RUNNING ON EMPTY

The financial sustainability and service delivery capacity of most municipalities are dismal and deteriorating rapidly. But towns that have prioritised fiscal discipline and service excellence are reaping the rewards

TWe must break the culture of blackmail and violence that has characterised labour relations in municipalities for far too long

he steep financial slide of South Africa’s local government sector is continuing unabated and, in the absence of a dramatic improvement in most municipalities’ approach to financial management, is likely to worsen further.

However, there are pockets of excellence as well as a few metros where the stirrings of a turnaround are evident.

This is according to the latest Ratings Afrika (RA) municipal financial sustainability index (MFSI) report — a ranking of South Africa’s 104 largest local municipalities, plus the eight metros, for the year ending June 2023.

Since 2011, the governance ratings agency has been warning about the “unabated destruction” of the country’s municipal financial sustainability. The 2023 report again provides evidence of broad dysfunction, with the Western Cape being the main exception.

The key problem is that as a result of “gross financial mismanagement and unsound governance” most municipalities continue to run deficits, which means they generate insufficient funds from their operations to fund service delivery or to maintain and develop infrastructure.

The upshot is poor or even nonexistent service delivery while economic growth is curtailed by failing infrastructure.

For the 2023 financial year, the aggregate operating deficit of the 112 municipalities surveyed totalled R27bn. Though down from R33bn in 2022, thanks mainly to Tshwane’s success in wiping almost R4bn off its deficit, the situation remains “dire”.

These losses have culminated in huge working capital (liquidity) shortfalls for most municipalities. The shortfall reached a combined R84.5bn in 2023, up from R65bn in 2022 and R54bn in 2021.

RA expects this shortfall to keep growing because most municipalities are likely to continue to realise losses while revenue collection is likely to remain subdued because of the poor economic climate. This means service delivery will probably continue to worsen in most parts of the country.

And yet there are some signs of progress. Nelson Mandela Bay (NMB), for instance, managed to raise its MFSI score from 50 to 56 between 2022 and 2023 due to a strong effort by the financial team, while Tshwane reduced its deficit from R4.2bn to R524m, helping it to climb from 22 to 29 points.

NMB CFO Selwyn Thys says the metro’s fiscal improvement — in 2022/2023 it also received its first unqualified audit from the auditor-general in 12 years — is due to a deliberate strategy of cost containment coupled with revenue maximisation.

Very prudent borrowing (which is limited to revenue-generating projects), strong liquidity management, and a conservative approach to budgeting have also served the metro well.

“There is always pressure to spend more,” says Thys, “but our approach is that you cannot budget to spend more

Cilliers Brink than you collect in’revenue.”

For Cilliers Brink, who has been the mayor of Tshwane s multiparty coalition government for a year, rescuing the city’s finances has been a top priority. And though Tshwane’s financial recovery will take another two years — the goal is to achieve a funded budget by 2026 — progress is being made.

The essence of Tshwane’s financial rescue plan is to increase revenue collection and reduce expenditure.

This means rebuilding controls, including the city’s tax administration capacity, and ensuring that its tender and contracting system delivers value for money.

The city now has a competent city manager in Johann Mettler, who has a record of fighting corruption and ineptitude in NMB. He is supported by a new top management team. Seven of the eight senior managers were recruited from outside Tshwane.

“And for good reason,” says Brink. “Changing management doesn’t guarantee a change of culture. But without a change of management there is no chance of changing the culture.”

Rescuing the city’s finances has also meant confronting the South African Municipal Workers’ Union (Samwu) by insisting on a 0% salary increase in 2023. This was done to correct the extraordinary increases granted by the city manager in 2019, which inflated personnel-related costs by R2.6bn year on year.

After a three-month strike last year, which was marked by violence and intimidation, workers returned to work when it became clear the city would not budge.

“If I could go back in time, I’d do the

same,” says Brink.

While standing firm was important from a financial perspective,

“more importantly,” he says, “we must break the culture of blackmail and violence that has characterised labour relations in municipalities for far too long.

