Report finds many municipalities in financial distress {writer: Shaun Meyer}

Local government finances have deteriorated significantly over the past four years; 66 of the country’s 262 municipalities are in financial distress; and another 37 are on the verge thereof; more than half do not have sufficient cash reserves and could face liquidity meltdown, making it impossible to meet short-term liabilities; and overall they have underspent R12.4 billion, or 29.3%, of their capital budgets.

This is the worrying picture of the financial position of the country’s local governments, which came to the fore in the latest report on the state of municipal finances released in January by the National Treasury.

It identified the practice of newly elected mayors to purge municipal managers and chief financial officers (CFOs) to make way for their own cronies, as one of the big problems causing financial distress to municipalities.

For the present financial year, ending in June last year, 155 municipalities had less than one month’s cash in reserve. This is in stark contrast to Treasury prescriptions that they should have at least three months’ cash at hand as buffer to ensure they are able to meet their short-term liquidity requirements and to pay creditors.

The report further revealed that most municipalities are heavily indebted and can barely manage to pay their debts on time.

Capital spending

Municipalities continued to experience difficulties with the planning and execution of capital spending. Of the total capital budget allocated to 21 secondary cities, about R2.9bn, or 44%, was underspent during the period under review.

District municipalities were found to be the worst performers, with more than half of them consistently underspending their budgets by more than 30%.

In other municipalities, 111 underspent their original capital budgets by more that 30%, impacting directly on the rollout of services.

Co-operative Governance and Traditional Affairs spokesperson Mbulelo Musi said the department had introduced the Municipal Systems Amendment Act and Operation Clean Audit to improve financial accountability.

“Municipalities do not have people with appropriate skills to manage finances, hence a directive to request all municipalities to employ a CFO.”

The department had established a municipal turnaround strategy and technical support units in all provinces to assist municipalities.

The underspending trend was attributed to poor capital budgeting; a shortage of planners and engineers able to draft appropriate specifications and prepare tenders of sufficient quality; poor capital expenditure planning; poorly managed procurement processes; political interference in procurement processes; and uncertainty as officials appear to have been reluctant to take spending decisions, owing to political considerations.

Repairs and maintenance

In the interim, the National Treasury is preparing processes to ensure better quality budgeting and reporting on repairs and maintenance. This follows the finding that, should a municipality find itself in financial distress, the first expense cut was the repairs and maintenance.

“The impact of not spending on repairs and maintenance was not visible or obvious in the short term, and it was also less politically sensitive than cutting the capital expenditure programme or reducing the entertainment budget,” the report said.

However, the consequences of underspending on repairs and maintenance over the medium- to long term included the deteriorating reliability and quality of services; more expensive crisis maintenance; the ever increasing cost of maintenance and refurbishment; shortening the useful life span of assets; and reduced revenues, due to the failure of selling services.

The report pointed out that 83 municipalities had acting municipal managers and 75 municipalities had acting CFOs. In 37 municipalities, acting officials filled both these key roles. This was most prevalent in Mpumalanga, North West and Limpopo.

Treasury criticised the lack of permanently employed municipal managers and CFOs in some of the municipalities, saying instability in these positions constituted a grave risk to the municipality.

Vacancies in both positions tend to spike after elections, suggesting that municipal administrative and financial bosses either resign at the completion of their five-year contracts that are linked to the municipal cycle, or they are pushed out by the newly elected political bosses.

“Information gathered since the elections indicates that the latter is probably the most likely explanation, especially in those provinces where the instances of acting officials is highest,” the report stated. “A certain number of the new mayors are more concerned about the official vehicle they drive, their accommodation and perks than serving their communities.”