Why allegations of Johannesburg’s insolvency are bankrupt
Last week, the Democratic Alliance (DA) alleged that the city of Johannesburg was technically insolvent. Even in the inevitably heated run-up to the elections, the claim was a dramatic one, not least because Johannesburg really did face financial bankruptcy about 12 years ago.
Most local government veterans will recall the disastrous state of the city’s finances in the late 1990s, when it was unable to meet its bills for bulk utilities, requiring provincial intervention and a comprehensive restructuring of the city’s organisational and managerial systems. But since that troubled time and working hard to reach ambitious targets, the city has been rated as one of the country’s top municipalities, by analysts and rating agencies alike.
The DA’s allegations of imminent financial collapse rested on a rather technical ratio of assets against liabilities (at a ratio of 0,71:1). Current or liquidity ratios reflect an organisation’s ability to pay back short-term liabilities with short-term assets. The higher the ratio, the more capable the organisation is of paying its obligations and hence, a ratio less than 1 suggests that if all obligations were due at the same time, an organisation would have difficulty paying its debts. Although potentially a serious concern, bankruptcy is not inevitable, and a high liquidity ratio is not necessarily inherently good or bad either. The local government norm (as defined by the auditor-general) is considered low in the text-book scenario (1,2:1), but compared with modern financial management models, ratios less than 1 can represent a defensible and desirable cash-flow management practice, where payment to creditors is delayed longer than payment by debtors (as is the case in Johannesburg). For residents, this means that cash is released sooner into the city’s budget: an advantageous outcome given that the city’s solvency ratio (total assets to total liabilities) is a solid 1,91:1.
In fact, few auditors would look at any ratio in isolation. So what then should concern residents who want to be assured of their city’s solvency? The first key issue is audit opinion. The auditor-general awarded Johannesburg an unqualified audit for the year ending in June last year, following one the previous financial year, suggesting accuracy in the city’s reporting and no areas of especial concern. Second, other key indicators should be considered. These include revenue and expenditure growth, which Johannesburg augmented by 14% and 19%, respectively. With capital expenditure growing by 17% to R4,1bn, accelerated delivery of some large and noticeable projects should be on the cards (demonstrated, for instance, by the Bus Rapid Transit system that is under construction). With these capital projects and an increase in cash and investment balances (to R4,2bn), the city’s finances, far from perilous, look downright healthy.
In terms of a balanced budget, the city’s in-year quarterly report suggests there is little cause for alarm. For the year to date (first and second quarters of 2008-09) actual operating expenditure at just less than R10bn is within the range of operating revenue at R9,7bn.
What else then should concern residents? The DA suggested that financial trouble was afoot due to the introduction of a new billing system, which reached only about 28% of sectional title residents. This is a serious concern but the city has responded that it achieved an annualised collection rate of 91% from March last year to February and that there has been engagement with sectional title owners, who represent less than 7% of its revenue base.
Given the city’s hard work to rebuild its reputation after its financial collapse 12 years ago, the allegation of insolvency is unfair without this context and record of success and, coming from a councillor of the city itself, somewhat irresponsible. But the slow response by the city is also cause for concern; no matter how spurious the allegations, it is very surprising that the spin-doctoring machine failed to swing into action immediately to publicly address what can only be considered a rather raw nerve for Johannesburg, even if it required a little elaboration of accounting principles.
Perhaps the issue and challenge then is to meaningfully translate accounting ratios and principles into a language with which all stakeholders can engage.