The section 154 intervention, aimed at supporting and strengthening the functioning of the distressed eThekwini municipality, has had a negative effect on the city’s creditworthiness with the credit rating outlook revised from stable to negative.
The review, conducted by the Global Credit Rating (GCR) agency in July, reflects the financial constraints amid subdued income growth, increasing expenditures and relatively weak collection rates. GCR is an affiliate of Moody’s Investors Service
This means that the city’s ability to pay back its loans has been weakened and the elevated risk will also contribute to the higher cost of borrowing for the cash-strapped metro.
eThekwini is the third largest metro in SA behind Johannesburg and Cape Town and contributes 59.88%, or R468bn, to the provincial economy.
The section 154 intervention, which will be in operation until July 2025, is set to address various challenges faced by the municipality including restoring public and investor confidence, building a clean and effective government and addressing noncompliance with terms and conditions, including poor spending on allocated grants for various projects.
Former city manager Michael Sutcliffe and former director-general in the presidency Cassius Lubisi will head the intervention team which was appointed by co-operative governance and traditional affairs (Cogta) MEC Thulasizwe Buthelezi in June.
“We are the second best run metro in the country when it comes to finances. Our investments and collection rates are within the National Treasury norms,” mayoral spokesperson Mluleki Mntungwa said.
“Possibly the reason this reference is being blamed is that there has been a lot of negative publicity in the media with regard to the how the section 154 support will be implemented, its outcomes and possibly a misinterpretation of what section 154 means,” the city further noted in emailed responses.
“Generally, lenders do place some reliance on the credit rating, which is provided by a credit rating agency, in addition to their own internal credit reviews. A negative outlook may, to some extent, signal an increase in risk in lending to that particular entity, which will then be reflected in the higher interest rate that a lender may offer the city,” the city said.
“The negative outlook will affect future borrowings. However, the city is in continuous engagement with lenders in terms responding to any concerns that may arise. More critically, notwithstanding the negative outlook, the city is in good financial standing.”
The unintended consequence of the intervention, however, is that the city now has negative credit rating, according to the city’s investment report tabled during a full council meeting last month.
“During discussion, the negative credit outlook of the municipality was noted with reservations. That it was not clear whether this indicates failure by the municipality to meet its loan obligations,” the finance committee report reads.
“Furthermore, that the municipality is operating at a loss based on the fact that the interest paid on borrowing exceeds the income derived from the investments. The committee emphasised the need to be furnished with an investment strategy to understand where there are gaps to ensure financial stability of the municipality
“In response, the management confirmed that the municipality remains capable of meeting its loan obligation. They attributed the severe impact on the municipality's credit rating to the introduction of section 159 of the constitution. However, confirmation was given that efforts are currently under way to reassess and potentially revise this outlook.”
DA eThekwini member of finance committee, Rory Macpherson said: “The notion of simply borrowing billions in loans to fund infrastructure developments, maintenance and service delivery instead of growing our rates base and collecting debt has thankfully been highlighted as a major concern.
“The report now confirms that borrowings must be dramatically reduced and replaced with generated revenue. This is a win for the hard-pressed ratepayers who end up servicing these massive loan debts.”
Update: October 4 2024
This story has been updated with new comment.
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