The bottom line is that SA’s municipal sector is, with very few exceptions, about to collapse financially. The situation has led to a breakdown in service delivery in many towns and could further fuel political unrest, with catastrophic consequences for residents and businesses.

Source: Financial Mail

SA’s municipalities head for total collapse

For the past 10 years, Ratings Afrika has been warning of the pending financial collapse of SA’s municipal sector. Over time its warnings have become increasingly shrill. In its latest report they reach fever pitch

16 JUNE 2022 – 05:00 CLAIRE BISSEKER

Drive through small towns in SA’s hinterland today, and you don’t need a ratings report to know most municipalities are in serious financial trouble. But an objective scorecard is essential to show just how rapidly municipalities’ financial stability is deteriorating.

This decline is having a disastrous effect on the quality of life and business activity in these towns, and it poses a major threat to the entire country’s economic growth prospects.

In its annual municipal financial sustainability index (MFSI) report for the year to June 2021, local governance ratings agency Ratings Afrika  (RA) estimates that, “through gross financial mismanagement and unsound governance”, SA’s municipal sector has accumulated a “staggering” R54bn aggregate working capital (cash or liquidity) shortfall, up from R51bn in 2020 and R32.9bn in 2019.

Without working capital, it is almost impossible for municipalities to deliver an acceptable level of services or pay Eskom, the water utilities and other creditors on time.

“It’s no wonder that services are breaking down in most municipalities and that infrastructure is crumbling at a pace previously unheard of,” says Leon Claassen,   RA’s lead analyst on the MFSI. “SA faces a calamity of major proportions if this lack of sustainability is not dealt with effectively and as a matter of urgency.”

Kevin Allan, MD of data and intelligence organisation Municipal IQ,  agrees.

 “We are at a point in local government where to do nothing is to risk total failure and collapse in many municipalities,” he says. “Our leaders need to find the courage to lose some friends locally and do what is right.”

In his view, the practice of cadre deployment, which has “run for years like poison through the sector”, is the real problem. 

“It’s not only that cadres are deployed to political positions; [they’re also placed] in senior administrative positions, a role for which they have, mostly, little or no qualifications or experience,” he says. “It’s led to the unnecessary politicisation of the administrative function of municipalities and destroyed technical professionalism in top positions.”

Parliament is finally stepping up to the plate by acting against this shameful deployment practice. Last month it unanimously passed the Municipal Systems Amendment Bill, which gives all municipal officials, from the municipal manager to general workers, a year to resign from any office-bearing position in a political party.

The DA is taking matters a step further with its “End Cadre Deployment Bill”, which seeks to extend the prohibition of  political office bearers to hold jobs in municipalities to the rest of the public sector. It also aims to enhance the independence of the Public Service Commission and give it the teeth to enforce merit-based appointments.

Last week the DA launched court action to have cadre deployment declared unconstitutional, based on the recommendations of the Zondo state capture commission and the precedents set by lower courts. 

We are at a point in local government where to do nothing is to risk total failure and collapse in many municipalities; a point of no return

Kevin Allan

But is more legislation really the answer when, according to the auditor-general, 90% of municipalities are failing to comply with existing legislation?

The Public Audit Amendment Act of 2018 already holds municipal accounting officers personally responsible for the theft or wastage of municipal funds, while the new Municipal Structures Amendment Act provides minimum requirements for councillors and a strict code of conduct.

Under section 139(7) of the constitution, the national government can even intervene directly in the management of a dysfunctional municipality. But this provision is seldom invoked.

Last year SA’s largest poultry products producer, Astral Foods, won a court order forcing the national government to intervene and devise a financial recovery plan for Lekwa (Standerton). It is the least financially sustainable municipality in the country, according to RA, with a score of seven in 2021, down from 13 the year before.

Allan concedes that nothing will change if existing municipal laws aren’t enforced. “It is our national and provincial leaders who are (and always have been) responsible for this enforcement, and they have failed to [carry out the responsibility],” he laments.

Claassen agrees,  saying that not only have most municipal councils failed miserably in their governance responsibilities, most provincial administrations have also been totally ineffective in exercising their oversight role.

At a parliamentary briefing last month, outgoing National Treasury director-general Dondo Mogajane admitted that, with about 170 (66%) of the country’s 257 municipalities in financial distress, the National Treasury cannot cope with the extent of the crisis, especially as its roots are political rather than technical.

