What separates the winners from the losers among municipalities

Written by Ciaran Ryan. Posted in Journalism

The biggest winners – including Oudtshoorn, Theewaterskloof, Cape Agulhas and Midvaal – focus on improved revenue collection, reduced wastage, lower costs and improved profitability. From Moneyweb.

Cape Agulhas, where the municipality improved its working capital surplus from R18m to R56m in five years. Image: Adobe Stock Images
Cape Agulhas, where the municipality improved its working capital surplus from R18m to R56m in five years. Image: Adobe Stock Images

Moneyweb asked Ratings Afrika to prepare a list of the most improved and most deteriorated municipalities over five years.

The data is drawn from the Ratings Afrika Municipal Financial Sustainability Index (MFSI) for the fiscal year to June 2020, which examines the 105 largest local municipalities plus eight metros in SA.

The MFSI comprises six financial components: operating performance, liquidity management, debt governance, budget practices, affordability, and infrastructure development. Municipalities are scored on a scale of one to 100.

The most improved are Oudtshoorn, Theewaterskloof, Cape Agulhas (all in the Western Cape) and Midvaal (Gauteng).

The most deteriorated are Enoch Mgijima (Queenstown, Eastern Cape), Moses Kotane (Mogwase, North West), Amahlathi (Stutterheim, Eastern Cape) and Gamagara (Kathu, Northern Cape).

Leon Claassen of Ratings Afrika says the most improved focused on doing the basics right: improving revenue collection, eliminating wastage and corruption, and better service delivery – which in turn depends on maintaining and improving infrastructure spending as well as maintenance of existing infrastructure.

Calibre of management

That’s easier said than done when many municipalities have chased away skilled administrators, leaving the door wide open for corrupt and incompetent deployments.

The most deteriorated municipalities often started five years ago with positive working capital balances, but allowed those to fritter away through a combination of ineptitude, bad management, unchecked wastage and sometimes corruption.

Moneyweb has reported on some municipalities that seem to have endless resources when it comes to fighting legal battles to get rid of problematic staff, but very little where it is really counts – in actual service delivery.

The overall state of SA’s municipalities is abysmal, and government will have to pay R51 billion to prevent a total collapse of municipalities and bring them on a level footing to pay their creditors as stipulated by the Municipal Finance Management Act (MFMA).

Reason to be hopeful

Despite the generally sour news at local government level, there are some nuggets of hope to be drawn from this, says Claassen.

“I don’t think we need to completely overhaul local government in SA. We can learn from those that are well managed and replicate their lessons elsewhere in the country.”

He adds: “It is not impossible to fix the problem, but it does take political will and a determination to confront the actual source of the problems at local government level, which is usually the quality of management.”

Source: Ratings Afrika

Ratings Afrika provided a brief summary of the most improved and most deteriorated municipalities, with an explanation for the respective scores.

Losers

1. Enoch Mgijima

Source: Ratings Afrika

With a sustainability index of just nine (out of a potential 100), this municipality is withering into irrelevance or worse, as far as residents are concerned.

It suffers a severe weakening of operating performance and liquidity, with an operating loss in 2020 of R285 million.

The municipality’s liquidity problem is reflected by working capital that went from R155 million positive in 2016 to R357 million negative (cash shortfall) in 2020. Revenue collection was 83% in 2016 (already well below the target 95%) and is now only 74%.

“Very bad financial management but the drought in Eastern Cape might play a role. Perhaps corruption also,” notes Ratings Afrika.

2. Moses Kotane

Source: Ratings Afrika

The municipality’s operating performance is a large contributor to its financial difficulties. It went from an operating profit (surplus) of R7 million in 2016 to loss of R175 million in 2020.

Expenditure growth outstripped revenue growth, indicating no control over expenses, and no financial discipline.

The deterioration in liquidity is even worse. It went from a positive score of 78 in 2016 to negative 22 in 2020. Positive working capital of R260 million in 2016 turned into a cash shortfall of R157 million in 2020, a swing of R417 million in five years.

Revenue collection is disastrous – it went from 80% in 2016 (already below the 95% target set by National Treasury) to just 39% in 2020.

“Not only bad financial management but probably corruption also,” says Ratings Afrika.

3. Amahlathi (Stutterheim)

Source: Ratings Afrika

Operating performance weak throughout the five-year period examined. The operating loss in 2016 was R39 million rising to R48 million in 2020.

Staff costs doubled over five years to R124 million from R63 million in 2016.

Almost no money is being spent or repairs and maintenance. In 2020 the repairs and maintenance spending was just R1.6 million which is less than 0.5% of asset value. It should be about 6% to 8%.

The liquidity deterioration is even worse. The municipality’s working capital was positive in 2016 with R80 million, now it is R81 million in the negative (2020). Revenue collection was at 87% in 2016, slipping to just 66% in 2020.

“Bad financial management all over, though the drought may also have an effect,” says Ratings Afrika.

Winners

1. Oudtshoorn

Source: Ratings Afrika

Oudtshoorn demonstrated good improvement in all the components analysed.

The operating loss reduced from R48 million in 2016 to R19 million in 2020. The working capital shortfall of R116 million in 2016 was turned into positive balance of R48 million in 2020.

The investment in infrastructure went up from R36 million in 2016 to R70 million in 2020, which will result in better service provision.

“Definitely much better financial management,” says Charl Kocks of Ratings Afrika.

2. Theewaterskloof (Caledon)

Source: Ratings Afrika

Good improvement in operating performance. The municipality turned an operating loss of R52 million in 2016 to an operating surplus of R29 million in 2020.

Its liquidity position is much improved, from a working capital shortfall in 2016 of R1 million to a surplus in 2020 of R90 million.

Revenue collection went up from 82% in 2013 to 87% in 2020, though this is still below the benchmark of 95% (though Caledon is a poor area with household income below the national average). There was a slight increase in infrastructure spending from R65 million in 2016 to R72 million in 2020.

Loans valued at R20 million were repaid over the last five years, “reflecting good financial management in difficult times,” says Ratings Afrika.

3. Cape Agulhas

Source: Ratings Afrika

Cape Agulhas showed good overall improvement across the board, with an operating loss of R9 million in 2016 turning into a 2020 surplus of R8 million, while the working capital surplus improved to R56 million from R18 million over the same period.

Revenue collection over five years remained at the target range of about 95%. Investment in infrastructure increased from R20 million in 2016 to R40 million in 2020, meaning better service provision for residents.

This shows a concerted effort from senior management to improve their financial sustainability, says Ratings Afrika.

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and Lewrockwell.com, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.