South Africa can forget about economic growth until municipalities change

Many municipalities are failing to meet the basic needs of their constituents, including providing adequate access to water, sanitation, housing, and electricity, says Londa Nxumalo, portfolio manager at Allan Gray.

Consequently, faith in the system has eroded, as reflected by the low voter turnout in the November 2021 local government elections, Nxumalo said.

Former finance minister Tito Mboweni, at a recent PSG annual conference, stressed that without fixing dysfunctional municipalities, dangerous roads, and reducing reliance on Eskom, South Africa can forget about meaningful economic growth.

His comments come as the demand for municipal services increases. According to the State of South African Cities Report, the country is experiencing rapid urbanisation, with over two-thirds (67%) of the population living in urban areas.

The report noted that by 2050, South Africa’s population is projected to grow by an additional 19-24 million people, most of whom will be living in cities and towns.

Between 2011 and 2019, there was a 39% increase in the number of households in the City of Joburg municipal area alone, with more than 20% being informal housing.

“Although the downward trend in municipal health has been well documented in the press, the sheer extent of the rot is still alarming: uncondoned, irregular, unauthorised, fruitless and wasteful expenditure amounted to a whopping R189 billion,” said Allan Gray.

Municipal financial distress

The auditor-general of South Africa minced no words in the latest report on local government audit outcomes. Only 28% of municipalities submitted quality financials for audit purposes, and just 11% received clean audits. The Free State and North West provinces 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 of which reinforces a culture of non-payment of municipal rates and service fees which, in turn, exacerbates 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 in prior years, but the respective mayors and councils have not addressed these. The lack of consequences further reinforces bad behaviour and misconduct. Ethical and accountable leadership is needed to turn these municipalities around,” said Allan Gray’s Nxumalo.

The fallout of failing municipalities does not only affect residents but creditors such as Eskom and small business owners, said Allan Gray. 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.

The amount of municipal debt owed to Eskom, and the debtor days outstanding of two of the large water utilities, are shown below. Municipalities make up 42% of Eskom’s revenue, and municipal arrears have ballooned to R35 billion.

This non-payment affects the regular taxpayer directly: Bailouts from the fiscus to Eskom will have amounted to R136.7 billion between 2020 and 2022.

What is the way forward?

Nxumalo said that for municipalities to see significant change, leadership from the top is needed to set the tone. She added that 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 being 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, Allan Gray said.

“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,” said Nxumalo.

Earlier this year, president Cyril Ramaphosa provided further details about the government’s planned District Development Model and how it will be implemented to improve the country’s municipalities.

He stressed that only 5% of municipalities are financially stable and that roughly 64 are dysfunctional due to poor governance, weak institutional capacity, poor financial management, corruption and political instability.

The District Development Model aims to improve coordination between national, provincial and local governments, and between government and its social partners, Ramaphosa said.

The model sets out a long-term strategic framework to guide investment and service delivery in specific districts or metros. Ramaphosa noted that they aim to forge innovative partnerships with communities, businesses and other stakeholders to improve and accelerate the implementation of key development projects.


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South Africa can forget about economic growth until municipalities change