“If it’s about improvement in financial management and oversight … we can do that, but if the system of oversight and governance is not functioning in the whole of SA, the National Treasury cannot do it,” Mogajane said.

In 2021, the weakest provinces, according to the RA report, were the Free State and North West, with average MFSI scores of 20 and 24 out of 100. The Western Cape, with an average score of 52, came out tops. It was the only province whose average exceeded 50 and whose municipalities RA considers to be largely sustainable financially.

The average municipal score for 2021 remained extremely low, at 37 out of 100, compared with 38 in 2017 and 42 in 2012. Furthermore, 60 of the largest 100 municipalities achieved scores below 35, which means they are seriously unsustainable financially.

Alarmingly, the average score for the eight big metros, which house 40% of the population and contribute 60% to GDP, has declined even faster over the past five years, dropping from a peak of 54 points in 2014 to 48 in 2017 and 42 in 2021.


The municipal sector faces financial collapse, except in the Western Cape, where nearly all the top-scoring municipalities are situated

This puts the average metro below the minimum threshold of viability (45).

Mangaung is the lowest-scoring metro, with just 21 points.

“This is a very concerning trend, as the metros are considered to be the engines of the economy,” says Claassen. “Service delivery failure by the metros will cause immeasurable damage to the economy.”

Another worrying trend is the lack of spending on repairs and maintenance. Given the huge maintenance backlogs that exist, this should be 6%-8% of the carrying value of the fixed assets.  At present municipalities’ average maintenance spending is only 1.7%, which is “hopelessly inadequate”, RA says.

“The deterioration of infrastructure — such as crumbling roads, [sewage] spillage and water or electricity disruptions — is visible everywhere as a consequence,” says Claassen. “It is imperative for maintenance spending to be increased dramatically to prevent a total breakdown in services in many municipalities.”

Only four local municipalities achieved a score of 70 or more on the index. All four are DA-run, and three — Mossel Bay, Saldanha Bay and Swartland — are in the Western Cape. Midvaal (Meyerton), in Gauteng, is the highest-scoring municipality in SA.

“Taken over many years, DA municipalities have accrued the institutional equivalent of compound interest. People do their jobs, consumers pay their bills and infrastructure is maintained,” says DA spokesperson on local government Cilliers Brink.  “In an ANC municipality, corruption and ineptitude are the norm … In a DA municipality, corruption and ineptitude are a source of scandal and shame, leading to resignations and reshuffles.”

Taken over many years, DA municipalities have accrued the institutional equivalent of compound interest

Cilliers Brink

Brink says there are both technical and policy solutions to the crisis, but their implementation depends on strong political leadership. In the short term, municipalities must increase revenue and decrease expenses, or at least procure better value for money.

On the expenditure side, the National Treasury should reverse race-based municipal preferential procurement policies, as these destroy value by shrinking the market of available goods and services, says Brink. They also provide cover for ANC cadres to do business with the state.

On the revenue side, effective collection is essential. Take Tshwane. The city’s finances are improving — following a disastrous period of provincial administration — thanks to DA mayor Randall Williams’s aggressive revenue collection campaign. It started with government departments and large commercial consumers, and even exposed an illegal reconnection racket in the city’s revenue division.

“By concentrating the efforts of the entire municipal administration on collecting what was due to it, the city recovered years of arrear debt in a matter of weeks,” says Brink. “The important point is that mayors have to become champions of getting the basics right, starting with effective billing and revenue collection.”

According to the RA report, the sector’s revenue collection rate averages a mere 79.3%. This is contributing to the sizeable cash shortfall. The Western Cape municipal collection rate of 92.9% is the only one close to the benchmark of 95%. The metros’ average is 87.3%; Cape Town’s is 98.5%.

The bottom line is that SA’s municipal sector is, with very few exceptions, about to collapse financially. The situation has led to a breakdown in service delivery in many towns and could further fuel political unrest, with catastrophic consequences for residents and businesses.

It seems the penny is finally dropping that the solutions are both technical and political. But unless the national government takes the lead and has the courage to dismantle its patronage networks, the value destruction and damage to people’s livelihoods and wellbeing will continue apace.