Cash-strapped Jozi is heading for a bailout

2018-06-10 05:53
Herman Mashaba  (Leon Sadiki, Gallo Images, City Press, file)

Herman Mashaba (Leon Sadiki, Gallo Images, City Press, file)

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The financial health of the City of Johannesburg (CoJ) is on life support and could require a bailout unless something drastic is done.

The situation is so bad that the country’s economic hub’s financials show that the CoJ had a bank balance of R1.2bn at the end of April, and that a shortfall of R3.5bn was projected for last month and this month.

There is already anxiety about whether June salaries will be paid. June marks the end of the CoJ’s financial year.

Because of its dire financial situation, the CoJ has had to dip into its reserves to compensate for the shortfall and help keep it afloat. This, coupled with a worrying R2bn shortfall in revenue collection, has contributed to fears that the situation could have a ripple effect if it doesn’t change fast enough, because the CoJ might need an intervention from provincial government and a bailout from Treasury.

However, the CoJ denied this week that the DA-led administration was in the red, saying its cash balances at the end of April stood at R3.279bn, “excluding the ring-fenced reserve for debt redemption, capital grants and the debt redemption fund”. The CoJ said its financial woes were historical in nature as the problems were caused by past ANC administrations.

“As the new administration, we inherited a city that had been run under a system of chaos and disorder. A clear sign of this is the extremely high levels of corruption that have been uncovered – close to R17bn,” said Kutlwano Olifant, spokesperson for Joburg finance member of the mayoral committee Funzela Ngobeni.

The CoJ has been forced to dip into its debt redemption fund for other projects, further raising concerns that this could compromise investor confidence and draw the ire of ratings agencies. An emergency executive adjudication committee meeting had to be convened recently to approve further borrowing.

Olifant said the borrowing amounted to R1.5bn “to fund capital investment projects”.

“You must note that the City’s borrowings do not happen as an isolated occurrence. They are informed by our long-term funding model, which is informed by our financial strategy. This ensures that we balance the budget within our financial threshold. Our borrowings are in line with our funding model,” Olifant said.

The CoJ’s own projections for last month show income or receipts of just less than R6.9bn versus payments of R7.1bn. For this month, the projections are R5.4bn for income and expenditure of R8.3bn.

These woes come as mayor Herman Mashaba had his hands full this week after twice failing to convince councillors to adopt the 2017/18 budget with exorbitant tariff hikes for water (14.2%) and electricity (7.37%). The rejections came largely from the ANC and the Economic Freedom Fighters (EFF).

At Friday’s council sitting, Mashaba succumbed to a last-minute adjustment proposed by the EFF, which resulted in rates reduced to 13.2% and 7.17% for water and electricity, respectively.

A special council meeting will sit tomorrow and the revised budget, which is yet to be assessed by Treasury, will be finalised.

City Press understands that the decision to increase tariffs was an attempt to “fill the cash hole”.

Joburg’s electricity company City Power was also operating on an overdraft of just more than R1bn. The CoJ conceded that the entity was facing serious challenges.

“City Power has had to deal with a number [of] situations that have negatively impacted its liquidity position. Soon after we came into office, a VAT refund of about R314.5m was withheld by the SA Revenue Service because of an income tax dispute that had been incurred under the past administration and had gone unresolved for years,” said Olifant.

“Adding to this, in the same period, the Kelvin Power contract between City Power and Eskom was suddenly terminated, further negatively impacting the financial performance … by R267.6m.”

The CoJ said the reasons Eskom and the taxman suddenly made these decisions had not been explained. They cost City Power more than R500m when the government changed hands and had been outstanding for years.

“Following interactions made under the previous administration, City Power completed work on the electrification of houses commissioned by the energy department to the value of R288.4m. Strangely, the grant now due to City Power has still not been paid,” Olifant said.

“The total effect on the City’s power cash flow of these three transactions is R870.5m,” which has negatively affected City Power’s cash balance.

“These were not challenges that suddenly arose; these are challenges that have been brewed under the previous administration over time.”

The worrying state of the CoJ’s finances, confirmed by officials and Mashaba’s colleagues in the DA, follows his recent boasts that the CoJ’s finances were healthy. The CoJ’s financial picture is based on a 2016/17 assessment by Treasury, which was only released last month. It is understood that the situation is even bleaker than originally thought, with some officials already preparing for a worse Treasury assessment for this financial year.

But the CoJ said Treasury found its proposed R59m budget for 2018/19 to be “funded and credible”, and that it praised the CoJ for improvements.

The CoJ said that, despite all the problems engulfing the new administration, work was under way to turn the situation around.

“We are working to ensure the City and its entities finally receive the good governance that it needs and secure the financial sustainability of the CoJ. This is something the CoJ has been successful in achieving,” Olifant said.

While the CoJ buckles under pressure, expenditure for forensic investigations has grown to R127m.

But Olifant defended this, saying corruption was public enemy number one and that there were 3 500 graft cases being investigated.

Read more on:    finance

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