On Wednesday, 24 May 2023, Ratings Afrika released the MFSI™ report, which evaluates the financial performance of the 104 largest local municipalities and eight metros in South Africa. The analysis is based on the financial year ending in June 2022. The MFSI™ assesses six financial components, including operating performance, liquidity management, debt governance, budget practices, affordability, and infrastructure development, scoring each component out of 100.
Ratings Afrika defines municipal financial sustainability as the ability of a municipality to deliver services, develop and maintain infrastructure, and handle financial shocks without relying on external assistance.
According to Ratings Afrika, the latest MFSI™ results once again highlight the decline of South African municipalities, excluding the majority of Western Cape municipalities and Midvaal in Gauteng.
Since 2011, Ratings Afrika has been warning about this alarming trend. The agency emphasized that poor financial management and governance have led to deficits and liquidity shortfalls in most municipalities, resulting in a breakdown of service delivery and infrastructure deterioration.
Furthermore, Ratings Afrika called for the government to recognize the crucial role of well-run municipalities in supporting economic growth and prosperity. The agency emphasized that efficient municipalities providing high-quality services are essential for sustainable development.
The financial sustainability of municipalities relies on generating operating surpluses and maintaining positive working capital. However, due to mismanagement and governance issues, the majority of South African municipalities operate at deficits.
For the 2022 municipal financial year, the aggregate operating deficits of the 112 municipalities included in the index amounted to R33.7 billion, a significant increase from R23.1 billion in 2021. These deficits hinder municipalities from funding services and infrastructure development, leading to working capital shortfalls.
Ratings Afrika highlighted that the liquidity shortfalls prevent municipalities from paying service providers, including Eskom and water utilities, within the required timeframe. This lack of funds severely affects service delivery and may contribute to political unrest.
The agency also noted the low average revenue collection rate of only 82.7%, with the Western Cape municipalities demonstrating the highest collection rate at 94.9%. These cash shortfalls are expected to worsen each year, as municipalities continue to realize losses and economic growth remains sluggish.
Ratings Afrika proposed that the government should provide a bailout of R65 billion to prevent a total collapse of municipalities and meet their financial obligations. However, this solution would burden taxpayers who are already under financial strain.
The report highlighted both the best-performing and lowest-scoring municipalities across provinces based on their financial stability. The best performers included Senqu (Lady Grey), Metsimaholo (Sasolburg), Midvaal (Meyerton), KwaDukuza (Stanger/Ballito), Lepelle Nkumpi, Steve Tshwete (Middelburg), Ga-Segonyana (Kuruman), JB Marks (Potchefstroom), and Saldanha Bay.
On the other hand, the municipalities with the lowest scores, indicating poor financial stability, were Enoch Mgijima (Queenstown), Matjhabeng (Welkom), Rand West City, Newcastle, Mogalakwena (Potgietersrus), Lekwa (Standerton), Emthanjeni (De Aar), Naledi (Vryburg), and Beaufort West.
The report highlighted that municipalities with low scores face liquidity challenges, operating deficits, and infrastructure deterioration, putting their ability to deliver services at risk.
The situation outlined by Ratings Afrika raises concerns about the impact on service delivery and calls for urgent actions to address the financial sustainability of municipalities. Share your thoughts on the matter in the comment section below.