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The Kettle Consulting Municipality Finance Index (KCMFI)- South African Municipality Overall Financial Performance (2020)

Prince Ken Nkiwane and Justin Kettle deliver a summary of the overall financial performance of South Africa’s eight metropolitan municipalities (metros). The analysis uses the Kettle Consulting Municipal Finance Index (KCMFI) to rank performance. Crucial areas of improvement are identified for incoming governments to address to bolster the financial sustainability of their respective municipalities.

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South Africa recently emerged from the most hotly contested local government election since the advent of democracy. Paradoxically, this election saw the lowest voter turnout (46% – 12million out of 26 registered voters). Pundits have attributed the low turnout to the loss of faith in democratic processes to deliver change. Regardless of who landed political office, one thing remains: they assume a delicate responsibility to build entities that can sustainably deliver electricity, water, and basic services (health, security, sanitation) to all residents in their jurisdiction. One key aspect of sustainability for municipalities is financial performance. 

This article seeks to deliver a summary of the overall financial performance of South Africa’s eight metropolitan municipalities (metros). The analysis uses the Kettle Consulting Municipal Finance Index (KCMFI) to rank performance. Crucial areas of improvement are identified for incoming governments to address to bolster the financial sustainability of their respective municipalities. 


From a financial perspective, the City of Johannesburg (58%) is the best performer, followed closely by Ekurhuleni. The city of Tshwane comes last at 15%. With 100% being the best possible score and 0% being the worst, one must note the overall scores are low (averaging 42%). Overall, no metro posted good performance. 

Methodology

The KCMFI aims to bring consistency in the interpretation and application of selected financial information using standardised financial ratios in line with Circular 71 publication by the National Treasury (2014). It addresses different categories of ratios norms, interpretation and covers various aspects of a municipality’s finances, such as financial position, financial performance, budget implementation, and governance. Each represents 30%, 30%, 10%, and 30% of the overall rating respectively. Each category has ratios that assume a rating of 1 if the ratio meets or surpasses the norm/benchmark, otherwise, it is allocated a rating of 0. An average of ratio ratings within each of the four categories is taken to represent the score for that category. 

Results and recommendations

1. Financial position:  

This metric assesses the strength of the municipality’s balance sheet position. Its ability to meet its long and short-term obligations as well and the efficiency in the management of cash flows. The City of Cape Town seems to be leading in this regard. The worst performer is the City of Tshwane. The average rating across all metros sits at 47% To corroborate our rating in June 2021 Moody’s downgraded the City of Tshwane, City of Johannesburg, City of Ekurhuleni, City of Cape Town, and Nelson Mandela Metropolitan Municipality. It is valid to conclude that in general metros are not in a good financial position. 


2. Financial performance:

This rating assesses the financial sustainability (as proxied by profitability and cash flow management) of a municipality as an economic entity. The city of Johannesburg and eThekwini Metropolitan is the best performer and Mangaung is the worst performer. Performance was largely driven by revenue increase (that beat CPI change) as well as strong Gross profits for service charge revenue items such as electricity and water. What undermines profit sustainability across the board is the poor management of operational expenditure and distribution losses. There is room for significant improvement in all metros that could yield positive outcomes for both financial performance and implicitly, financial position.  

3. Budget implementation:

This saves a measure of the extent to which metros follow through and meet their planned targets for capital expenditure, operating expenditure, and revenue (service charges and property and rates). It indicates the degree of proficiency with which management can lead (forecast, plan and execute) business.  Ekurhuleni and Cape Town are quite efficiently managed in contrast to the rest of the metros. There is enormous room for improvement for the City of Tshwane, eThekwini, and Nelson Mandela Bay. 

4. Governance:

The governance rating uses audit outcomes and the degree of Irregular, Fruitless, and Wasteful, and Unauthorised Expenditure as proxies for governance. Half of the metros (Buffalo City, City of Tshwane, and Mangaung) had qualified or adverse audit outcomes. Across the board, one can note that Irregular, Fruitless and Wasteful, and Unauthorised Expenditure are rife. The overall governance rating points out skills shortage and corruption as key drivers of poor governance. This is further corroborated by the Bureau for Economic Research (BER) findings in their research on SA’s municipal challenges and their impact on local economic development.


In conclusion, based on overall financial performance municipalities post dismal performance in the year 2020. There is still significant room for improvement even from relative top performers (City of Johannesburg and City of Ekurhuleni). Major issues related to revenue, cash flow, and balance sheet strength. Incoming governments need to prioritise the resolution of these challenges.

insight by:

Prince Ken Nkiwane
Management Consultant
@Kettle Consulting
Justin Kettle
Managing Director
@Kettle Consulting

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