The revenue crunch facing municipalities, due to the financial constraints faced by residents and businesses in the national lockdown, could have dire implications for their ability to deliver basic services.
Ratings agency Moody’s Investors Services, which recently downgraded SA’s sovereign debt to junk, reported on Wednesday that while the scale and duration of the outbreak was uncertain it expected a temporary disruption in revenue collection in all SA municipalities. This was so as local government was not operating fully during the lockdown, which would weigh on their liquidity.
Municipalities have revenue-generating capacity and depend less on money provided by the state than other spheres of government. Big metropolitan municipalities have the largest revenue-generating capacity, which funds most of their budgets.
Moody’s said the lower collection rates would lead to a rise in bad debt provision and a decline in municipalities’ operating balances over the next one to two years.
“In addition, the SA economy is likely to go into further recession as a result of the coronavirus, and local governments will be affected by customers struggling to pay property rates and service charges as unemployment continues to rise,” its report said.
Moody’s said municipalities with strong liquidity profiles such as Cape Town and Nelson Mandela Bay would cope with a reduction of cash flow in the short term, while those with weak liquidity profiles such as Mangaung in the Free State would experience worse cash-flow problems than before.
Limit effect
The ratings agency said that municipalities might be forced to delay some capital and operating expenditure projects due to government restrictions, but this would relieve pressure on liquidity in the short term.
It was noted in the report that large metropolitan municipalities with good governance and budgetary practices could forecast and incorporate the potential effects of the pandemic into their fiscal 2021 operating and capital expenditure budgets, limiting the negative effect on liquidity.
The 2020/2021 financial year starts on July 1, by when the budgeting process should have been completed, unless the lockdown ended less than 30 days before that time.
Johannesburg, Africa’s wealthiest city and SA’s biggest-budget municipality, was initially projected to collect R3.5bn in revenue for April, but it is not close to meeting this target.
The city has said it will not cut services to defaulting customers during the lockdown, forgoing one of the ways it traditionally uses to get people to pay for services.
Jolidee Matongo, member of the mayoral committee for finance, said the rest of the month would show if revenue collection increased. But the city is concerned that the metro will not meet its targets. He said this would “affect the resources we have to enable us to deliver services”.
‘Considerable knock’
“But we also understand that some people may not be able to pay, so we have to look at a comprehensive response as a city to see how we will mitigate this,” Matongo said.
Ian Neilson, Cape Town’s finance MMC, said there has been a drop in revenue collection during the first half of April, but payment rates could not be assessed before month’s end. He said rates and service charges made up 72% of the city’s monthly income.
“Take this away for some months and the city ceases to be able to deliver its services. All local governments are in this position. Even though the city is perhaps stronger for its sound financial management over the years, it cannot afford to have months of no income from rates and services,” Neilson said.
The city was expected to spend more than R1bn extra on enhanced service delivery for vulnerable groups, the local health-care system, personal protective equipment and other services not funded by the government. Neilson said no emergency funds had been made available to Cape Town or any of the other metros.
Omogolo Taunyane-Mnguni, spokesperson for the City of Tshwane’s administrator, said collection levels had so far taken a “considerable knock” of about 25% during the lockdown.
This was expected to worsen due to financial constraints stemming from the lockdown, she said.
Taunyane-Mnguni said many residents had asked for their payment terms to be extended.
Due to the suspension of credit-control actions during the lockdown, the city was not in a position to divulge revenue targets as projections were severely affected by it, she said.
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