OPINION

Is Joburg headed for a fiscal cliff?

Former MMC questions the state of the city's finances under mayor Herman Mashaba

“If you don’t claim an identity, one will be given to you”. At first glance, this statement reminds me of a joke I once read in a magazine. This went along the lines that in some nightclubs in Johannesburg you are body searched on entering to determine whether or not you have a knife on you. If no knife is found, one will be given to you.

My former boss - City of Johannesburg’s executive mayor, Herman Mashaba - has been trying to give me an identity which portrays me in negative light. Amongst others, he has insinuated that I was an inefficient Member of Mayoral Committee of Finance who could neither resolve the billing crisis nor improve revenue collection.

Further, Mashaba would lambast the previous ANC’s administration under the leadership of Mayor Parks Tau for the poor state of the city’s finances and about R170-billion infrastructure backlog.

I should hasten to add that the R18-billion that Mashaba claimed to have uncovered from corrupt activities is not true. Even if you add money wasted through corruption, unauthorised, and fruitless and wasteful expenditure – the number will never come closer to R10-billion.

Evidence in the possession of the city’s council contradicts Mashaba’s assertions. When Tau became the mayor in 2011, the cash balance was around R300-million. By the time Tau’s administration came to an end, the cash cover had improved to R4.5-billion, and monthly revenue collection improved from millions of rands to R2.6billion. I built and extended on this magnificent performance and thus by the time I was sacked as MMC, the monthly average revenue collection was approaching R3.2-billion.

In fact, if it were not for Mashaba and Head of Forensic Unit, Shadrack Sibiya, who constantly harass our finance staff – we would definitely have improved revenue collection to R3.4-billion by January 2018. Despite our highly commended efforts, the financial situation of the city was concerning.

Under my political leadership and oversight, the open billing queries were reduced from about 200 000 to just over 10 000. Since my unceremonious departure, the monthly revenue collection has declined to a monthly average of less than R2-billion and thus the city is facing real prospect of collapse.

In other words, the situation has moved from concerning to alarming. While still MMC, my team and I identified four factors that were causing the billing crisis as follows: legacy technology systems, uncleansed data, disintegrated value chain, and inadequately trained staff. Measures to deal with the aforementioned factors through a revenue enhancement project were very advanced when I got removed from the mayoral committee.

The implementation of this project has now stalled and an opportunity to improve revenue collection by targeting corporate customers who were not paying about R6-billion per year has been squandered.

When the ANC took over 16 municipal councils and integrated them into a single metropolitan city, they inherited a bankrupt city with infrastructure which was unmaintained and neglected by the apartheid government. It is Tau’s administration which determined that the infrastructure backlog was about R170-billion. Their plan to repair, maintain, and deploy new infrastructure was captured on their Financial Development Plan.

This plan ensured continued financial sustainability and effective financial planning through prudent borrowing, generation of annual operating surplus and the creation of cash reserves which would lead to the expenditure of R100-billion on infrastructure over a period of 10 years.

The Democratic Alliance (DA) administration has reduced the capital budget from an annual average of R10-billion to just over R7-billion, but yet Mashaba mourns non-stop about the infrastructure backlog. The Auditor General acknowledged the Tau administration’s prudential management of finances and upgraded the city’s core administration audit outcome to unqualified while the majority of the municipality owned entities received clean audits.

Moody’s and Fitch’s upgraded the city’s credit rating to Aa1.za/P-1.za and AA.zaf/F1+.zaf respectively for: strong revenue growth supported by a broad tax base, improved liquidity levels, and large and diversified economic base.

At the end of second quarter in December 2017 (a few days before I was sacked), the city’s cash balance was around R4.2-billion. By the end third quarter in March 2018, the cash balance had gone down to R1.2-billion. City Press was correct to report that there was real possibility of the city finishing the financial year (at the end of June) with a negative balance and potentially even fail to pay the salaries. Fortunately, the city had a cash balance of R1.2-billion and was able to pay salaries at the end of June 2018.

Four factors enabled the City to achieve this.

1.    Firstly, they stopped paying most service providers for a period of few weeks. Only statutory payments (VAT, salaries, etc) and bulk purchases such electricity were made.

2.    Secondly, the R1.5-billion loan from the DBSA, and another R1.5-billion from Nedbank for infrastructure projects came in handy. These loans arrived in May and June 2018 respectively and they absorbed a lot of liquidity squeeze. One can reasonably suspect that the money which was supposed to have been invested in capital projects was used in operational expenditure.

3.    Thirdly, the city has drastically underspent on its Operating Budget. By the end of the third quarter (31st March 2018), the actual direct operating expenditure was under budget by R2.2-billion. The actual year to date direct expenditure represented 70% of the total budget. Unless they would have done massive fiscal dump in April, May & June 2018, the likelihood is that they would have spent an extra 10%, and this would bring the total direct expenditure to around 80%. Unfortunately, the end of June 2018 and fourth quarter reports have not yet been issued.

4.    Lastly, the city has embarrassingly underspent on its Capital Budget. By the end of the third quarter (31st March 2018), the total expenditure including commitments was approximately R3.3-billion (45%) of the approved adjusted budget of R7.4-billion. A commitment can be defined as an expressed intention to purchase or incur expenses with no legal obligation and it can be reversed. The total expenditure excluding commitments to end of March 2018 amounted to approximately R2.8-billion (38%) of the approved adjusted budget of R7.4-billion. Chances that the Capital Budget expenditure would have increased to at least 65% by the end of financial year June 2018 are very slim.

The acceptable expenditure is at least minimum of 90% for both Operating and Capital Budgets. Had the City paid service providers on time and spent the budget appropriately, the money would have dried up long before the end of the financial year. In my view, it is criminal to save money by paying suppliers late, under-performing in terms of service delivery, and using loans for infrastructure in operational expenditure.

Whereas in other enterprises one should be commended for underspending on one’s Operating Budget, in a municipality – such underspending could represent poor service delivery. It could mean that the grass was not cut, pot holes and traffic lights were not fixed, and medicines were not sufficiently delivered to the township clinics.

The R1.2 billion that was in the bank account on the 30th June 2018 represents a huge financial crisis, and the city is still facing a fiscal cliff. At least R4.2-billion would have satisfied the National Treasury requirements (ratios). Moreover, R1.2-billion contravened the covenants with the investors. It would be interesting to see how the investors would react, and whether Moody’s will review and change their City’s credit rating.

Mashaba’s administration has been withholding the Revenue Collection, and Cashflow Management Reports from the Finance Portfolio Committee, and the Council. This is extremely wrong. If all is well and the city finances are healthy as the executive mayor claims – then what are they hiding? Mashaba should stop the blame games and dishing out unsavoury identities to his rivals and focus on the city’s financial sustainability and service delivery.

On the 26th July 2018, Mashaba issued a statement based on what he claimed to be unaudited financials. The aforesaid statement painted a rosy picture of the City’s finances. The truth is - that statement was littered with improbabilities and blatant falsehoods. Firstly, producing unaudited annual financials is very strenuous and this could practically only be completed by the end of August 2018. Secondly, it is improbable that the City could have increased the capital expenditure which was 38% by the end of March to 89% by the end of June 2018.

Dr. Rabelani Dagada is former MMC of Finance at the City of Johannesburg. He is on Twitter: @Rabelani_Dagada