Municipal failure in spending budgets has dire results

The Treasury has sounded the alarm over SA’s 257 municipalities, saying their underperformance in spending billions of rand in allocated budgets and conditional grants was a “source of concern”, as residents grappled with poor service delivery by local councils.

It warned in its local government revenue and expenditure report for the second quarter of 2023/24, released on Monday, that the liquidity position of most municipalities was under threat due to revenue undercollection.

The Treasury report comes after it cracked down on the Tshwane and Johannesburg metros in February, notifying both municipalities of its intention to cut a combined R1.83bn for grants due to underperformance.

The report covers performance against the adopted budgets of local government for the second quarter of the municipal financial year ending December 31 2023, and includes spending against conditional grant allocations for the same period.

Some of the key takeaways from the report were that as of December 31 2023, aggregate municipal spending for both operating and capital budgets was R283.5bn or 46.3% of the total adopted expenditure budget of R612bn.

Aggregated billing and other revenue was R310.9bn or 50.3% of the total adopted revenue budget of R618.5bn. Capital expenditure, according to the report, was R25.6bn or 31.1% of the adopted capital budget of R82.5bn. Of the adopted operating expenditure budget of R536bn, R285.3bn or 53.2% was spent by December 31.

“Municipalities adopted a budget of R154.5bn for salaries and wages (including councillors’ remuneration), representing a R7.9bn or a 5.4% increase from the adopted budget of R146.6bn for the 2022/23 municipal financial year. As of December 31 2023, R72.8bn or 47.2% of the adopted salary budget, had been spent,” the report said.

During the period under review, aggregate municipal consumer debts amounted to R338.2bn and R6.4bn had been written off as bad debt. A total of R104.3bn was owed to municipalities as at December 31, an increase of R2.9bn compared to the R101.4bn reported in the first quarter of 2023/24.

“The analysis of the collection rates indicates that while municipalities in the year to date have budgeted for a 75.6% collection rate, aggregated actual collection performance against billed is only 58.4%. The underperformance of actual collections against billed revenue holds a significant risk for the liquidity position of most municipalities as the planned expenditure is based on a higher performance level,” the Treasury said in the report.

“The report ... is therefore a management tool that serves as an early warning mechanism for councils, provincial legislatures, and municipal management to monitor and improve municipal performance timeously.”

Regarding conditional grants as at December 31, the Treasury said R27.8bn or 63.5% of the R43.7bn allocated to municipalities had been transferred to local councils for 2023/24.

“The performance of the infrastructure grants to munici

palities during the second quarter was not satisfactory. The municipal infrastructure grant is the highest-performing direct infrastructure grant to municipalities during the second quarter, with a performance of 49.3%, which is higher than the 37.6% reported for the same period in the previous financial year,” the Treasury said.

At 46.7%, the integrated urban development grant was the second-highest performing grant, while the municipal disaster recovery grant was the lowest-spending grant during the second quarter, “with 12.7% expenditure, equivalent to R40.1m expenditure against the R320m allocation”.

The Treasury described the public transport network grant as the second-lowest performing grant with expenditure performance of 25%, adding: “It should be noted that this grant is an infrastructure grant allocated to metropolitan municipalities only, and it is an observation that metropolitan municipalities are increasingly struggling to implement this programme.”

The Treasury said low expenditure on infrastructure grants “is a source of concern because this slow performance may eventually lead to unspent conditional grants that have to revert to the National Revenue Fund (NRF). The surrendering of unspent conditional grants to the NRF has negative consequences to the communities that must receive the services linked to the infrastructure to be built”.

The Treasury report follows a recent decision by Moody’s Investors Service to send the rating of the Ekurhuleni metro further into junk territory and placed Tshwane’s on review for a downgrade for failure to submit its audited financial statements by February 29.

The ratings agency downgraded Ekurhuleni’s long-term issuer (domestic), senior unsecured ratings to Caa2, three notches below the highest junk status, in reflection of a high credit risk. Moody’s also put the City of Tshwane long-term issuer rating of Caa2, and its national scale rating of Caa1.za on review for further cuts.

Moody’s action was viewed as a blow to the two cities, which are home to key industries and Africa’s busiest airport, OR Tambo International.