South African municipalities in turmoil

The National Treasury remains concerned about South Africa’s 257 municipalities due to persistent issues of accumulating customer and municipal debt, inadequate revenue collection, and underspending grant allocations.

The National Treasury released the local government revenue and expenditure report for the third quarter of the 2023/24 financial year.

This report covers local government performance against adjusted budgets for the third quarter of the municipal financial year ending 31 March 2024 and includes spending against conditional grant allocations for the same period.

Similar to the second quarter of the 2023/2024 financial year, this report highlighted major issues in municipal spending, with weak revenue collection, increasing municipal debts, and grant allocations not being spent.

In recent years, several experts have spoken out against municipalities misusing their funds.

Former President Kgalema Motlanthe previously warned that South Africa’s municipalities are heading for collapse, saying that 66 of them are totally dysfunctional and 163 are in distress.

Motlanthe, whose foundation has focused on issues with local governments since 2019, urged the national government to drive municipalities to increase their efficiency and capacity.

At the end of the third quarter of the 2023/24 financial year, municipalities’ aggregate spending was R411.4 billion (66.3%) of the total adjusted expenditure budget of R620.7 billion. Aggregated billing and other revenue was R452.8 billion (73.4%) of the R616.6 billion budget.

Capital expenditure was R38.1 billion (48.3%) of the adjusted capital budget of R79 billion.

The adjusted operating expenditure budget was R541.7 billion, of which R373.3 billion (68.9%) was spent.

Municipalities decreased their salaries and wages budget by R1 billion, from R154.5 billion to R153.5 billion. As of 31 March 2024, R108.5 billion (70.7%) of the adjusted salary budget was spent.

The Treasury has previously warned that grave underspending in this regard could have dire consequences on respective municipalities, especially in terms of councils fulfilling their service delivery mandates.

Municipal customer debt

The report also revealed that aggregate municipal consumer debts were R347.6 billion, compared to R338.2 billion reported in the second quarter of 2023/24.

A total of R8.3 billion (2.4%) has been written off as bad debt. The largest component of this debt relates to households and represents 73%, or R253.6 billion, compared to 72.7%, or R245.8 billion, in the second quarter.

Municipal debt increased by R2.4 billion to R106.7 billion as of 31 March 2024.

“Of concern is outstanding creditors for more than 30 days relating to bulk electricity and water, trade creditors and other creditors,” said the Treasury.

While municipalities, on average, have an adjustments budget of a 83% collection rate, aggregated actual collection performance against billed is an underachievement of 61.5%.

“The underperformance of actual collections against billed revenue holds a significant risk for the liquidity position of most municipalities as the planned expenditure is based on a higher performance level,” the National Treasury explained.

The Treasury has previously explained that revenue estimates are “seldom underpinned by realistic or realisable revenue assumptions, resulting in municipalities not being able to collect this revenue, which results in difficulties in cash flow”.

Others have also expressed concern about municipal debt.

“Writing off municipal debt is also a serious risk to the market and sets a negative precedent,” Citadel chief economist Maarten Ackerman warned following the 2023 Medium-Term Budget Policy Statement (MTBPS).

In this statement, the government announced plans to write off municipal debts to Eskom, which amounted to R58.5 billion at the time.

“The state of our municipal audits and service delivery has been deteriorating, and the grace now extended to our defaulting municipalities also sends the wrong message to other indebted state-owned enterprises,” Ackerman warned.

Underspending grants

Many municipalities are also underspending their infrastructure grants from the National Treasury despite the dilapidated nature of municipal infrastructure.

As of 31 March 2024, R42.4 billion, or 99.6%, had been transferred to municipalities against the adjusted direct conditional grant allocation of R42.5 billion.

National Transferring Officers (NTOs) reported an expenditure of 58.8% against the total adjusted allocation for direct conditional grants, while municipalities reported an expenditure of 46.8%.

Direct conditional grants allocated for the 2023/24 financial year against the infrastructure grants were adjusted to R39.6 billion from the original allocation of R41.4 billion.

This was predominantly due to the fiscal consolidation reductions across all direct infrastructure grants apart from the Municipal Disaster Recovery Grant, where R1.2 billion was added to fund the reconstruction and rehabilitation of municipal infrastructure damaged by the floods in February and March 2023.

Of the R39.6 billion allocated, 99.6% has been transferred to municipalities, and R23.6 billion (59.4%) was reported as expenditure against the revised total infrastructure allocation.

“Low expenditure on infrastructure grants is a source of concern because this slow performance may eventually lead to unspent conditional grants that have to revert to the National Revenue Fund (NRF),” the Treasury said.

“The surrendering of unspent conditional grants to the NRF has negative consequences for the communities that must receive the services linked to the infrastructure to be built.”

Municipal underspending has been a continuous cause for concern.

For example, in November 2023, Attorney and Director of the Public Service Accountability Monitor, Jay Kruuse, condemned the Makana Municipality’s 83% underspending of their Municipal Infrastructure Grant (MIG).

“Conditional grant funds are especially vital for ensuring priority service delivery issues are targeted as these funds are strictly ‘ring-fenced’,” he said.

“Such funds may not be utilised for purposes other than the criteria set out in the relevant conditional framework.”

“And, where grants are not spent by the end of the quarter of each financial year, the Municipal Finance Management Act dictates that these funds must be surrendered to the National Revenue Fund.”

He said that in Makana’s 2021/22 budget, the municipality explained that the MIG would be used to upgrade certain streets, refurbish wastewater treatment works, upgrade a gravity sewer, and upgrade sports facilities and street lights.

“However, with the bulk of the MIG funds now having to be returned, it’s clear that most of what was planned has not materialised,” he said.

“There is, therefore, no question that this underspending has had major and adverse impacts on progress towards addressing Makana’s rapidly deteriorating infrastructure.”