End of the line for South Africa’s richest city
South Africa’s government may soon need to make the politically fraught decision to take control of Johannesburg to avert the city’s financial collapse, according to a consultant appointed by two of the country’s leading business groups.
While such a move would be difficult for the African National Congress before crucial local elections in November, it may have little choice but to act.
This is according to Lael Bethlehem, a partner at Genesis Analytics, speaking during the presentation of a study commissioned by Business Leadership South Africa and Business For South Africa.
“The City of Johannesburg is essentially bankrupt,” Bethlehem said Thursday.
“We may have a situation where they may not be able to limp on until November, and the government will have to implement” a takeover plan, she said.
Her presentation came a day before a Friday deadline set by Finance Minister Enoch Godongwana for the city to explain how it will address financial shortcomings or lose R8 billion in annual state funding, or about a 10th of its budget, a letter seen by Bloomberg showed.
Mayor Dada Morero will respond next week, his spokeswoman, Khathu Mulaudzi, said.
Run by an ANC-led alliance, Johannesburg has descended deeper into dysfunction in recent months and is expected to be among the fiercest battlegrounds in the 4 November municipal vote.
The Democratic Alliance, a partner of the ANC in the national coalition government, has nominated former party leader and Cape Town Mayor Helen Zille as its mayoral candidate.
The city owes hundreds of millions of dollars to state-owned power and water utilities and has been threatened with power cuts.
It has also run out of fuel for vehicles used to provide essential services, such as road repairs.
Godongwana, in an earlier warning letter, instructed Morero to cancel what he called an “illegal” wage deal to pay city workers an additional R10.3 billion over the next two years.
Even so, Johannesburg plans to increase its workforce by about 1,700 people this financial year to more than 40,000, a review of its budget documents by Bloomberg showed.
On the edge of collapse
The deterioration in Johannesburg’s finances has alarmed business and the government because the city of 4.8 million people is the economic hub of South Africa, contributing about 16% of gross domestic product.
A financial collapse would reverberate across the national economy, impacting growth and tax revenue.
“The state of the city has become a matter of national importance,” BLSA Chief Executive Officer Busi Mavuso said as she introduced the presentation.
Afterward, she said it had left her “with a profound sense of disbelief and sadness. How did we get here?”
Bethlehem’s analysis showed that despite spending more per resident than South Africa’s seven other major metropolitan areas, Johannesburg lags almost all of them on most measures of financial health and performance.
Johannesburg has 8.5 employees for every 1,000 inhabitants, compared with a national metropolitan average of 6.4. It loses 45% of its water to leaks and theft compared with about a quarter in Cape Town.
Almost a third of its power is stolen or wasted versus 11% in Cape Town, and it’s adding housing units at less than half the rate of its coastal rival.
Over the past decade, the city has added 108,000 jobs while its working-age population has grown by 850,000.
That’s a third of the number added in Cape Town, which has had lower overall population growth. Operating expenditure has almost doubled since 2010, while capital investment has fallen 13%.
“The City of Johannesburg has a large budget. Lots of money is being spent, it is just being spent wrongly,” Bethlehem said.
“You cannot run a city by spending all of your income on operating expenditure and so little on capital.”
The city’s decline has also weighed on property values. Adjusted for inflation, property prices in Johannesburg have fallen by a fifth since 2010, compared with a 34% rise in Cape Town.
The options for the government should the city deteriorate further are twofold, and one may lead to the other.
Godongwana is currently using a section of the Municipal Finance Act to potentially withdraw funding.
If he carries out his threat, the finances of the city are likely to deteriorate further, possibly necessitating the appointment of an administrator by the provincial government.
Fixing the city will require new leadership and action against graft, which is one of the causes of why there’s little to show for the billions of rand being spent, Bethlehem said.
“Johannesburg is in a deep, systemic and escalating crisis,” she said. “Addressing the problems of Johannesburg will involve a reckoning with criminal syndicates.”
By Antony Sguazzin for Bloomberg
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