The most sustainable municipalities in South Africa – as local government crumbles

 ·11 Apr 2024

The Midvaal Municipality in Gauteng and Mossel Bay Municipality in the Western Cape have been identified as the most financially sustainable municipalities in South Africa by governance rating agency, Ratings Afrika.

This was revealed in its recently published Municipal Financial Sustainability Index (MFSI), which gauges the financial sustainability of the 104 largest local municipalities plus 8 metros in South Africa. A two-page report is published on each.

The agency gives each of the 112 municipalities a score out of 100, based on an analysis of six components:

  • Operating performance;
  • Liquidity management;
  • Debt governance;
  • Budget position;
  • Affordability;
  • Infrastructure development.

Municipal financial sustainability is, according to Ratings Afrika, “the financial ability of a municipality to deliver services, develop and maintain the infrastructure required by its residents without unplanned increases in rates and tariffs or a reduction in the level of services [while having] the capacity to absorb financial shocks.”

While numerous municipalities across the country performed relatively well, particularly in the Western Cape, the agency said that this almost pales in comparison to the poor financial sustainability of many others.

“The results of the latest MFSI once again confirm the ruination of the South African municipalities under the leadership of the current elected councillors and their appointed executive management teams,” said Ratings Afrika.

Provincial averages

Looking at the index score averages, the only province to receive an average MFSI score of over 50 was the Western Cape, at 53.

The Free State and Mpumalanga are the provinces with the lowest performance, each scoring an average of 23 in 2023.

The Free State, however, has shown improvement, increasing its score from 19 in 2019 to 23 in 2023. In contrast, Mpumalanga’s performance has declined, dropping from a score of 29 in 2019 to 23 in 2023.

Notable progress has been made in the North West province, which saw the greatest improvement, with its score rising by five points from 23 to 28.

Furthermore, the Eastern Cape and Limpopo have shown progress, each improving by two points, “indicating that it is possible to slowly turn the situation around,” said Ratings Afrika.

Looking at the financial results of the 112 municipalities, the aggregate operating deficits amount to over R27 billion, down from R33 billion the year before.

“The effect of these operating deficits is that the municipalities do not generate sufficient funds from their operations to fund the services they are supposed to deliver… [leading to] very poor service delivery,” and underinvestment in critical things like infrastructure, said Ratings Afrika.

These losses have, over time, culminated in huge working capital (liquidity) shortfalls for most of them, with the aggregate cash or liquidity shortfall sitting at R84.5 billion for 2023, up R20 billion from R65 billion in 2022.

Table: Ratings Afrika.

The practical reality of the liquidity shortfalls is that these municipalities do not have sufficient funds available to pay service providers on time.

Performance of individual municipalities

“In spite of the overall disturbing picture painted by the recent analyses, there remain municipalities
that are performing well, demonstrating that with a commitment to sound financial management and
dedication, it is possible to maintain high levels of financial sustainability and service delivery,” said the agency.

As previously mentioned, Midvaal and Mossel Bay were the most financially sustainable municipalities for 2023, each with a score of 74.

Only three other local municipalities achieved a score of 70 or more on the Index, including Saldanha Bay (73), Swellendam (72) and Swartland (Malmesbury) (71) – all in the Western Cape.

The City of “Cape Town is the only metro that is still considered to be highly sustainable financially in 2023 with a score of 70,” said Ratings Afrika.

Table: Ratings Afrika

The municipalities “normally have well-entrenched financial policies and their budgets are based on sound long-term financial strategies [and adhering] to good budgetary practices, strict financial control and good revenue collection even through tough economic conditions,” said Ratings Afrika.

The biggest improvement out of all the metros was seen in Nelson Mandela Bay, with a score of 56 (up from 50 in 2022).

Conversely, the lowest scoring local municipality was Amahlathi in the Eastern Cape (7), while the lowest scoring metro was Mangaung in the Free State (23).

Looking at Mangaung specifically, the metro realised an operating deficit of R811 million and its liquidity shortfall is R936 million.

The agency points out that all the municipalities with the poorest performance share a significant characteristic: their financial liquidity is notably poor, noting that there is a mismatch between their operating income and expenses, leading to notably large operating shortfalls.

Additionally, the condition of their infrastructure is on the decline due to inadequate investment in maintenance and repairs, posing a risk to the sustainability and quality of services in the long term.

Table: Ratings Afrika

Going forward

“Unless there is a concerted effort from the municipalities themselves, the provinces and national government to strengthen their governance and financial management, this very bad situation will continue,” said Ratings Afrika.

“Efficient, well-run municipalities that provide high-quality services to its residents and support local businesses, are the underpin to economic growth and prosperity of the country,” it added.

To improve financial sustainability, the group said that municipalities need strengthen their governance and financial management, with the ultimate goal of generating operating surpluses and positive working capital balances.

For the former, this provides the funds for the delivery of services, investment in infrastructure, and to build reserves.

For the latter, this is where municipalities are required to pay service providers Eskom and water boards, invest in infrastructure, and build reserves.

Read: South Africa’s 32 most ‘dysfunctional’ municipalities

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