NOMPU SIZIBA: Moody’s Investor Services has downgraded the credit ratings of the City of Tshwane and the city of Ekurhuleni, as well as the Ekurhuleni Water Care Company [Erwat]. A lower credit rating suggests that, when an institution goes to the financial markets to borrow money, they’ll be charged a higher premium for that privilege, as they’re considered to be a higher risk in terms of their ability to pay back on their debt obligations. This is most certainly likely to be a negative turn of events for these public entities, as they need to be able to raise capital in order to execute on their mandates.
Well, to discuss this latest development and its implications, I’m joined on the line by Mike Schüssler, chief economist at Economists.co.za. Thanks very much, Mike, for joining us. What do you understand from the latest credit rating move by Moody’s? This no doubt puts these public entities in somewhat of a financial pickle, especially given current economic constraints.
MIKE SCHÜSSLER: Well, you know, it seems that there’s a large amount of people not paying in both the City of Tshwane and the City of Ekurhuleni for their normal services – water and electricity and the like.
And in the City of Ekurhuleni at the moment, they don’t even have an operating surplus. They seem to operate in deficit of 1% – and that is before they even get to other factors that influence these things, such as, for example, the interest that they have to carry and the like. So, quite frankly, it shows the deterioration of local government finances in South Africa, partly due to Covid, but I think specifically Ekurhuleni and Tshwane may be at the top of the pile at the moment. And I wouldn’t be surprised if Moody’s and other rating agencies are going to be downgrading other big municipal issuers in South Africa in the coming months.
NOMPU SIZIBA: That was going to be my next question. So, let me ask an alternative one. What happens if these guys, Ekurhuleni and Tshwane, do go to the marketplace to borrow more money? Will they still be able to get it, but have to pay a higher interest rate?
MIKE SCHÜSSLER: They will have to pay a much higher interest rate. But I think it’s becoming very clear that they’ll probably need some sort of money from the government to help them close their books. We know that during Covid government did give the municipalities or local governments extra funds in view of them knowing that many people wouldn’t be able to pay.
So one has to wonder how much extra they would pay, or if it would be a wise idea for them to go to the market, because ultimately it may mean we as taxpayers having to bale out our local authority – maybe not just these two, but others as we carry on in the coming years,
NOMPU SIZIBA: Mike, all municipalities are important because they’re there to serve the communities that reside and work within them. But metropoles serve a particularly important function – or they should do – because these are the regions where there tends to be much more economic activity, and where perhaps there’s more demand for the services that they’re supposed to render.
So what’s the implication of the credit rating downgrade for Tshwane and Ekurhuleni in terms of their ability to actually provide services?
MIKE SCHÜSSLER: I think it’s difficult to answer that one. It’s very straightforward but, obviously, if they don’t have the money, then it’s very difficult for them to, say, hook up more people to electricity or provide more houses with water. And the fact of the matter is, when people are not paying there’s a big kickback to the other people that are paying, and their service rates go up.
So it becomes very difficult then being a business, for example, in a place like Ekurhuleni or Tshwane, where you are going to see above-inflation water and electricity hikes – above those of the country, probably. And that means your costs are going to increase a lot.
So it’s also going to have an impact on the actual economic activity in these areas. I think that too is a major problem. I think we also have to realise that it’s not just that people can’t pay, because we do have government grants for the delinquents. It is also very often here a case of management not closing the gaps where they need to – for example, following up on people who aren’t paying, or finding out why there’s a loss of water and electricity – because often it is not the non-paying part, but there are other losses in the process. You could have, for example, water leaks or people stealing electricity.
So it is definitely also a question of how we manage and how we control the costs that we have in these municipalities. And particularly, I think, you’re quite right, the metros are very important to economic growth because the metros in South Africa probably make up – well, we know they make up 62% of the population – but they probably make up about 80, 85% of the total economy in South Africa.
NOMPU SIZIBA: Look, Mike, I know you’re an economist, but you can’t divorce politics from economics because one thing affects the other. We know that Tshwane has been somewhat embattled, because of politics basically trumping service delivery. Do you think that’s part of the problem, a big chunk of the problem, at least in the past 18 months?
MIKE SCHÜSSLER: Yes, I think Tshwane has probably got a political problem where the focus is on the political battle, instead of providing services and finding out who’s not paying and doing something about it – because the situation is so precarious. Politicians don’t like going after people and saying, “You must pay now,” because politicians like being popular. So that’s the long and the short of it.
If we look at other metros in South Africa that belong to either party, there has been a deterioration in the finances overall. I think, if I’m quite correct, the amount of money outstanding for more than 90 days in our municipalities is well over R150 billion. To put that into context, we wouldn’t have to pay water and lights for a year – maybe not salaries – but we wouldn’t have to pay water and lights for a year in the whole of South Africa’s municipalities if that debt were paid,
NOMPU SIZIBA: Mike, looking more broadly at municipalities, including the metros, do you think there needs to be an overhaul of their funding model because at the moment these look broken, what with the citizens, particularly poorer ones, not being able to pay their bills – or some people just deciding that they won’t pay, even though they can afford to do so? There don’t seem to be consequences in this regard. We often hear about municipalities owing Eskom over R31 billion for electricity. With the Covid-19 impact and the fiscus set to be down by over R300 billion this fiscal year, it just doesn’t look sustainable at all.
MIKE SCHÜSSLER: No, it doesn’t look sustainable, Nompu. But I think we must just also take a step back and say our municipalities had the right stuff. We were in a much stronger financial position, say, 15 years ago. But somewhere in the process things were let go. And I think part of the unsustainability is that the management of the metros has probably weakened over the time. That’s one thing I think.
And then the other thing I think is that there’s definitely an element of corruption in the non-payment of some of the municipalities that I’ve seen, personally seen, and that I do know that citizens are trying to get around the municipalities. For example, in Harrismith and Standerton businesses and others are trying to [pay] Eskom directly, because the municipality seems to go away with the money.
And I think that is maybe also a question that we need to investigate quite quickly. Let’s call it the “Zuma effect”, where people saw somebody get away with corruption, and they thought they could get away with it too.
NOMPU SIZIBA: That was Mike Schussler. He’s chief economist at Economists.co.za.