Ratings Afrika analysed the recently published audited financial statements (for the year ended June 30 2016) of all eight metropolitan municipalities in South Africa and scored each with regard to financial stability. Moneyweb will publish its analysis of each of the metros in the coming days. Read Ratings Afrika’s findings on Joburg, Cape Town, Tshwane and eThikwini.
The latest Municipal Financial Sustainability Index (MFSI) from Ratings Afrika, based on the financial results up to June 2016, reveals mixed results for the eight metropolitan municipalities in South Africa. The MFSI is a scoring model that evaluates the operating performance, liabilities management, budget practices and liquidity position of a municipality and scores these components out of 100.
Ekurhuleni’s overall financial sustainability score of 59 (out of 100) reflects an adequate level of sustainability and some measure of consistency over the last five years. The weakest component of its financial sustainability is its operating performance. Although the operating surplus was more than R1 billion in 2016, it is only 3.7% of its operating revenue. This low operating margin is a characteristic of its financial strategy over the last three years, even though it is showing an improving trend. However, it is considered inadequate to fund the investments required for a fast growing metro. This is reflected in its average per capita spend per year of only R1 010, the lowest of all the metros.
The spending on maintenance is also low at only 3.4% of the value of its assets, which could affect the quality of the assets adversely, with an increased risk of service disruptions.
Ekurhuleni regularly raises new loans and its total long-term borrowings of R5.6 billion equates to 37% of its operating revenue. This is considered moderate and provides the metro some headroom should it wish to raise more loans to fund infrastructure investments.
Ekurhuleni has a strong liquidity position with a liquidity surplus (net current assets) of more than R7 billion, and it is displaying a growing trend. The low level of capital spending has allowed the metro to build up this relatively high liquidity surplus. Revenue collection however is a concern as it remained at only about 90% over the last three years. This low collection rate is likely to impact its liquidity position negatively and hamper service delivery should it continue at this level over the medium term.
Although Ekurhuleni is displaying adequate financial sustainability it is lagging in the investment in infrastructure that is required to improve its service delivery capacity.
Note: The Financial Stability score is based on the analysis of the financial statements only.
Leon Claassen is an analyst at Ratings Afrika.