Municipalities cannot continue operating and providing services if their financial health concerns remain, the Auditor-General’s (AG’s) office says.

The AG’s office released its 2020/2021 municipal audit outcomes last week, which found only 41 municipalities in South Africa had received clean audits. Its findings were based on the financial statements of 230 municipalities and 18 municipal entities.

The AG’s report says municipalities “cannot operate and provide services if financial health concerns remain. Yet local government finances remain under severe pressure due to non-payment by municipal debtors, poor budgeting practices and ineffective financial management.”

The AG’s assessment of the financial health of 230 municipalities and 18 entities based on their financial statements showed “increasing indicators of a collapse” in local government finances and “continued deterioration over the term of the previous administration”.

“At 22 municipalities and one municipal entity, the financial statements were not reliable enough for us to analyse because of disclaimed or adverse audit findings,” it says.

The AG’s office says the financial position of 28% of South African municipalities is so dire that there is “significant doubt” on whether they will be able to continue operating as going concerns in the near future.

“This effectively means that such municipalities do not have enough revenue to cover their expenditure and that they owe more money than what they have,” reads the AG’s report.

In addition, many of the municipalities have been in these dire financial positions multiple times over the term of the previous administration, the report concludes.

Municipalities with ongoing concerns include:

• Gauteng: Sedibeng, Rand West City, Emfuleni, West Rand and City of Tshwane
• Limpopo: Mopani, Thabazimbi, Modimolle-Mookgophong, Musina and Ba-Phalaborwa
• Mpumalanga: Emalahleni, Lekwa, Msukaligwa, City of Mbombela, Dipaleseng, Thaba Chweu and Govan Mbeki
• North West: City of Matlosana, Mahikeng, Maquassi Hills, Tswaing, Mamusa, Naledi, Kgetlengrivier, Moses Kotane and Rustenburg
• Northern Cape: Dikgatlong, Magareng, Gamagara, Ga-Segonyana, Kamiesberg, Khai-Ma, Thembelihle, Ubuntu, Emthanjeni, Richtersveld and Siyathemba
• KwaZulu-Natal: Mpofana, Ulundi, uThukela, Ugu, Msunduzi, uMkhanyakude and Newcastle
• Eastern Cape: Amathole, King Sabata Dalindyebo, Kou Kamma, Makana, Raymond Mhlaba, Amahlati, Enoch Mgijima, Inxuba Yethemba and Dr Beyers Naudé
• Free State: Xhariep, Letsemeng, Mangaung, Tswelopele, Matjhabeng, Dihlabeng, Phumelela, Moqhaka, Ngwathe and Setsoto
• Western Cape: Cederberg

According to the AG, some of the municipalities have already been placed under administration or provincial intervention.

During the AG briefing last week to present the audit findings, its office pointed out that no municipalities in the Free State had received a clean audit, while 22 of the 41 municipalities in the Western Cape had received a clean audit.

Metros are ‘particularly concerning’

The AG’s report says the financial health of metros is “particularly concerning” as they serve the largest segment of the population and account for more than half of the local government expenditure budget.

The City of Tshwane, the City of Johannesburg and the City of Ekurhuleni in Gauteng, the City of Cape Town in the Western Cape and Nelson Mandela Bay in the Eastern Cape were all downgraded to below investment grade by 30 June 2021.

“The downgrades put pressure on some of the metros to raise funding for capital expenditure, and they had to use internal savings from operational budgets to fund shortfalls,” the AG says.

Most of the metros, the report warns, were put on review for further downgrades by the credit-rating agencies, which could plunge them “deeper into sub-investment territory if economic conditions worsen”.

The AG also says cash-strapped consumers are increasingly falling behind on municipal rates and taxes. In turn, credit-rating agencies are flagging increased concerns around the likelihood of metros being unable to meet their debt payments or source cash from capital markets to meet future obligations due to falling revenues.

“The debt of metros that is unlikely to be recovered in full ranged from 53% to 88%,” the report says.

Salga’s response

Responding to the report, the South African Local Government Association (Salga) said it painted a “gloomy picture” of the lack of accountability in municipal finance management. The agency called for a new approach to enforce accountability.

Although Salga says it is disappointed with the AG’s findings, it says it “welcomes the report as it provides some key lessons on what works, identifies areas of improvement, and those municipalities that require serious and urgent intervention”.

The “deteriorating quality of governance and accountability that is fuelled by lack of consequence management in municipalities” is a serious concern for Salga.

Salga says its national executive meeting in June had resolved to “urge all municipalities that received negative audit outcomes to place emphasis on improving their control environment, to implement their audit action plans with [the AG’s] recommendations and to do so with the requisite seriousness over the coming financial year”. DM