Local and international investors have been warned by South African Property Owner’s Association (Sapoa) CEO Neil Gopal to carefully consider where they invest in the country following Auditor-General (AG) Tsakani Maluleke’s damning 2019/2020 municipal audit outcomes report to parliament last week.
The report highlights R5.5 billion in unaccounted-for spending in the worst-run municipalities and R26 billion in irregular expenditure at municipalities overall countrywide.
“Investors need to read the AG’s report and then reflect very carefully on any new developments or investments they intend making in South Africa, especially investments into a dysfunctional municipality,” Gopal tells Moneyweb.
“If you as an investor have no control over your annual property rates bill or water and electricity bill, if you don’t have a guarantee of water and electricity [supply], or you have intermittent or no service delivery, where exactly is the value proposition?” he asks.
“The increasing rate of local municipality collapses around South Africa will make the Eskom crisis look pretty uncomplicated,” says Gopal.
“The recent experiences of Clover and JSE-listed Astral Foods in closing and or moving their businesses [in North West’s Ditsobotla and Mpumalanga’s Lekwa local municipalities] as a result of municipal failures are symptomatic of the issues around unauthorised, irregular, and fruitful and wasteful expenditure, in addition to fraud and corruption within municipalities,” he adds.
Gopal notes that both the latest report from the AG as well as National Treasury (on Q3 local government revenue and expenditure for the 2020/21 financial year) highlight concerns around such financial practices at South Africa’s municipalities.
“Simply put, the so-called ‘financial distress’ at most municipalities is largely as a result of large-scale looting and corruption,” he says.
“We are approaching a situation where there is basically no value or investment proposition left any longer.
“The landscape out there is one where your expenses exceed your income, where you pay taxes but cannot get access to water and electricity, where your annual property rates increases far exceed inflation, where you have to spend millions on generators and water tanks due to no supply or intermittent supply of water and electricity,” says Gopal.
With only 10.5% of the country’s 257 municipalities receiving clean audits, he says it is evident the financial situation among municipalities is dire, with lack of accountability rampant among officials.
“The AG’s revelation that no one can account for R5.5 billion at the country’s worst-run municipality is a clear indication that the roots of corruption run deep, especially considering that some municipalities fail to submit financials for auditing purposes, therefore leaving a financial reporting vacuum,” he notes.
“Most concerning is that the chaos in these municipalities is filtering at exponential speeds into the pockets of already strained property owners [who] are expected to empty their bank accounts to keep municipalities afloat through unjustifiable tariff hikes in property rates, water, refuse removal, and electricity among others.”
Gopal highlights the latest tariff increases in the City of Joburg, such as the 14.59% hike in electricity.
“This is far above acceptable, particularly in the current economic climate … However, perplexingly, the city’s mayoral committee on finance’s councillor Jolidee Matonga expressed that among [the] factors considered when deciding on the tariff increases was the economy of the country and the impact of the pandemic,” he says.
“It is exploitative to expect property owners to carry the burden of servicing municipal budget shortages spurred on by corrupt activities and mismanagement.
“The increasing tariffs, which are supposed to be reduced with new general valuation rolls but are not, are now unsustainable, and businesses are shutting down as property owners’ expenses are starting to exceed their income.”
Listen to Suren Naidoo’s recent interview with Gopal on The Property Pod: