The latest Municipal Financial Sustainability Index (MFSI) from Ratings Afrika, based on the financial results for June 2016, reveals mixed results for the eight metropolitan municipalities in South Africa. The MFSI is a scoring model that evaluates the operating performance, liabilities management, budget practices and liquidity position of a municipality and scores these components out of 100.
The score achieved by Johannesburg is of concern. Johannesburg is the business and financial capital of South Africa, which places huge responsibility on the shoulders of its municipal administration. Coupled with a fast-growing population, the pressures increase rapidly. To continue with an adequate level of service delivery as well as expanding the municipal infrastructure, the city needs a strong financial underpin. Unfortunately the financial stability of Johannesburg has been declining rapidly and this will make it very difficult for the new administration to make any progress.
The financial stability score of 30 out of 100 achieved by Johannesburg in 2016 is seven points lower than that of 2015. This reflects a very weak financial stability and is the third-lowest of the metros in South Africa. The weak stability is caused by a number of factors.
Johannesburg’s operating performance is only moderate in spite of an improvement in 2016. Even though its operating deficit of R180 million (after interest payments and excluding capital grants received from government) is relatively small, it does not contribute to meaningful long-term capital formation. This means that Johannesburg will have to continue to heavily rely on borrowed money to finance infrastructure development.
Johannesburg’s capital spending of R9.7 billion in 2016 is currently the highest of all the metros at some R1 800 per capita per annum. However, this strategy might not be sustainable over the medium to long term. Johannesburg’s borrowings increased from R15.3 billion in 2014 to R18.4 billion in 2016, causing its debt burden to become the highest of all the metros, at almost 74% of operating revenue. This in turn is adversely affecting its operating performance since interest costs are almost R2 billion per annum. To maintain the current level of infrastructure spending, Johannesburg will have to become more efficient in its service delivery, which would generate larger surpluses that can then be used for capital investment.
Another factor that adversely affects Johannesburg’s financial stability is its weak liquidity. Its liquidity shortfall, the amount by which its current liabilities exceed its current assets, was R620 million in 2016. This was caused by a high level of capital spending but low revenue collection. The revenue collection rate of only 90% is inadequate for the operational and capital spending pressures that rest on the metro. At this level, the city is losing some R3.4 billion per year that could have been used for infrastructure development.
Another concern is its spending on maintenance, considered low compared with other metros. At less than 5% of its operating expenditure, it might be too low to maintain the quality of its assets at an adequate level, which could result in more service disruption in future.
Johannesburg is the city with the highest average household income in the country. Its rates and tariffs seem to be affordable to the average resident but it might become a concern for households at the lower end of the income scale.
With careful budgetary planning, financial discipline and improved revenue collections, the current administration of Johannesburg should be able to strengthen its financial sustainability and enable the city to continue with its role as the business capital of Africa.
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