Covid-19

UNSTABLE MOUNTAIN

Cape Town’s looming financial crunch as Covid-19 throttles income streams

Cape Town’s looming financial crunch as Covid-19 throttles income streams
Cape Town's deputy mayor Ian Neilson says the city is a billion rand down in revenue due to the Covid-19 lockdown. (Photo: Flickr / Duncam Rawlinson)

The City of Cape Town, like other metros and towns across South Africa, is walking a budgetary tightrope as the Covid-19 pandemic and lockdown eats into its revenue streams. It’s a delicate book-balancing act.

The Covid-19 lockdown and the consequent economic tsunami that has engulfed swathes of the rate- and service-payers of the City of Cape Town has had a massive domino effect on the metro council’s finances: about R900-million is outstanding in April’s rates and service payments alone. A third of the revenue base is missing from the City’s fiscus.

But the official opposition argues the City has plenty of money to plug such holes – with many new ones expected in the months ahead. The ANC says the DA City government is trying to prove it was running a tight fiscal ship when it should be providing rates relief and drawing down its reserves. It was holding its fiscal head up high while rate- and service-payers were drowning. 

Cape Town’s deputy mayor, Ian Neilson, puts it bluntly. “The drop in payments is basically a billion [rand],” he said. 

The Mother City is already providing relief measures to the poor and people who are unemployed, including those made redundant by the lockdown and struggling businesses. On top of that, the draft budget, which must be passed by council ahead of the new financial year which starts in July, has proposed rates increases of just 4% – in line with recently revised inflation figures.

Other service increases are between just 3.5% (refuse collection) and 4.8% (electricity). These “are the lowest of any [metropolitan] municipality,” says Neilson, who became the DA deputy mayor in 2009. “The draft budget proposes… increases… in line with or below the inflation rate.” 

The City’s budget woes have been exacerbated by the closure of the City’s banking halls by the Covid-19 lockdown and deliveries of City invoices stopped because the Post Office has not been operating.

Why can’t the charges be even lower than those proposed? Neilson, who is the mayoral committee member in charge of City finances, says very low increases or zero increases would be unsustainable and would result in big jumps in later years because the City runs on a cost-recovery basis – and he emphasises that the City does not make a profit from the rates and services charged. However, the City was considering no rates for not-for-profit organisations that owned their properties. No rates are paid on properties worth R300,000 or less in any case.

“Rates and service charges comprise an amount equal to 72% of the City’s income per month. Take this away from some months and the City ceases to be able to deliver its services.” 

The proposed budget for 2020/21 is R53-billion. Neilson reported that in March, R2.9-billion was raised by rates and utilities. This was down to about R2-billion in April – when the national lockdown affected the entire month.

ANC councillor and leader of the opposition on the council, Xolani Sotashe, says rates relief should be urgently sought. A special dispensation should be required to provide such a relief for ratepayers. The City should approach Cogta or National Treasury for this dispensation. The public participation on the draft budget for next year has been completed, but he feared that ratepayers’ concerns about the impact of Covid-19 on their households would not be heard.

Sotashe says the City is well-heeled. It “over-recovered” about R1-billion in the past financial year. This, he believed, was from over-valuations of properties as well as incorrect billing. For example, former minister Tina Joemat-Petersson received a R200,000 bill on her property. He himself got a R10,000 bill for rates and services on his Strand property, but this was subsequently corrected.

There had been a protest in Khayelitsha last August over services bills, he said. This “over-recovery” money could now subsidise rates as well as Covid-19 costs. He expected a proportional share of the national monies for Covid-19 – about R20-billion of the R500-billion national package – would go to Cape Town. However, insiders at the City say they have “no clue” whatsoever whether Cape Town would indeed get any of this money. It is thought not, because the national government would prefer to send money where it is most needed.

In any case, Neilson said, his administration had received communications from National Treasury “saying that local authorities must not give rates holidays”. He said: “Mr Sotashe is at odds with the national ANC government.”

If he were mayor, what would Sotashe do about the calls for a rates cut or a zero increase? Sotashe said national government had advised municipalities “to do adjustments” to their budgets. He said since the amalgamation of the various municipalities in 2000 – when he became a city councillor – into the mega-city administration of Cape Town, the City had been managing its finances well.

