Now that the elections are over, the brutal reality sinks in for metros

A post-election analysis of SA’s eight metros by Ratings Afrika paints a grim picture of the financial mountain that confronts the country’s biggest cities.

Only Cape Town – run by the Democratic Alliance (DA) – is in any kind of financial health. The rest are faced with static or declining revenue collections, operating deficits (with the notable exception of Cape Town and Johannesburg) and often massive underspending on infrastructure, which is a key measure of basic service delivery.

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“The 2021 municipal elections are now behind us and some political parties celebrate their new-found control of the metros through the election of new mayors,” says Leon Claassen, analyst with Ratings Afrika.

Read: Local government will never be the same again

“Politicians generally make grandiose promises before an election but often fail somewhat in delivering on them afterwards. We believe it might be the same this time round if they do not take a reality check on their abilities to do so.”

Ratings Afrika’s latest Municipal Financial Sustainability Index (MFSI) provides just that reality check.

The MFSI comprises six financial components: operating performance, liquidity management, debt governance, budget practices, affordability, and infrastructure development. The metros are scored on a scale of one to 100.

“Unfortunately the majority of the newly-elected mayors, regardless of political affiliation, will soon have to face the reality that their metros do not have the financial capacity to deliver on the promises made,” says Claassen.

It is only Cape Town that can deliver on the promises with confidence, while Tshwane and Mangaung are very likely to fail and the rest will find it very difficult to fulfil the promises made.

Read: The extent of SA’s municipal problem? R51bn, says Ratings Afrika

Government departments not paying their bills

Tshwane’s DA mayor told the SA Institute of Business Accountants conference in September that government departments, many of them headquartered in Pretoria, owe the metro a combined R1.4 billion in back-bills for electricity and other services.

“Metros like Tshwane have accumulated a financial mess over many years, and this is not something that is going to be turned around in a year or two,” says Claassen.

“Even though Tshwane is owed large sums by government departments, this still counts as debtors on the financial statements, and is an asset on its books. Tshwane has a lot more to do to get its finances in order.”

Claassen says there are two main reasons why these metros will struggle: most are plagued by operating deficits realised, aggravated by weak liquidity – and made worse by poor collection rates.

Metros and municipalities have started cannibalising their capital budgets to meet escalating staff bills, and that means less money available to repair potholes, burst water pipes and other infrastructure.

Mangaung

Municipal Money, a database of municipal finances run by National Treasury, shows that Mangaung in the Free State – faced with a declining cash balance due in part to overspending on its operating budget – spent 38% less on capital infrastructure than was budgeted in the 2019 financial year (the latest year for which figures are available).

It spent 0% on repairs and maintenance.

Ratings Afrika shows that revenue collection at 77% is weakest of all the metros, while fruitless and wasteful expenditure accounted for 30% of its operating expenditure in 2019.

Other weak metros …

eThekwini in KwaZulu-Natal has a fairly consistent cash balance and its revenue collection rate at 92% is well above average (though still short of the 95% target set by National Treasury). It underspent by 28.5% against its capital budget in 2019, with 0% going to repairs and maintenance.

Likewise, Ekurhuleni in Gauteng has seen its cash balance dwindle by more than half since 2015, contributing to an 8.5% underspend on budgeted capital infrastructure projects in 2019. Municipal Money shows its spent 0% on repairs and maintenance in the 2019 financial year.

The City of Joburg has sufficient cash on hand to cover about 1.3 months of expenses, according to the Municipal Money database for 2019, though its underspent slightly (5.1%) on capital infrastructure items.

Spending on repairs and maintenance as a percentage of property, plant and equipment was 4.6%, somewhat below the 8% target rate.

Only three of the eight metros – Cape Town, Joburg and Nelson Mandela Bay – have any operating surpluses at all, though Cape Town is far and away the most fiscally sound metro in the country.

Operating performance

Claassen says operating performance is the key driver of a municipality’s long-term financial sustainability.

“With only three metros realising surpluses, the majority are in a very precarious situation with operating deficits that have been accumulating as time goes on.

“As a result of these losses, the metros do not generate sufficient cash to invest in new infrastructure, nor do they retain enough funds for the replacement of obsolete assets and proper maintenance of existing infrastructure, which is required to provide proper levels of services.

“Improving the operating performance of a municipality is not an easy task, as the operating expenditures are rather inflexible and cost cutting a lengthy and difficult process.”

The largest cost item in all metros is staff salaries, and this is where cuts will have to be made.

The ideal ratio of staff costs to total operating expenditures (excluding bulk purchase costs of water and electricity) is roughly 35%. Only Buffalo City and Ekurhuleni are close to this ideal, at 38%. The rest are all above 40%, with Tshwane the highest at 47%.

This leaves ample room for the majority of the metros to reduce their operating costs significantly.

Joburg’s newly-installed DA mayor Mpho Phalatse recently announced a freeze on filling all vacant positions in the city administration. Joburg residents meanwhile continue to complain of incorrect billing and deteriorating service delivery – such as erratic water supply and power cuts.

Neglect

“In the majority of the metros the neglect of the assets is clearly visible and residents experience the discomfort daily,” says Claassen.

“Those metros that still have liquidity surpluses might find themselves in a deficit position very quickly as they continue realising operating deficits, and revenue collections remain at levels which are well below the 95% benchmark,” says Claassen.

“It is disturbing but true that the majority of metros would probably not be able to deliver on election promises unless drastic steps are taken to cut out unnecessary and unauthorised operating expenditures.

“This might be very unpopular and difficult to achieve.”