Tshwane false alarm still a timely wake-up for municipalities

Many were shocked when the typically stable City of Tshwane announced it had to renegotiate payment terms with two of its major creditors — Rand Water (owed R64m) and Eskom (R495m). The city blamed the knock-on effects from the economic downturn on defaulting customers. The Gauteng secretary of the African National Congress voiced concern that the province’s municipalities were buckling under the pressure of the recession.

 

 

 

 

However, recently published data from the National Treasury on the preliminary results for the fourth quarter of the year ending June 30 suggest that Tshwane’s financial position remains stable. So is the concern misplaced?

 

 

 

 

Tshwane’s good standing is based on a track record of solid expenditure and performance. While the immediate cause of the crisis was attributed to the closure of short-term credit lines during the year-end period, it would be incorrect to assume anything other than lack of foresight for the mess, especially given the city’s solid structural footing.

 

 

 

 

The local government budget statements released timeously by the Treasury last week are highly significant, not only for Tshwane, but as a snapshot of local government, and they couldn’t have come at a better time, especially given the very negative sentiments towards local government in the wake of widespread protests.

 

 

 

 

The results suggest that, on aggregate, spending and revenue collection are on track — by June (the end of the 2008-09 financial year), municipalities had, on aggregate, spent just more than 90% (R165bn) of their budgets, and had collected, on aggregate, 92,5% (R182,4bn) of revenue budgets, although areas of strain in revenue collection were evident in large metros.

 

 

 

 

On aggregate, 182 municipalities underspent on their budgets (against overspending by 35 ), suggesting that capacity remains a greater problem than financial means. But consumer debts (a hindrance to ensuring financial means) remain a headache; amounting to R50,4bn as at June 30 (unaudited figures), with metros accounting for R29,4bn of this debt — suggesting that the problem of revenue collection and potential overspending (as incorrectly attributed to Tshwane) may become more prevalent.

 

 

 

 

So the diagnosis, if a little premature, may have been correct, but for the wrong patient. In the absence of an apparent financial crisis, the well-capacitated Tshwane lacked the foresight to match its capital spending programme to what its revenue base can sustain, suggesting that financial planning in local government remains a one-dimensional process that fails to take into account longer-term financial sustainability considerations and macroeconomic conditions.

 

 

 

 

What is also of concern is that consumer defaults are already evident in other municipalities . The latest gross domestic product data suggest consumers are in poor shape and there is no doubt the effects of the recession will feed into the revenue streams of municipalities.

 

 

 

 

For local government, the crippling effects of the downturn on consumers translate into lower revenue, and this will not affect only the typically larger, rate-dependent municipalities, such as Tshwane, which need to collect rates and utility fees from a contracting consumer base. It will also have a choking effect on intergovernmental transfers, typically the mainstay of smaller municipalities, as medium-term demands on the strained fiscus will become even more contested.

 

 

For municipalities, debt collection strategies will need to be both pragmatic and, where necessary, aggressive to ensure their place in the queue alongside other creditors. On the back of the expectations placed on the Zuma administration to address the needs of the poor, this will mean a fundamental mismatch between dwindling revenue sources and greater expenditure expectations and, quite probably, sustained service delivery protests. While Tshwane may not be afflicted with a serious financial crisis, local government is in for a rough ride.