The financial position of municipalities has deteriorated so dramatically over the past decade that it now poses a major threat to the country’s economic growth prospects
Source: Financial Mail
BL PREMIUM22 APRIL 2021 – 05:00 CLAIRE BISSEKER
“A calamity of major proportions” is building in SA’s municipal sector. Years of financial mismanagement and weak corporate governance, compounded over the past year by the pandemic, have resulted in most of SA’s municipalities no longer being financially sustainable.
The sector’s aggregate cash shortfall is now a staggering R50.7bn — up from R32.9bn in 2019 — and unless this money can be found, many municipalities will face collapse.
This is the key finding by local governance ratings agency Ratings Afrika (RA) in its annual municipal financial sustainability index (MFSI) report for the year to June 2020, released last week.
It concludes that “the municipal sector is in a financial mess, and it is time for the government to acknowledge it and start taking the necessary steps to save the country from disaster”.
Most alarming is the finding that the pace of the deterioration of SA’s eight big metro municipalities, which house 40% of the population and contribute 60% to GDP, has been even faster than that of local municipalities. Last year, hastened by the effects of the pandemic, the metros’ average financial sustainability score fell below the minimum threshold for viability for the first time.
“This is a very concerning trend, since the metros are considered to be the backbone of the SA economy,” says RA principal Charl Kocks. “Service delivery failure by the metros will cause immeasurable damage to the economy.”
The RA report echoes the latest municipal audit report by the auditor-general (AG), released last June, which flagged “increasing indicators of a collapse in local government finances”.
It found that the financial status of 79% of municipalities was either concerning or required urgent intervention, while just under a third were “particularly vulnerable”.
According to RA’s estimates, most of the top local municipalities across SA (63 of the 105) achieved an MFSI score of less than 35 last year (down from 39 in 2016). This renders them seriously unsustainable and perhaps even dysfunctional in terms of normal service delivery.
The metros’ average MFSI score dropped from 50 to 43 over the same period, below the threshold of 45 that’s considered to be the minimum for a municipality to be viable (see table).
According to the RA report, the weakest municipalities are concentrated in the Free State and North West. These provinces’ MFSI scores average 17 and 21 respectively. The worst individual performers are the Naledi municipality (Vryburg) in the North West and the Enoch Mgijima municipality (Queenstown) in the Eastern Cape. Both score a mere nine.
At the opposite end of the scale, five local municipalities achieved a score of 70 or more on the index. Four of them — Mossel Bay, Saldanha Bay, Swartland (Malmesbury) and Overstrand (Hermanus) — are in the Western Cape, with Midvaal in Gauteng the only one outside that province.
The Western Cape’s MFSI score averages 53, making it the only province in SA where most of the municipalities remain financially sustainable. Cape Town is also the only metro still considered financially sustainable, with a score of 71, outperforming the rest of the metros by a large margin.
The MFSI scores six financial components of a municipality out of 100: operating performance; liquidity management; debt governance; budget practices; affordability; and infrastructure development.
It defines financial sustainability as the financial ability of a municipality to deliver services, and develop and maintain the infrastructure required by its residents, without unplanned increases in rates and taxes or a reduction in the level of services. A municipality should also be able to absorb financial shocks without external assistance.
Two key forces drive a municipality’s financial sustainability: the generation of operating surpluses and positive working capital (liquidity or cash) balances.
However, due to gross financial mismanagement and poor corporate governance, most municipalities are still operating at deficits. These have culminated in huge working capital (liquidity) shortfalls for most, amounting to almost R51bn for the sector as a whole.
Without working capital, it becomes almost impossible for these municipalities to provide an acceptable level of services or to pay service providers such as Eskom, the big water utilities and other creditors within 30 days, as required by law.
According to the AG report, the average creditor-payment period is now 180 days. So, for instance, at the end of 2018/2019, R53.5bn was owed to municipal creditors, but the cash available amounted to only R43.2bn, with the accounts of Eskom and the water boards most heavily in arrears.
