South Africa’s richest city is heading for financial disaster

The City of Johannesburg is in a financial death spiral as it consistently posts a material deficit that it is not permitted to have. 

This deficit is hidden by the city in how it presents its budget, chair of Social Security Systems Administration and Management Studies at the University of the Witwatersrand, Alex van den Heever said. 

The problem is going to be exacerbated in the coming years by a R10.3 billion wage agreement that the city has no way of funding. 

Van den Heever explained to Newzroom Afrika that the deficit is structural, with the city being unable to collect sufficient revenue to fund its spending plans. 

The most recent draft budget tabled by Finance MMC Loyiso Masuku revealed significant write-offs resulting in a material loss of R9.5 billion. 

“The write-offs a key concern because the city wants to get them off the balance sheet. What it means is that they are irrecoverable revenue,” Van den Heever said. 

“Now, they have reached a point where the city is saying they cannot recover it. So, it makes some aspects of their numbers look okay.”

While it makes some parts of the city’s financials look sustainable, it masks an underlying threat to its status as a going concern. 

“The problem is they have a current expenditure plan that has to be covered by current revenue. This is something they cannot do,” Van den Heever said. 

“This means that they incur a deficit, a structural deficit, every year that they are not permitted to have, as it is not budgeted for.” 

Van den Heever pointed to the national government as an example of what a public entity should do. The National Treasury, when there is a deficit, covers it through borrowing money. 

When the Treasury does this, it budgets for that borrowing on its books and ensures there is a plan to pay back that debt at some future time. 

“That is the national government’s prerogative, but not a municipality’s. A municipality must balance their budget,” Van den Heever said. 

“The City of Cape Town balances its budget. The City of Johannesburg can’t, structurally. Its numbers appear not to make sense.” 

Salaries over infrastructure

Van den Heever expects the financial problems the city faces to only get worse in the coming years, with an unfunded wage deal and deteriorating infrastructure. 

The city has unveiled an R10.3 billion wage deal with municipal workers for the next two years to resolve outstanding salary disparities. 

This wage deal has been signed without the city having any funding to pay the R10.3 billion to municipal workers, leaving it to be funded through debt or tariff increases in the future. 

“There should be consequences for this because it is essentially illegal and it is unlawful for the city to incur expenditure without actually having the funding for it,” Van den Heever said. 

“This is exactly what is happening in this case. The Finance Minister has pointed out that this is unfunded and has been exposed by opposition parties.” 

Van den Heever also said that the agreement has little to no link with service delivery or municipal performance, with it appearing to be a political payoff. 

“There is a real question whether this is for the workers to provide support for an election campaign or to improve service delivery. It is not clear,” he said. 

“It is very concerning because it shows there is no interest whatsoever in proper financial governance in the city.” 

The wage deal is coupled with declining expenditure on maintaining or upgrading infrastructure to deliver services. 

Currently, the city estimates that it has a R200 billion infrastructure backlog, with current spending unable to address this need. 

“It is worthwhile to note that the City of Cape Town does not have a backlog when it comes to infrastructure maintenance. All of its capital budget goes towards new infrastructure,” Van den Heever said. 

“In the City of Johannesburg, its capital budget goes towards patching up the failing infrastructure that has had decades of no investment and maintenance.”