It is hard to believe that just 20 years ago the municipality of Durban was regarded as one of the most creditworthy local authorities in the world.
Today the eThekwini metropolitan municipality, encompassing Durban and seven formerly independent local councils with 3 million people, is one of many municipalities fingered in a research report by Ratings Afrika for its deteriorating municipal governance.
The intensive survey, carried out over the past five years, aims to highlight the state of financial governance at municipalities. The information will allow banks to assess the business merit of lending to municipalities that need to supplement their budgets.
Ratings Afrika found a worrying picture in eThekwini, with debt climbing and cash flow under pressure. Similar circumstances exist at many other metros and municipalities in the country as they struggle to extend basic services to all.
A lack of revenue is particularly pronounced in eThekwini, though. Net income as a percentage of total income declined from 25,41% in 2007 to 10,44% in 2010.
With income from water and electricity services under pressure since 2007, the metro did what many of its peers have done — it increased property valuations.
Even increasing this source of income was not enough for the municipality to avoid taking on further debt. Interest- bearing debt as a percentage of operating revenue has climbed from 46,3% to 54,2% while long-term liabilities have risen by R3bn from R5.1bn in 2008 to the present R8.2bn.
Provinces receive a budget from national government, but municipalities and metros mainly have to raise their own funds through rates. This has proved to be ineffective and they are turning to debt to run services.
Ratings Afrika CEO Charl Kocks says municipalities such as eThekwini cannot keep on borrowing to run basic services.
He is especially concerned about liquidity: “It is the lifeblood of any municipality.” At eThekwini, cash from operations as a percentage of income has declined from 34,5% in 2008 to only 13,47%.
The ratings index has a maximum score of 100 and assess 50 municipalities. They take into account the financial position of the municipality as well as its operating performance, debt position and liquidity management. Particular focus is placed on liquidity, which forms 40% of the weighting, followed by debt governance at 28%.
The average score of all municipalities was 62 points in 2007. It has fallen to 48 in 2010.
The lowest-scoring municipality was Madibeng (Brits) with 16 points, followed by Westonaria and Richards Bay with 21 each. Though scoring a full 100 points is technically possible, the best- performing council in 2010 was Saldanha Bay with 87.
Kocks says it is scary that the number of municipalities scoring 35 and less is increasing. In 2007 only three fell into this category but the number has increased to 15. “We are hitting the wall right now,” he says.
The number of municipalities with scores above 80 has declined from nine in 2007 to five now.
As with eThekwini, a marked deterioration is occurring in the bigger metros. Of particular concern is Johannesburg, which experienced a significant decline between 2007 and 2010 and only a moderate improvement over the past year.
The problems in Johannesburg relate to the integration of IT billing systems, negatively affecting revenue. Kocks says there is a real possibility that revenue and debtor figures are at least 10% in error. “But the biggest deterioration is with reputational risk and this could lead to more people not paying or defaulting because the figures cannot be trusted.”
Johannesburg’s performance declined quite rapidly but in 2009 it was one of four municipalities out of 283 receiving a clean audit opinion from the auditor-general.
Research Afrika’s research shows that little has improved since last year. The auditor-general was unable to give an opinion on 81 municipalities because of inadequate data.
Altogether 38 municipalities did not submit reports and 47 received qualified reports.
Kocks says it is not necessarily a political problem. Saldanha Bay is an ANC-controlled municipality while the controversial DA-led Midvaal performed only on average. Other municipalities doing well include Stellenbosch (80) and Lephalale (Ellisras) with 81. Tlokwe (Potchefstroom) was also a good performer at 82.
Sources within municipalities have disputed the figures used by Ratings Afrika in its research. They have questioned the validity of conclusions reached. But Kocks says this criticism should really get one worried. “We used only official data from treasury and all the municipalities had the opportunity to comment.”
Institute of Municipal Finance Officers president Chris Nagooroo says some of the findings could be unduly negative, though he has not read the report. He admits cash flow is a serious problem at most municipalities.
Many municipalities have improved their performance. “But much more needs to be done and we are definitely not where we want to be.”
Credit to: Financial Mail