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Failing cities stymie South African bid to revive growth

14th November 2019

By: Bloomberg


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South African municipalities’ inability to provide consistent power is exacerbating supply disruptions by the debt-stricken state electricity utility, hobbling efforts to revive the nation’s economy.

While State-owned Eskom Holdings has subjected the country to controlled, timed blackouts intermittently over the past decade to prevent a total collapse of the country’s power grid, municipalities cut supply more regularly and often without notice – hurting sales, production, business confidence, jobs and economic growth.

Local governments – which buy electricity from Eskom and sell it at a higher price to their customers – heavily rely on sales of power to fund their maintenance budgets. With companies seeking more regular supply, many are defecting from municipal systems or producing electricity privately using generators or solar panels. This results in even less revenue for municipalities to repair dilapidated roads, leaking water pipes and broken pavements, and replace stolen communication and power cables.

“We’ve got billions of rand of maintenance backlogs across local government – the downtown areas of small towns are literally falling apart,” said Tracy Ledger, the head of research at the Public Affairs Research Institute in Johannesburg. “A lot of unscheduled power cuts take place because the infrastructure isn’t being maintained.”

The country has made strides in extending services to many communities excluded during white-minority rule, but municipalities have faced more than 1 400 protests against poor delivery since 2012. Only 18 of the country’s 257 audited local governments got clean outcomes in 2018 and 128 were in financial distress in 2017, according to the National Treasury.

One of the big casualties of the lack of consistent power is manufacturing, whose contribution to gross domestic product has declined by a third in the past 25 years. This adds to the drag on an economy that’s heading for nine years of sub-2% growth.

“One of the most adverse factors for economic growth in this country, is dysfunctional municipalities,” Reserve Bank deputy governor Rashad Cassim said last month.

Since 2009, investment in the metals and engineering sector has dropped 36%, in part because of a sixfold increase in electricity costs and erratic power supply that renders the industry unattractive to investors, according to Michael Ade, the chief economist at the Steel and Engineering Industries Federation of South Africa.

Seifsa has 1,300 member companies – down from a peak of about 2 000 – that employ close to 200 000 workers, and most of the firms are concentrated in the provincial economic hub of Gauteng.

Ekurhuleni, in the east of Gauteng, is home to the country’s biggest international airport. It once represented the largest single territorial concentration of manufacturing in the nation and was known as Africa’s workshop, according to the Centre for Development and Enterprise. Manufacturing’s share of the area’s gross value added has fell to 23% in 2015 from 30% in 2000, it said in its development plan.

“A lot of businesses have moved away or closed,” said Carol Ova, an executive member of the Ekurhuleni Aerotropolis Chamber of Commerce and Industry. “The power cuts, cable theft and lack of maintenance of water infrastructure all have a negative impact on production and communication. The municipality doesn’t advise when the cuts will happen. And while people try to make do with generators, this isn’t an option for many businesses because of the prohibitive cost.”

The municipality didn’t respond to emailed questions. It has developed a plan to revitalise the manufacturing sector, saying it has facilitated R7-billion of foreign direct investment each year since mid-2013.

Macsteel Service Centres SA is one of the biggest rate payers in Ekurhuleni, with 12 sites across the area. “The amount of disruption... we’re just living with it -- it’s part and parcel of living in South Africa,” said Mike Benfield, its CEO. Six years ago, the company had almost double the 3 000 workers it employs now and produced as much as 25% more.

Financial support isn’t the issue. After state staff costs, goods, debt-service expenses and household grants, municipalities are the largest recipients of government transfers.

“Problems in revenue management are the largest contributor to financial distress in local government,” the National Treasury said. In 2017/18, almost half of all municipalities collected less than 80% of their billed revenue, it said.

South Africa’s fiscal framework for municipalities - set up in the 1998 white paper on local government - assumed they will be able to fund maintenance out of their own revenue, Ledger said. “This is a huge challenge in smaller municipalities, given that many people can’t pay their accounts and so their own revenue is under enormous pressure,” she said.

Local government receives support for new infrastructure development through conditional capital grants, such as municipal infrastructure grants, but can’t use this money for upkeep of what’s already there, said Ledger. The Treasury is looking to reform the system, allowing for grants to be used to renew infrastructure.

When nationwide power outages started in 2008, Macsteel invested in generators. “Diesel usage can amount to a few million rand annually,” Benfield said. “New entrants wouldn’t survive. Many major industrial concerns are looking at ways to bypass Eskom and the municipalities. Business is working on alternative power sources all the time. The problem is it takes five to ten years to pay.”

Edited by Bloomberg





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