The only way to stabilise the finances of the majority of South Africa’s 100 biggest local municipalities is for government to fill the R22.4 billion liquidity deficit, says Ratings Afrika analyst Leon Claassen.
That would come from ratepayers’ pockets.
This is the conclusion Ratings Afrika reached after it analysed the financial statements of South Africa’s 100 biggest local municipalities and scored them on the Municipal Financial Sustainability Index.
Ratings Afrika also scored the eight metropolitan municipalities and found a shocking collapse in the City of Johannesburg’s financial sustainability. It dropped from a score of 41 for the 2015/16 financial year to a mere 24 out of 100 in 2016/17.
Only Mangaung, which is, according to Claassen, on the brink of collapse with a score of 22 out of 100, did worse than Joburg.
Claassen warned that business people who bid for municipal contracts should be aware that weak financial stability could indicate the inability of a municipality to pay its suppliers within 30 days as required by legislation. He said if business people are aware of the risk, they could take steps to mitigate it, like insisting on a prepayment and regular progress payments with an agreement that work would stop if payments are late.
Ratings Afrika has for the first time combined forces with Compuscan and will in future make detailed analyses of municipal finances available through this data service to clients who need to assess their risk before doing business with local authorities.
Claassen says problems in municipalities start with inadequate budget planning and a lack of discipline in executing those budgets, which results in expenses exceeding income and subsequent operating losses. These losses and bad revenue collection cause current liabilities to exceed current assets, which leaves the municipality with a liquidity shortfall and renders them commercially insolvent as they cannot pay their creditors in the normal course of business.
Claassen says only 22 of the 100 local municipalities in the sample have reported operating surpluses. That means a shocking 78 reported losses.
The combined losses total R15.3 billion and the combined liquidity deficit totals R22.4 billion.
Claassen says the municipalities do not have the means to trade themselves out of their desperate positions. They cannot sell their assets, because the nature of their infrastructure means they cannot be sold for cash to redeem their liabilities.
“The only realistic way out would be for government to bail them out, pay the creditors what is owed to them, and put the municipalities on a stable footing again. This burden will unfortunately have to be carried by the taxpayer to the extent of at least R22.4 billion (in the sample only),” says Claassen.
Only two of the eight metros reported profits, namely Cape Town and Tshwane. Their working capital positions are however better with only Joburg (R2.9 billion), Tshwane (R3.7 billion) and Mangaung (R943 million) reporting liquidity deficits.
Claassen points out that about 40% of the population lives in the eight metros and they contribute about 60% of the South African GDP. “The economic activities within their borders play a crucial role in the economic growth and development of the country,” Claassen says.
Over the last two years the financial sustainability of the metros has, however, weakened and for the first time since 2013 the average score dropped below 50 to 49.
Claassen points out that Cape Town scored the highest and has also consistently improved its score over the last five years.
He says although Johannesburg and Mangaung reported liquidity shortfalls in 2016/17, they are not as severe as that of Tshwane with its R3.7 billion shortfall. “Johannesburg and Tshwane, with their relatively large income bases, might be able to trade themselves out of trouble. However it is doubtful if Mangaung, with a revenue base of only R5.5 billion, can easily turn its operating loss of R1 billion into a profit. Mangaung might have to receive a bailout of some sort to put it on a sound footing again,” Claassen said.
He says given the weak financial sustainability of key local municipalities in South Africa, Ratings Afrika expects service delivery to deteriorate. This situation might place additional financial pressure on the central government to keep the unstable municipalities going.
“Correction will require decisive political leadership that looks after the interests of the residents including that of the business community rather than its own, roots out corruption, appoints managers with the right skills and experience to implement sound budgetary practices, and exercises strict financial discipline. The current political leadership in control of the majority of municipalities has demonstrated over the last five years and more to not being capable of sound governance. This is the main cause of the deteriorating financial sustainability of the municipal sector in South Africa,” Claassen said.