Municipal review: 24 April
False economies and dodgy numbers
One of the challenges to understanding municipal finances is the official numbers can be so messy. We noted in last week’s post that Nelson Mandela Bay did not have any information on its conditional grants and eThekwini spent R1.3-billion on disaster management, seemingly unfunded by the Treasury.
Sometimes there is a good reason for metropolitan municipalities to underspend their conditional grants. There is always the potential for delays on large, complicated projects that involve the provincial government and require a sign-off from the National Treasury. Two of the eight metros spent over 90% of their grants - at least on paper - and another two spent more than 70%. Should 70% be the benchmark? It’s difficult to answer questions like these without knowing the context behind the numbers - and that context is not always clear.
All municipalities are required to submit monthly financial reports to the Treasury, which then makes this information available to the public in a quarterly format. Much of our analysis is based on these Section 71 reports, named for the eponymous section of the Municipal Finance Management Act that mandates them.
The Act, and the reports, are supposed to improve compliance and accountability. Every municipality, particularly the metros, is expected to report on their operating budget, capital budget, cash flow, debtors’ and creditors’ books in the same format. Treasury will dutifully and efficiently collate and share this information publicly, even if no information is returned or the financial statements are incomplete.
This has led to the normalisation of some very creative accounting, particularly with the treatment of the debtors’ books and the writing-off of bad debt. For over a decade, Johannesburg, Tshwane and dozens of other municipalities have maintained a fiction that they could simultaneously recover tens of billions of rands of old debt, forgive a couple of billion every quarter, but only allocate a few million in bad debt write-offs under operating expenditure.
As a consequence, it is difficult to trust the official revenue collection rates of many municipalities: is that really money in the bank, or is it money you hope to collect in the next three months and possibly write it off at a future date?
The other big problem with accepting the accounting sleight-of-hand quarter after quarter is that there is no early warning that comes through clearly in the official numbers. For years it was quietly accepted that the largest municipalities could undercollect their revenue, underspend on infrastructure, and still manage to pay their creditors. That all came crashing down when Johannesburg, through City Power, defaulted on its payments to Eskom in October 2023.
The metros’ creditors books seemed to be in much better order than their debtors’ books. From the 2016/17 financial year until the end of the 2018/19 financial year (30 June 2019), only two of the eight metros were chronically late in paying their creditors: more than 50% of Mangaung’s debt for bulk water was older than three months while eThekwini’s stale debt owing to trade creditors and for loan repayments was almost R900-million in 2016/17, rising to over a billion rand by 2018/19.
By 2019/20, Nelson Mandela Bay also exhibited difficulty in paying its creditors on time, with almost R720-million in debt older than three months owing to trade creditors. The creditors’ books for Buffalo City, Ekurhuleni and Cape Town have remained manageable over the last eight financial years - at least half the time Cape Town’s creditors appeared to owe the metro money, not the other way around.
Although Johannesburg’s creditors were consistently owed money many months in arrears, the metro’s debt never exceeded R400-million until the 2022/23 financial year, where its debt older than three months shot up to R670-million, rising to R820-million by 2023/24. Tshwane, who had maintained a clean creditors’ book until the end of 2021/22, suddenly owed almost R340-million in late payments by the end of 2022/23 which climbed to a staggering R2-billion by the end of 2023/24.
Johannesburg still did not owe any late payments for bulk electricity by the end of 2023/24, at least according to the numbers in its creditors’ book: all old debt is attributed to trade creditors and ‘other’ creditors. It strains credibility that the metro could default on its payments to Eskom in October 2023, suspend all payments by March 2024, but report in June 2024 that it owed nothing for bulk electricity payments.
As in the case of conditional grant spending, certain information was just not submitted to Treasury: Mangaung has no numbers for its creditors’ book for the 2017/18 financial year and Nelson Mandela Bay submitted no numbers for the 2022/23 financial year. At least the absence of numbers is a story of poor financial controls in itself; Johannesburg’s and Tshwane’s figures for the last two financial years must be taken on faith at this point.
The mainstream media would have offered a better warning system to analysts than the official numbers. By February 2022 it was clear that Tshwane was trying to improve its collection rate on outstanding electricity accounts through an aggressive disconnection campaign; Eskom had claimed the previous month that Tshwane’s payments had been irregular since at least July 2021.
National Treasury and the Auditor-General’s office will have to do more than periodically plead with local government to take its reporting duties more seriously. It is also difficult to see how a new funding model for local government can succeed if the extent of municipalities’ financial ill health continues to be obscured by the official numbers.