“A bad decision is one thing, but a culture that encourages endless bad decisions is far worse. I think the unions understand this, and our relationship has improved significantly since the strike was broken.”

The parties are in mediation on the salary issue, but the city’s position is that any salary increases must remain subject to affordability and cash flow requirements.

Cape Town, with a score of 70, is the only metro still considered to be highly sustainable financially. Underpinning its score is a revenue collection rate of 96.3%, an operating surplus of R1.8bn and cash reserves of R12.6bn.

At the opposite extreme is Mangaung. Though it raised its MFSI score from 24 in 2022 to 27 in 2023, it is still the lowest-scoring metro. With a liquidity shortfall of R936m, indicating an inability to pay service providers, including Eskom, the report says the metro “borders on dysfunctionality”.

Overall, the eight metros’ average MFSI score edged up from 40 in 2022 to 43 in 2023, but this is still woefully low.

There are some other pockets of excellence — municipalities that demonstrate that it’s possible to maintain high levels of financial sustainability and service delivery even when contending with extreme poverty and low economic growth.

For 2023, Midvaal and Mossel

Bay are the country’s most financially sustainable municipalities, each with an MFSI score of 74.

Only three other local municipalities achieved a score of 70 or more: Saldanha Bay (73), Swellendam (72) and Swartland (71).

Mossel Bay’s executive mayor

Dirk Kotzé says maintaining financial sustainability is a key priority but so is keeping service charges affordable, as a large number of the town’s residents are pensioners.

This is why Mossel Bay — which is South Africa’s fastestgrowing town — has traditionally levied some of the lowest property taxes in the country. It derives just 12.8% of its total budget from property taxes while some similar-sized municipalities average in the mid-20% range.

Financial sustainability rests on longterm financial planning, conservative borrowing, and prudent budgeting and spending practices, including maintaining affordable staff costs, says Kotzé.

At the same time, service delivery excellence requires not just strict adherence to delivery standards but also dedicated, highly qualified, and experienced staff. Many of the municipality’s staff have long service records, exceeding 20 or 30 years.

Also of “utmost importance”, adds Kotzé, is maintaining a high collection rate by imposing strict debt collection measures, even though this is politically unpopular. Equally important, he believes, is to ensure maximum relief for the poor by conscientiously applying an indigent policy.

With the exception of Midvaal, which is in Gauteng, all the top-scoring municipalities are in the Western Cape. With an average MFSI score of 53, it is once again the top-scoring province, the only province to score more than 50, and the only one whose municipalities are largely sustainable financially.

Contributing to the province’s success is its average municipal collection rate of 97.6%, making it the only province to get above the benchmark of 95%. The sector’s average is 83% — something which contributes to its huge cash shortfall. This reflects an unwillingness or inability to collect money owed for services rendered.

The weakest provinces are the Free State and Mpumalanga, both with average scores of 23. However, the Free State has improved from 19 in 2019 to 23 in 2023, whereas Mpumalanga declined from 29 to 23 over the same period.

North West achieved the largest improvement, upping its MFSI score from 23 to 28 points, while the Eastern Cape and Limpopo each improved by two points. This indicates, says RA analyst Leon Claassen, “that it is possible to slowly turn the situation around”.

However, the provinces’ average local municipality score remains extremely low at 37 out of 100, which the report says is indicative of “very poor financial management practices and discipline”.

Furthermore, 55% of the municipalities (58 of the top 104), achieved a score of less than 35, rendering them “seriously unsustainable and perhaps even dysfunctional in terms of normal service delivery”.

The report’s key message is that the financial sustainability of most municipalities, and consequently their service delivery capacity, remains dismal and continues to deteriorate rapidly.

“It’s clear that the majority of municipal councils have failed miserably in their governance responsibilities by allowing them to sink into this desperate, unsustainable financial situation,” says Claassen.

He also berates the department of co-operative governance & traditional affairs and most provincial administrations for being ineffective in exercising their oversight role.

The bottom line is that unless there is a much more concerted effort from the municipalities themselves, the provinces and national government to strengthen the sector’s governance and financial management, its descent will continue, further reducing residents’ quality of life and deepening the drag on the economy.