The South African Cities Network (SACN) has published its biennial State of City Finances Report for 2020, examining the finances of the nine biggest cities in South Africa.
Since the 2018 report, South Africa’s economy has continued to perform poorly due to a myriad of challenges, which include a decline in economic growth, persistently high levels of unemployment, struggling state-owned enterprises, and electricity supply shortages.
More recently, the global shock, prompted by the Covid-19 pandemic and unprecedented lockdown, aimed at protecting public health, has led to a sharp contraction in the economy, with the latest data from Stats SA putting the expected decline at 7% for 2020.
Because of the adverse economic conditions, South Africa’s biggest cities are finding it increasingly difficult to raise sufficient revenue to cover their mandates, SACN said, mainly as a result of structural issues within the local government the deteriorating macro-economic environment in which they operate.
Both of which are beyond the control of the cities themselves.
This has been exacerbated by problems on the ground among households as well, with a growing number of consumers accruing debt – either by willingly not paying bills, or simply being unable to – and more people looking to alternative sources for services like water and electricity.
As urbanisation continues to spread, the population of low-income groups has also grown, the group said, adding to the problems as they search for jobs which are not available.
“Reduced margins on electricity and water sales, as a result of both rising unemployment and stagnating household incomes, and above-inflation increases in the cost of bulk purchases, mean that cities are less able to cross-subsidise the provision of basic services for lower income residents,” SACN said.
According to the SACN, cities in South Africa rely on a mix of grants and their own revenue sources to fund constitutionally mandated expenditure responsibilities.
Since 2015/16, city revenues have grown at varying rates, with the trend showing actual city revenues improving compared to budgets – although the group noted that cities make very different assumptions about rates of growth going forward.
“Between 2015/16 and 2018/19, total actual revenue grew at an average annual rate of 5.7%, but the average revenue growth rates differed considerably among cities. Johannesburg (6.2%), Cape Town (6.1%), Ekurhuleni (6.3%) and Tshwane (6.7%) experienced the highest average annual increases, while Buffalo City’s revenue increased by an average of just 3% per year, it said.
Among the major metros, the City of Johannesburg is the top earning, having pulled in R52.3 billion in revenue in the 2018/19 financial year. Along with Ekurhuleni (R35.1 billion) and Tshwane (R33.2 billion), the greater ‘Jo-toria’ super-city accounts for more than half the revenue earned by South Africa’s major metros.
Municipalities generate their own revenue in several way, including property rates, user charges for municipal services rendered and other local taxes. However, these sources have come under strain over the years as residents themselves have felt the pressure of a declining economy.
Municipalities operate on an accrual accounting basis, which means that revenue is recorded when a municipal bill is issued now when it is collected.
This money on the books can’t be used to pay off any services like Eskom, or to pay off debt and any other expenditure in the city, with the metros highly reliant on the collection of monthly bills.
However, if cities show poor collection rates – and debts remain unpaid – it is a sign of financial difficulties ahead, the SACN said.
It is bad news for big cities, then, that collection rates have declined over the years, while the number of debtors (households not paying their bills) has increased.
“The non-payment of municipal bills, and hence poor collection rates and rising consumer debts, might be caused by high bills and an inability of households, businesses and institutions to pay,” the group said.
“It might also be caused by an unwillingness to pay because of various factors, including dissatisfaction with the service and declining trust in the municipality.”
Poor collection rates and rising debt might also be due to failures to implement municipal credit control and debt collection systems, or to the way cities account for and write off bad debt, it said.
The SACN said that people are also, in some instances, taking the procurement of services into their own hands, which also affects collections.
Across the major metros, municipal collections have declined from around 91% in 2015, to 86% in the latest financial year, with expectation that things won’t get much better in the years that lie ahead.
While the decline in collections has been trending for a number of years, the Covid-10 pandemic has exacerbated this, the group noted.
For example, Johannesburg suspended credit control measures during the lockdown, leading to an under-collection of revenue by R1.4 billion for the year to date in April.
“Covid-19 is likely to result in higher non-payment and thus rising debtors and lower cash balances,” the SACN said.