ASHOR SARUPEN: Throwing money at dysfunctional cities is not the solution

SA’s cities are the largest contributors to the country’s GDP and are vital hubs of growth and development. Yet the financial challenges plaguing several metros threaten their ability to fulfil this role. Poor governance, weak political leadership and administrative failures are undermining the financial sustainability of our urban centres and, in turn, the services they provide to millions of South Africans.

Eskom has raised the alarm bell that several metros are beginning to fall behind on their payments to the utility. As the largest customers this risks the security of the energy sector just as it has started to get back on track. 

The most recent State of Local Government Report, published by the National Treasury, paints a bleak picture: 157 municipalities were identified as being in financial distress, representing more than 60% of the country’s municipalities. Furthermore, 96 municipalities have adopted unfunded budgets for this financial year, signalling an inability to match their planned expenditures with realistic revenue streams.   

Local government leadership receives monthly section 71 reports, as prescribed by the Municipal Finance Management Act, which provide a diagnostic assessment of financial sustainability. Rising debt and shrinking revenue bases are early warning signs that require immediate and decisive action. Yet all too often these warnings are ignored until the situation spirals out of control, leaving cities teetering on the brink of collapse.   

When financial decline sets in, arresting it must become the top priority. Anything less is a recipe for disaster. The challenges we face today are compounded by rotating mayors, unstable political coalitions and poor separation between politics and administration, which have resulted in inadequate internal controls. Poor credit management, inaccurate billing systems and a lack of enforcement on nonpayment have eroded the municipal revenue value chain.   

Non-technical losses in electricity — often accounting for 20%-25% of supply — go unaddressed due to insufficient investment in infrastructure maintenance and repairs. As revenue collection falters and infrastructure deteriorates, cities lose their ability to provide even basic services such as water, electricity and waste management.   

The response to these challenges cannot simply be to throw more money at the problem. Increases in funding must be paired with deep structural reforms to ensure fiscal discipline and accountability. As we have learnt from the experiences with state-owned companies, bailouts are not a solution. Issuing blank cheques to municipalities that don’t exercise any governance and service delivery reforms would lead us to the same failures, at a time when the national balance sheet is already strained. 

To address the financial crises in local government the Treasury has implemented a municipal debt relief programme with stringent conditions. Only municipalities actively working to restore their financial health will qualify for this programme. This approach aims to rebuild the revenue value chain, prioritise necessary expenditure and reduce waste.   

One innovative step is the introduction of the smart meters grant, with R2bn allocated over the medium term for implementation. Smart technologies are essential for improving efficiency, as well as protecting revenue streams and integrating renewable energy into local grids. Municipalities on the debt relief programme can use these technologies to optimise revenue collection and service delivery.   

In addition, the Metro Trading Services Reform Programme has been initiated to fast-track the turnaround of trading services such as water and electricity in metros. This performance-based finance incentive combines institutional reforms, greater financial transparency and increased access to long-term infrastructure financing. The design of this reform is being supported by international partners and experts in this space. Already six of the eight metros have submitted water business turnaround strategies and are eligible for incentives.   

However, these interventions underscore a broader truth: while the Treasury can provide the tools and frameworks for reform, the root causes of many of these problems lie in leadership. Weak or unstable leadership often compromises the administrative functioning of cities. To restore cities as engines of growth we need political maturity and stability, coupled with a strong administrative arm staffed by independent people who are committed to executing their mandates effectively, transparently and cost-effectively.   

Cities are the bedrock of SA’s economy. Their proper governance is not optional; it is imperative. The future of our economy depends on getting this right.   

• Sarupen is deputy finance minister.