CITY OF JOHANNESBURG IN A FINANCIAL CRUNCH
The ANC Greater Johannesburg is extremely concerned about the fact that the City of Johannesburg is on the brink of collapse due to the financial ruin it is in. The following concerns point to an imminent collapse of the City of Johannesburg Metropolitan Municipality:
- Revenue underperformance
- An inflated 2017/2018 budget
- Expenditure decline
- A precarious liquidity position
The City has experienced a revenue under billing of R2.4 billion – with an under-collection of over R 3 billion by the end of June 2017. This means the City is now only able to deliver services in the short term using borrowed funds. This position is not sustainable and it will show in a few months’ time when a drop in service delivery levels becomes visible. The impact of this has also resulted in some of the key entities of the City moving from a positive cash position to being in an overdraft position. This includes key revenue raising entities such as City Power which contributes 40% to the City’s revenue and Joburg Water. In his State of the City Address, Mayor Herman Mashaba suggested that the city will be collecting R 4 billion by July this year, which clearly has not been achieved. With regard to City Power for example, the city has shifted from a positive position of R1, 7 billion in August last year to an overdraft of R300m by the end of May 2017.
As the ANC Joburg Region we are also concerned that the 2017/2018 budget has been inflated by R 1 billion with no indication of where this will come from. This matter we raised in the budget debate and have still not received a response. The revenue budget is therefore overstated by a minimum of R 1 billion which places the entire budget at risk especially the Capital Expenditure (CAPEX) budget which in part is funded from surpluses.
It is our considered view that the City of Johannesburg has to revise down its budget, both the revenue side and also on the expenditure side. Failure to do this will place the City at the risk of being unable to pay for bulk services such as electricity and water; pay salaries and also redeem its bond of R 2.7 billion that needs to be repaid by June 2018.
The redemption of the R2.7 billion bond and bank loans is also compromised by the City raiding its Debt Redemption Fund which had been set aside to pay its loans. Already R1 billion has been withdrawn from the fund by the City. This was done to mislead the public by having the books reflect a higher cash balance and fund operational costs than it was the case in reality.
The withdrawal from the Debt Redemption Fund is a breach of promise made to investors and rating agencies, and it is against the objective for which the fund was established. Due to a cross-default clause in some of the City’s debt agreements, a default in repaying the debt when it falls due may result in investors calling for the City to immediately settle all outstanding debt amounting to over R19 billion. The City will not be in a position to honour the settlement therefore it cannot afford a single default.
The City’s administration is not only raiding the Debt Redemption Fund, they are also not investing in the fund for future redemptions, which is also a key covenant to the City’s bond holders.
On the expenditure side, we are concerned that the City has also significantly underspent capital grants from National and Provincial governments to the tune of R 750 million. This means that some of this money, which reflects in the City’s cash position, is at risk of being returned. The return of grants simply means projects that these grants were allocated for are not being implemented in the City of Johannesburg. As a result, the grants will be redirected to performing municipalities. All this is after Mayor Mashaba had claimed that the provincial and national governments had reduced subsidies to the City simply because the City was under the DA.
COJ’s Liquidity Position:
The City’s liquidity position has c a precarious level and has dropped by 30% between June 2016 and June 2017. Furthermore the liquidity of the City has been compromised, forcing the City to raise short term facilities to the tune of R 3 billion in the first month of the financial year in order to pay for daily operational expenses such as salaries, bulk services- water and electricity, repairs and maintenance, cost of debt (interest) and other short term obligations.
This deteriorating situation has also placed the City in a difficult position as the key treasury financial ratios are set to be breached. The National Treasury benchmark requires the City to maintain minimum cash levels to cover at least 30 days of operational expenditure. This situation places the City’s credit rating at the risk of being downgraded and thus increase the cost of borrowing.
The financial situation in the City of Johannesburg requires urgent attention if the metropolitan municipality is to survive over the next few months. This is a clear indication that Mayor Mashaba and his team are inexperienced and incapable of running an economic hub like Johannesburg. One year on, the DA led coalition is overwhelmed by the task of leading Africa’s pre-eminent City.
We will be requesting National Treasury to do a thorough analysis of the City of Johannesburg’s 2017/2018 budget, particularly as it relates to the dubious R1 billion in revenue which cannot be accounted for. We will also request the Gauteng Provincial Government, through the MEC for Human Settlements and Co-operative Governance, to keep an eye on the financial position of the City over the next few months. We cannot afford a situation where Africa’s pre-eminent City collapses without us intervening.
ANC Joburg Region
072 633 9956
Mr Geoffrey Makhubo
083 261 3356
082 468 3908