Local governments are living beyond their means and are due to spend much more than their budgeted revenue this year. The National Treasury says this is the first sign that they are experiencing financial challenges.
Finance minister Enoch Godongwana said in July more than 150 of the 257 municipalities nationally were bankrupt or insolvent with unfunded budgets the primary catalyst for financial distress. The situation was compounded, he added, by widespread political dysfunction.
Many municipalities are unable to pay for electricity and bulk water supply with Eskom being owed more than R50bn. They also find it difficult to collect the revenue due to them for services rendered.
According to information on municipal operating and capital budgets published by the Treasury on Monday, the total aggregated budgeted revenue for 2022/2023 will be R529.7bn while total municipal expenditure for the year will be R557.4bn.
“Municipalities will realise operating deficits on the operating budgets in the 2022/2023 financial year as the total operating expenditure increases at a higher rate than the revenue projections. This is an indication that municipalities are living beyond their means and a first sign of financial challenges. However, the situation is projected to improve in the outer years of the 2022/2023 medium-term revenue and expenditure framework as operating surpluses will be realised,” the Treasury said.
“The main cost drivers are employee-related costs and materials and bulk purchases representing 28.9% and 32.7% of the operating expenditure, respectively. Municipalities are experiencing a two-fold impact of the high electricity and water tariff increases; lower sales levels owing to changes in consumption patterns and increased bad debt as a result of affordability pressures.”
The data on the municipal budgets give an overview of expected revenue and expenditure trends in local government over the next three years.
The aggregated budgeted revenue for 2022/2023 is R529.7bn compared with total municipal expenditure of R557.4bn. In 2023/2024 the figures are R558.1bn and R582.1bn respectively and in 2024/25 R593.9bn and R614.5bn.
Municipalities will accumulate an operating deficit of R27.7bn in 2022/2023, R24bn in 2023/2024 and R20.5bn in 2024/2025. However, after taking into account borrowing and internally generated revenue, a net deficit of R269.6m is expected in the 2022/2023 financial year, which improves to a surplus of R3.5bn in 2023/2024 and R7.3bn in 2024/2025.
But the Treasury cautions that “it is a common practice amongst most municipalities when preparing their annual budgets to overstate or inflate revenue projections, either to reflect a surplus or on the surface to show that excess expenditure requirements are adequately covered by revenues to be collected. Hence, the revenue estimates are seldom underpinned by realistic or realisable revenue assumptions, resulting in municipalities not being able to collect this revenue and therefore finding themselves in cash flow difficulties.”
Despite the parlous state of their infrastructure whether it be roads, water reticulation or treatment plants, municipalities often do not spend their capital budgets.
In his comments earlier this year, Godongwana noted that several municipalities had underbudgeted for infrastructure maintenance, resulting in potholes in roads, burst sewer pipes, and an overall decline in service delivery.
The information provided by the Treasury shows that municipal capital expenditure increased 1% to R69.7bn in 2022/2023 compared to the original budget for the 2021/2022 financial year. Capital expenditure in aggregate represents 12.5% in 2022/2023, 11.7% in 2023/2024 and 11.4% in 2024/2025 of the overall budget of municipalities.
Trading services (electricity, water, wastewater management and waste management) represent 49.7% of the total capital expenditure of R69.7bn in 2022/2023 and slightly decrease to 49.1% by 2024/2025.
The 2022/2023 capital expenditure budget reflects a R43.8bn investment in new infrastructure, which is 62.8% of the total aggregated capital budget. Investment in the renewal and upgrading of existing assets is much lower at R10.9bn (15.6%) and R15.1bn (21.6%) of the total capital budget respectively.
Municipalities allocated R27.7bn to repairs and maintenance of assets in 2022/2023. This will increase to R29.2bn in 2023/2024 and to R30.9bn in 2024/2025.
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