The only way to stabilise the finances of the majority of South Africa’s 100 biggest local municipalities is by government filling the R22.4 billion liquidity deficit – and that money would come from taxpayers’ pockets.
This is the conclusion Ratings Afrika reached after it analysed the financial statements of South Africa’s 100 biggest local municipalities and scored them on the Municipal Financial Sustainability Index.
Ratings Afrika also scored the eight metropolitan municipalities and found a shocking collapse in the City of Joburg’s financial sustainability. It dropped from a score of 41 for the 2015-16 financial year to a mere 24 out of 100 in 2016-17.
Only Mangaung which is, according to Ratings Afrika analyst Leon Claassen, on the brink of collapse with a score of 22 out of 100, did worse than Joburg.
Claassen warned that businesses which bid for municipal contracts should be aware that weak financial stability could indicate the inability of a municipality to pay its suppliers within 30 days, as required by legislation.
He said if business people were aware of the risk, they could take steps to mitigate it, like insisting on a prepayment and regular progress payments, with an agreement that work would stop if payments are late.
Ratings Afrika has, for the first time, combined forces with Compuscan, and will in future make detailed analyses of municipal finances available through this data service to clients who need to assess their risk before doing business with local authorities.
Claassen says problems in municipalities start with inadequate budget planning and a lack of discipline in executing those budgets. These losses and bad revenue collection cause current liabilities to exceed assets, which leaves the municipality with a liquidity shortfall and renders them commercially insolvent as they cannot pay their creditors.
Claassen says only 22 of the 100 local municipalities in the sample have reported operating surpluses, amounting to a shocking 78 reported losses. The combined losses total R15.3 billion and the combined liquidity deficit totals R22.4 billion.
Claassen says the municipalities do not have the means to trade themselves out of their desperate positions. They cannot sell their assets, because the nature of their infrastructure means they cannot be sold for cash to redeem their liabilities.
“The only realistic way out would be for government to bail them out, pay the creditors what is owed to them and put the municipalities on a stable footing again. This burden will have to be carried by the taxpayer to the extent of at least R22.4 billion,” says Claassen.
Only two of the eight metros reported profits, Cape Town and Tshwane. Their working capital positions are, however, better with only Joburg (R2.9 billion), Tshwane (R3.7 billion) and Mangaung (R943 million) reporting liquidity deficits.
Claassen points out that about 40% of the population lives in the eight metros and they contribute about 60% of the national GDP.
“Economic activities within their borders play a crucial role in the economic growth and development of the country,” he says.
Over the past two years, the financial sustainability of the metros has, however, weakened and for the first time since 2013, the average score dropped below 50.
Claassen points out that Cape Town scored the highest and has also consistently improved its score over the last five years.
He says although Joburg and Mangaung reported liquidity shortfalls in 2016-17, they are not as severe as that of Tshwane with its R3.7 billion shortfall.
“Johannesburg and Tshwane, with their relatively large income bases, might be able to trade themselves out of trouble. However, it is doubtful if Mangaung, with a revenue base of only R5.5 billion, can easily turn its operating loss of R1 billion into a profit.”
He says given the weak financial sustainability of key local municipalities, Ratings Afrika expects service delivery to deteriorate.
“Correction will require decisive political leadership that looks after the interests of the residents rather than its own, roots out corruption, appoints managers with the right skills and exercises strict financial discipline.”