“It has built up billions of rands in reserves… it is not a question of running short of money. We need to meet the residents halfway. Residents could not afford these exorbitant rates.” 

Neilson, however, says Covid-19 costs have already reached about R1-billion, roughly the same amount that hasn’t come into the coffers. This has been spent on medical equipment, aiding clinics and providing temporary housing for the homeless – including the controversial Strandfontein camp. The city has been providing about 4,000 meals a day to the previously homeless.

While Strandfontein is now being scaled down, it had been set up on the instruction of national government. Neilson said this particular relocation spot had come under a hammering from the Human Rights Commission, rather unfairly, he believed.

Sotashe says Johannesburg – now under ANC rule – and Buffalo City in the Eastern Cape, also under ANC rule, had told their residents that if they could not afford to pay rates and utilities, there would be “leniency”. Those who can afford to pay must, however, insisted Sotashe.

Neilson says that Cape Town is raising rates and services at the lowest amounts in the country, certainly for any metropolitan city. In any case, the City administration had announced in April that businesses hit hard by the lockdown could get rates relief. For example, guesthouses and certain bed and breakfast properties are classified as business properties and are thus liable for higher municipal rates than ordinary residential properties.

Owing to the impact of the National State of Disaster – and the lockdown – the City recognised the hospitality industry was suffering from a loss of business. These establishments could apply to become normal residential properties, with lower rates. Owners of commercial properties who have fallen into arrears on their rates could apply to the City for payment arrangement plans “to pay off rates over an agreed number of months”. Neilson emphasised that “no interest” would be charged.

Sotashe argues that a new rates general evaluation should be held. The last general evaluation of the one million households in Cape Town which are rateable was pegged in July 2018, when properties were at a historic high – some would say “a bubble”. Sotashe says there were all sorts of discrepancies relating to rates imposed. He called for a special dispensation to hold another valuation.

Neilson said this wasn’t really practicable. All the national finance minister could do was to extend the period, “but we would seek to bring it forward”. General valuations were of little concern for the national minister. In any case, Cape Town – like all SA municipalities – was on the brink of a new financial year starting July 1. The City was set to complete its next general valuation of property in mid-2021, which coincides with general municipal elections. Neilson doubted this could be brought forward because during the lockdown and the months ahead, very few properties would be sold – making it difficult to do a proper general valuation in 2020.

As the City gears up for a budget debate – the first virtual city council sitting in general assembly – within the month, the parties are ready for a fight over zero-rating for poorer citizens and businesses in distress. The ANC will be proposing using reserves, but the City argues there is limited scope for this. For example, the R1-billion green bond issued in July 2017 – a first for Cape Town – is earmarked for green projects like electric bus procurement, energy efficiency in buildings, water management initiatives such as water meter installations and replacements, pressure management and reservoir upgrades and sewerage effluent treatment. Such funding can’t be used to subsidise rates or service provision. However, the R1-billion “over-recovery”, as he dubbed it, in the last year will plug a recent fiscal gap or two. 

Neilson said Cape Town did have strong reserves built over a long period. It had R20-billion in cash reserves. However, this was not money that could be liberally spent. A substantial portion, for example, was invested to pay bonds off when they matured. There were also cash-backed insurance funds. The capital replacement reserve “has to be cashed back”. In effect, some of the money is used for internal funding for the existing budget in the form of cash.

In the context of the City’s R3.5-billion a month in turnover, “We are reviewing the internal cash allocation of R5.7-billion to the capital spend of the new budget. We will be shifting some of that to support the R4-billion impact of Covid-19 on the budget and we will be proposing taking up loans to cover that portion of the capital budget.”

So, while the City has a cushion, it is limited in its use. 

“We are not disputing the fact that the City has a strong balance sheet… but the numbers need to be correctly understood before one can decide what is available for new purposes.” DM

Donwald Pressly is a veteran political economy journalist based in Cape Town.

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"Information pertaining to Covid-19, vaccines, how to control the spread of the virus and potential treatments is ever-changing. Under the South African Disaster Management Act Regulation 11(5)(c) it is prohibited to publish information through any medium with the intention to deceive people on government measures to address COVID-19. We are therefore disabling the comment section on this article in order to protect both the commenting member and ourselves from potential liability. Should you have additional information that you think we should know, please email [email protected]"

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