Fiscal challenges facing municipalities ahead of Local Government Elections

JULY 25, 2016

Despite total municipal income reaching nearly R313 billion in 2015, local authorities are already under pressure to find alternative income sources as the public goes to the ballots on 3 August, 2016.

At the same time, bad debts have proved a persistent fiscal problem for municipalities, despite increasing efforts to address billing systems and stricter enforcement of payments.

This is according to Eyal Shevel, Head of Corporate and Local Authority Ratings at Global Credit Ratings (GCR), who notes the impact that several economic factors have had on growth in South Africa.

“Overall, the economy finds itself in a vicious circle in which a mix of internal and external factors have converged to undermine key productive sectors of the economy, resulting in currency weakness and inflationary pressures. In an environment where the consumer is already under significant financial strain due to an over indebtedness and the rising cost of living, these pressures will only serve to hamstring consumer and key economic sectors further, at a time where renewed growth is necessary to reverse the fortunes of the South African economy,” Shevel says.

He says that in terms of financial management, the municipal sector has made significant strides in recent years, with income from all sources increasing.

Over the period of 2009 to 2015, total municipal income more than doubled to reach nearly R313 billion in 2015, including transfers which were recognised as capital. However, some distinction needs to be made between the larger municipalities and the smaller rural municipalities.

In this regard, growth has been reported widely across the Metros, the top 19 cities, but aside from transfers from the National Treasury, income has been slower in the smaller municipalities.

“In light of the growing fiscal constraint on the National Government, some priority is likely to be given to the smaller municipalities, who have less means of raising cash at their disposal. In contrast the Treasury is likely to compel the larger municipalities to find new sources of funding as income decreases or remains stagnant. While private sector institutions have demonstrated a strong willingness to lend to the larger Metros, the National Treasury and other private sector organisations are exploring ways to open up debt markets to secondary 19 municipalities,” says Shevel.

Bad debts have been a persistent problem for municipalities and the high incidence of bad debts has been a significant impediment to ensuring the municipal sector generates predictable cash flows.

Within the Metros, improved debtors management has been attributable to a mix of more accurate billing systems, educational programmes and stricter enforcement of payments - as cutting electricity on defaulting customers and employing private sector collection agents to pursue long-outstanding debts.

In the smaller municipalities outstanding debtors pose even greater cash flow challenges, although given the lack of management skills, they are often not accurately reported.

He says that another expenditure issue that needs attention is the calculation of non-cash expenses such as depreciations including depreciation, which hase been a source of contention in municipalities.

“Deprecation needs to be correctly reported, otherwise it is likely that the conditional grant income from National Treasury will not be sufficient to meet the true replacement costs of the infrastructure for which it is intended at a local level,” he says.

Shevel concludes, “In terms of financial management, the municipal sector has made significant strides in recent years. Income from all sources has been increasing. However, municipalities are going to have to work hard on finding alternative revenue sources as National Treasury and consumers alike are facing several economic pressures.”