SA faces a calamity of major proportions if this lack of sustainability is not dealt with effectively and as a matter of urgency
To square the circle, many municipalities defer payment for past goods and services until the following financial year and then reimburse creditors out of new money allocated for future spending, explains the AG report.
In this way, many districts have entered “an inevitable downward spiral to a financial cul-de-sac”.
Wits University adjunct professor Michael Sachs is more blunt, describing the situation — which also includes some provincial education and health departments — as a “death spiral”.
The RA report warns that at the municipal level, the situation could lead to a breakdown in service delivery and fuel political unrest, with catastrophic consequences for residents and businesses.
Kocks says: “It is no wonder that services are breaking down in most municipalities and that infrastructure is crumbling at a pace unheard of. SA faces a calamity of major proportions if this lack of sustainability is not dealt with effectively and as a matter of urgency.”
Unable to bear the cost associated with chronic service delivery failure any longer, business is fighting back.
Last week, in a case that will likely set a strong precedent for other companies facing similar problems, SA’s largest poultry products producer, Astral Foods, won a court order over a lack of service delivery by the Lekwa municipality in the agricultural town of Standerton, Mpumalanga.
Water and electricity supply interruptions cost Astral about R62m in the year to end-September 2020 (in addition to R126m the year before), and it has had to spend millions of rands to transport water to its large poultry processing plant in the town.
The RA report rates Lekwa the least financially sustainable municipality in Mpumalanga, with an MFSI score of just 13.
In terms of the court order, the national government must intervene in Lekwa and, with the National Treasury, prepare a financial recovery plan as contemplated in the Municipal Finance Management Act.
But why should the government be forced by court action to do what it already has the power and responsibility to do, asks DA local government spokesperson Cilliers Brink.
“Under section 139(7) of the constitution, national government can even intervene directly in the management of a dysfunctional municipality, but this provision has never been invoked, not even to facilitate payment arrangements between municipalities and Eskom,” Brink says.
Moreover, a bill dealing with intergovernmental support, monitoring and intervention has been collecting dust since 2013.
The AG sees the solution mainly in instituting preventative controls and effective governance and accountability measures, revealing in its most recent report that 44% of municipalities with negative audit findings against them didn’t even bother to investigate them.
RA believes the only way to prevent the collapse of the municipal sector is for the government to bail it out to the tune of R50bn.
The DA, however, is strongly opposed to this, as it “would amount to throwing good money after bad”.
“Without competent and ethical mayors and municipal managers, more bailout money will simply increase the level of corruption and waste,” says Brink.
According to public service & administration minister Senzo Mchunu, one in three senior managers in the national and provincial public service (that is 3,301 out of 9,477) is not qualified for the position they hold. This is despite the fact that minimum entry requirements were made mandatory for senior managers from April 2017.
The situation is arguably worse at a municipal level. The National Planning Commission has urged the government to select the top 25 most important municipalities and give them two years to align the qualifications and expertise of their top six executives with the standards required or remove them.
WHAT IT MEANS
Most of SA’s municipalities and major metros are no longer financially sustainable; the sector as a whole faces a R51bn cash crunch
It should keep repeating the process until the most of the sector has been systematically upgraded.
For Brink, the quickest way to improve municipal service delivery and financial management would be for citizens to vote the ANC out of power, given that municipalities that have been under DA control for an extended period have bucked the downward trend. “In the longer term, local government needs the largest possible supply of skills and experience to avert financial and institutional collapse,” he says. “So, not only should cadre deployment be outlawed, racial quotas in municipal recruitment and procurement have to be abolished or at the very least suspended.”
Brink also calls for a salary freeze for municipal officials — a position that municipal employer body the SA Local Government Association (Salga) seems to be finally coming around to.
From July 1 last year, Salga implemented a 6.25% wage hike across the sector in defiance of a Treasury warning that the pay hikes were unaffordable. It is now proposing only a 2.8% wage increase for 2021/2022, while warning that some financially distressed municipalities will have to freeze wages outright.
It seems the penny is finally dropping as to the dire state of municipal finances. But whether the national government has left it too late to avert a financial and institutional collapse, or whether it has the political will to dismantle its patronage networks, remains to be seen.