The dire state of SA’s local government finances

We hardly need reminding that the state of local government in SA is in an appalling state, but the latest Ratings Afrika survey on 112 municipalities and metros is perhaps the bleakest in years.

“Residents and businesses are suffering from poor, and in some cases almost non-existent service delivery,” says the report.

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“It is incomprehensible that the government cannot see or acknowledge what is happening and start taking the necessary steps to save the country from disaster.”

The majority of municipalities are still operating at deficits due to gross financial mismanagement and poor governance. Tallied together, the 112 municipalities and metros measured by Ratings Afrika ran up a combined operating deficit of R27 billion in 2023. Bad as that is, it’s an improvement on the R33 billion in 2022.

Ratings Afrika’s Municipal Financial Sustainability Index (MFSI) measures financial sustainability on a score of zero to 100, based on six underlying components:

• Operating performance;
• Liquidity management;
• Debt governance;
• Budget practices;
• Affordability; and
• Infrastructure development of a municipality.

It’s not all bad news

Some municipalities performed outstandingly, as shown below.

Though Ratings Afrika makes no mention of it, all five of the above municipalities are DA-run.

So too is the top-performing metro, Cape Town, with a score of 70, well above the metro average of 43 and leagues ahead of worst performer Mangaung.

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Mangaung came in with a score of 27. Its financial situation is so dire that it struggles to pay its suppliers on time, says Ratings Afrika analyst Leon Claassen.

Will this play a role in the upcoming elections?

Almost certainly, as people and businesses are moving to better-run areas of the country.

Well-run areas attract growth

Mossel Bay Mayor Dirk Kotzé points out that the municipality’s population has grown roughly 50% since 2011, due in part to ‘semigration’, where people move to well-run coastal areas, and in part to informal settlement growth.

Saldanha Bay Mayor André Truter says the town’s population has grown by a similar percentage over the same period, again due largely to semigration. “We’re at the receiving end of failed national policies, which are left to local government to solve,” he said at an event on Wednesday hosted by Ratings Arika.

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Nor is the migratory trend confined to coastal areas.

Midvaal in Gauteng has seen its population grow by almost a third since 2011, says Mayor Peter Texeira, with businesses such as SA Steel Mills and Heineken establishing plants in recent years.

What separates the good from the bad?

The two key forces that drive a municipality’s financial sustainability are the generation of operating surpluses and positive working capital.

Without working capital, it becomes almost impossible for municipalities to provide acceptable services, and that can quickly turn into open revolt.

A key distinguishing feature between good and poor performance is debt collection, running at 97.6% in the Western Cape and as low as 63.3% in the Free State.

The average debt collection rate is a worrying 83%.

Some municipalities have failed to send invoices out for three years.

The top performing municipalities watch this ratio like hawks.

Having stumbled into the error of allowing some leniency during Covid, they realised that a culture of non-payment can very quickly take root.

“Fortunately, we’ve got residents that have a habit of paying rates and taxes,” says Saldanha Bay’s Truter. “We try to find a balance between affordable rates and taxes and financial sustainability.”

High-scoring municipalities demonstrate consistency over the years, have well-entrenched financial policies, and their budgets are based on sound long-term financial strategies.

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They adhere to good budgetary practices, strict financial control and good revenue collection even through tough economic conditions. The sound levels of financial sustainability place these municipalities in a very strong position to invest in infrastructure and it gives them the capacity to absorb financial shocks, says the survey.

Vicious cycle

The majority of municipalities are lacking in the kind of strong controls and budgetary practices that separate the good from the bad.

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For many, their cash shortfalls are expected to worsen since most “will continue to realise losses, and revenue collection is expected to remain subdued because of the slow economic growth caused by the central government’s inability to implement free market economic policies that would stimulate economic activity in the private sector,” says Ratings Afrika.

Without funds, service delivery in most municipalities will continue to worsen.

R85 billion bailout needed

To prevent a total collapse of these municipalities, the only solution is for government to bail them out to the tune of R85 billion.

This will however only bring the municipalities onto a level footing to pay their creditors as stipulated by the Municipal Finance Management Act.

“Unfortunately this R85 billion charge will have to be borne by already overburdened taxpayers,” adds Ratings Afrika.

“Unless there is a concerted effort from the municipalities themselves, the provinces and national government to strengthen their governance and financial management this very bad situation will continue,” says Ratings Afrika.

“Service delivery will break down further, the quality of life for most residents will deteriorate, and economic activity will be stifled.

“The time to act is now.”

This article was republished from Moneyweb. Read the original here