SA’s faith in its municipalities is collapsing even faster than its cities

The extensive infrastructure needs of South African municipalities provide an opportunity for long-term bond investors, such as retirement funds, to help finance these important assets.

However, many municipalities have failed to meet the basic needs of their constituents, including providing adequate access to water, sanitation, housing and electricity. Consequently, faith in the system has been eroded, as reflected by very low voter turnout at the November local government elections.

The municipal sector needs a reboot for the overwhelmingly negative trend to be arrested and this requires capable and honest leadership.

The auditor-general of SA, Tsukani Maluleke, did not mince her words in her latest report on local government audit outcomes, which have deteriorated markedly over the years. Though the downward trend in municipal health has been well documented in the press, the sheer extent of the rot is still alarming: irregular, unauthorised, fruitless and wasteful expenditure amounted to a whopping R189bn. Only 28% of municipalities submitted quality financials for audit purposes and just 11% received clean audits. The Free State and North West did not have a single clean audit between them.

The report describes a death spiral: rampant corruption and mismanagement at many municipalities result in a lack of funds and increasingly poor service delivery, the latter reinforcing a culture of nonpayment of municipal rates and service fees which worsens the financial deterioration of the municipalities and further affects service delivery.

Discouragingly, many of the issues plaguing municipalities have been raised by the auditor-general before, but the mayors and councils have not addressed these. The lack of consequences further reinforces bad behaviour and malfeasance. Ethical and accountable leadership is needed to turn these municipalities around.

On July 16 2021 Moody’s downgraded five municipalities, including Cape Town, Johannesburg, Ekurhuleni and Nelson Mandela Bay. Tshwane had already been downgraded to junk in June. In November Nelson Mandela Bay and Ekurhuleni were downgraded again, with the latter falling to subinvestment grade. The ratings agency cited material revenue shortfalls and liquidity concerns, which are expected to persist, given the weak economy. The agency has also indicated that further downgrades may be forthcoming.

While the ability of households and businesses to pay their municipal rates and service fees has undoubtedly been impacted by the Covid-19 pandemic, this only partly explains the deterioration in the creditworthiness of local governments. In the case of Mangaung, Rustenburg and Ekurhuleni, credit rating downgrades started in 2019.

According to the National Treasury, municipal borrowings were R68bn in March 2021, of which some 28% consisted of bonds. Lower credit ratings result in higher funding costs and may lead to some municipalities becoming uninvestable for conservative funds, such as retirement funds, the mandates of which prohibit junk-rated investments. The result is less funding being accessible for municipalities to spend on much needed infrastructure for service delivery.

The fallout from failing municipalities does not only affect residents of that locale; municipal financial distress also has an impact on creditors such as Eskom, the water boards and smaller suppliers. The bearing on small businesses, which rely on prompt payment for their survival and have been touted as a crucial source of jobs, is particularly egregious.

Municipalities make up 42% of Eskom’s revenue and municipal arrears have ballooned to R35bn. This nonpayment affects the regular taxpayer directly: bailouts from the fiscus to Eskom will have amounted to R136.7bn between 2020 and 2022.

The water utilities derive almost all their income from municipalities. Though the amount of overdue municipal debt to these (R377m to Umgeni Water and R1.9bn to Rand Water) pales in comparison to that due to Eskom, the upward trend in debtor days is not promising and these entities may eventually need bailouts too.

The basic services that municipalities are meant to provide are foundational to improving living standards, yet hardly a day goes by without a headline about municipal fraud, corruption, wastage and infrastructure degradation. Municipalities also often underspend on infrastructure due to poor project management, impacting service delivery.

In his letter to the nation ahead of the 2021 local government elections, President Cyril Ramaphosa said public trust is easily lost and difficult to regain without accountability from public officials. It is therefore unsurprising that many municipalities have lost the trust of their communities.

The lack of public belief in municipal officials arguably shows up in poor collection rates, with the auditor-general estimating that about 60% of municipal debt is irrecoverable.

The recent local government elections also saw the lowest voter turnout in the democratic era, at an effective 30% of the voting age population. A low voter turnout points to a loss of public belief in the electoral system, which has profound implications for social cohesion, as evidenced by the escalating number of protests and riots. If a population loses faith in the electoral system, people will make their voices heard in other, more destructive ways.

Leadership sets the tone at the top of any organisation. If leaders are unethical, have a disregard for sound governance and lack accountability, it filters through to the rest of the organisation and results in a culture of poor performance and impunity.

Many residents do not pay their fair share, while paying residents understandably become disillusioned when their hard-earned money is wasted or stolen, and are tempted to stop paying their municipal bills. This inevitably results in municipal collapse. Indeed, a number of municipalities are already deemed to be dysfunctional.

Turning the situation around will require a delicate dance between two groups: leaders who must drive the change and residents who must pay their bills. One cannot happen without the other, but the former clearly leads the latter.

Londa Nxumalo is a portfolio manager with Allan Gray.