majority of metros remain a concern. They are considered to be the economic engines of the South African economy. Service delivery failure by the metros can cause immeasurable damage to the economy,” the agency said at the release of the 2023 results.

Ratings Afrika has been publishing its Municipal Financial Sustainability Index (MFSI) since 2011.

The index analyses municipalities’ annual financial statements and scores six components out of 100 to arrive at the final sustainability score. The elements are operating performance, liquidity management, debt governance, budget practices, affordability, and infrastructure development.

The agency defines financial sustainability as “the financial ability of a municipality to deliver services, develop and maintain the infrastructure required by its residents without unplanned increases in rates and tariffs or a reduction in the level of services”.

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“Additionally, the municipality should have the capacity to absorb financial shocks caused by natural, economic, political, and other adversities without external financial assistance.”

Tshwane still has a ‘long way to go’

While still doing very poorly, the City of Tshwane showed the biggest improvement from the previous year. Leon Claassen, Ratings Afrika’s analyst, says this shows the multi-party coalition is doing the right things, “but they still have a very long way to go”.

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The improvement confirms Tshwane’s recent improved audit outcomes. Auditor-General Tsakani Maluleke issued a qualified opinion, which is better than the previous year’s adverse opinion. 

Rating agency Moody’s also recently confirmed a stable outlook on Tshwane’s credit rating following the city’s publication of its financial statements on Sens after missing two earlier deadlines.

Claassen says the improvement in Tshwane’s operating performance is encouraging. “The liquidity position is still very weak, but a continued improvement in operating performance will alleviate the liquidity pressures over the medium term.”

He says Tshwane’s municipal services are still affordable and show a stable trend, but infrastructure development is still considered inadequate. This should improve with a stronger liquidity situation.

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He points out that Tshwane succeeded in decreasing its deficit at year-end from R4.2 billion at the end of June 2022 to R524 million a year later.

Mangaung

The Mangaung metro, based in Bloemfontein in the Free State, was the worst performer with a score of 27, despite a small improvement from the previous year’s 24.

According to Claassen, this shows very low financial sustainability and even doubts about its ability to continue as a going concern. 

Ratings Afrika notes: “It is primarily caused by its very low liquidity, but the very weak operating performance also contributed to the situation. To improve the financial sustainability, Mangaung will have to curtail its operating expenditures and implement strategies to enhance its revenue. Service delivery is severely affected.”

Cape Town

Ratings Africa says the Mother City has consistently outperformed its peers despite growing challenges.

“The strong liquidity position and low debt burden underpin its sustainability. The operating performance displayed some improvement from a low level in 2021 that was caused by the impact of COVID-19 and operational spending pressures coupled with the City’s desire to keep municipal tariffs affordable.”

Claassen says the score of 70 is exemplary and should serve as an inspiration for other metros.

Johannesburg

The City of Gold has been sliding backwards over the last five years, scoring a mere 36 points, 11 points lower than in 2019, indicating low financial sustainability.

Its expenses exceed its income, and its liquidity is very low, which results in overall poor sustainability, according to Ratings Afrika.

“The affordability level is still good, but spending on infrastructure is not optimal, which might impact the service delivery over the medium term, given the fast-growing population of Johannesburg.”

Ekurhuleni

Joburg’s neighbour on the East Rand in Gauteng scored even worse at 32, which indicates very low financial sustainability.

“It is a marked decline from 45 in 2019.” Ratings Afrika says the deterioration is primarily the result of very weak operating performance and a severe decline in liquidity over the last five years.

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“Low liquidity means there is insufficient funds to spend on infrastructure which is reflected in the declining scores over the last five years that also contributed to the lower overall score in 2023.”

eThekwini

The eThekwini metro, based in Durban, has been steadily improving since 2020 and is almost back at its pre-Covid level. At 49, it shows a “fair” level of sustainability, according to Ratings Afrika. 

“The improvement in the operating performance and liquidity position contributed to the better overall sustainability score.

“Unfortunately, the spending on infrastructure shows a declining trend which will adversely affect services over the medium term.”

Nelson Mandela Bay 

In second position after Cape Town is the Nelson Mandela Bay metro, based in Gqeberha, which improved its score by six index points compared to the previous year, taking up to 56.

This reflects “the efforts by the finance team to strengthen their financial standing”, says Ratings Afrika.

“The strong liquidity position and low debt burden underpin its improved sustainability. The operating performance is still weak but has improved which is the underpin of the improved financial sustainability.”

Buffalo City

Buffalo City, based in East London in the Eastern Cape, shows a fair level of financial sustainability, according to Ratings Afrika, “but with a declining trend from 2020”.

Its expenditure exceeds its income, and it has very little cash.

The metro’s high scores for debt governance and infrastructure development (more than 80) underpin its sustainability, says Ratings Afrika.

“It shows some effort by the metro to improve the infrastructure required for better services. The weak operating performance is causing some structural adjustment within the components that could prove detrimental if maintained.”

This article was republished from Moneyweb. Read the original here