S.Africa: Governance Failure in Johannesburg – Is Johannesburg going into FREE FALL from 2025?

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Governance failure in Johannesburg: Freefall from 2025?

Jan 09, 2025

The primary objective of government, and of local government in particular, is to provide “public goods” that enhance collective wellbeing. By providing clean water, regular power, sewerage removal, road networks and an enabling transport systems municipalities markedly enhance the wellbeing of residents, enable economic production and foster social development. Axiomatically, when such services are not provided households and enterprises forgo the benefits and experience poorer health, impediments to economic activity etc. Given the amorphous nature of the benefits of public goods it is difficult to quantify the benefits or the cost of failing to provide these benefits. In many cities the quality (and quantity) of public goods seems to be deteriorating. In South Africa sewerage on beaches, water shortages, power outages, defiled rivers, collapsing road and rail networks are becoming the norm. In recent years this decay has become particularly notable in the “economic heartland” of Gauteng and, in particular, its largest city (Johannesburg). Perhaps what makes the experience of South African cities of peculiar interest is that the decline cannot be attributed to conflict, economic crises, changes in climate or even mass migration. The collapse of public good provision in South African cities can thus be attributed to poor governance.

Prima facie the the City of Johannesburg is poorly governed. There is ample evidence that resources are inappropriately allocated, workers are inefficiently deployed, there is little evidence that employees (including senior officials) are held to account for poor performance or misconduct, workers are complicit in the theft of city assets, standards are geared to the temporary patching of faults rather than repair or rehabilitation, little of the work performed is overseen by management and so on. These and other factors result in the deterioration of service levels and the accelerated decline of city assets and infrastructure.

While accusations of a governance deficit will probably resonate with residents it is imperative that substance is given to the allegations or, at the very least, the some measure is provided. In South Africa the most popular measure that reflects of the performance of government agencies is the opinion of the Auditor General. Another pivotal (although not widely used) measure are the ratings provided by credit agencies etc. Neither of these sources reflect on actual performance. Auditor General opinions reflect almost solely on the degree to which the rules governing entities have been complied with. As such they reflect a particularly low bar of performance – albeit one central to the possibility of public goods being provided. Credit rating agencies like Moody’s speak to the likelihood that debts will be honoured. Neither of these sources indicate the extent to which public goods are provided, whether services are effective, cost efficient of even fit for purpose. It is on the latter that the nub of good governance rests and by which the quality of governance can be assessed.

Even when we forgo measuring opportunity costs assessing the quality of governance at local government level is extremely “challenging”. In South Africa municipalities do not routinely share details of the extent of service delivery, service backlogs, turnaround times etc. It is not reliably known how many potholes have been filled (or reported), how many electrical substations are unserviced, dysfunctional or stolen. Generally speaking he extent and nature of water and electricity losses are disguised in catch-all figures that undermine insights into the nature of inefficiencies. Some insight may be offered by municipalities (or credit rating agencies) estimates as to how much it would cost to rehabilitate infrastructure. However, when issued by the municipalities themselves, these reports seem primarily focussed on leveraging funding from the national treasury and should be treated with some scepticism. Moreover the basis for deriving such estimates are unclear. There is probably a substantial difference between those estimates based on market price for rehabilitating infrastructure and those based on how much it would cost of municipalities to do the same (inefficiently).

Analysts are left with having to distill insights from the data reported to National Treasury and the national statistics agency (StatsSA). Interpretation of that data compels analysts to draw comparisons between municipalities of similar size. Metropolitan municipalities can be compared to each other and, if necessary, aspects of their performance can be benchmarked against an exemplar. An example would be comparing the financial status of CoJ to that of Cape Town. The former is marked by massive urban decay and clear governance deficits. The latter is, reputedly, an example of a relatively well run, proactive, administration. Better governance of Cape Town is routinely indicated by various metrics including both the opinion of the Auditor General and those of credit rating agencies. This situation is also implied by returns from the last national election where CoJ voters distanced themselves from the ruling party.

All cities in South Africa are subject to similar macro economic constraints, are subject to the same national legislation and regulations, their residents experience the same taxation framework. The citys are reliant on the same central state agencies for the provision of bulk services and are subject to the same policies regarding preferential procurement practices and so on. Broadly speaking the are enjoy similar levels of development and are incumbered by the same level of inequality. Drawing comparisons between these cities, loathsome as this may be, thus seems legitimate and is informative.

Both Johannesburg and Cape Town routinely acquire substantial loans from commercial and development banks. The latest loan obtained was one of R2.5-billion acquired by the City of Johannesburg in August 2024. That, and earlier loans, result in CoJ currently being in debt to the tune of R22-billion. Cape Town has been somewhat less reliant on debt and has taken fewer loans. The last loan acquired by that administration was a loan of R3.5-billion in June 2023. Despite this the Cape Town is in debt to the tune of only R7.6-billion. As few loans have been explicitly linked to infrastructure projects not only does Johannesburg seem more reliant on debtor funding it seems dependent on such loans for operational funding.

The differing levels of indebtedness thus speaks volumes to the differences in the quality of governance in the two cities. The higher debt levels (coupled to concerns about governance) renders CoJ a greater financial risk than Cape Town. Moreover Johannesburg has been associated with higher risk levels for many years. In general CoJ has been able to acquire financing only be paying a premium. As a rule CoJ has only been able to acquire loans at one or two points above the prime interest rate prevailing at the time. By contrast the City of cape Town acquires its loans at one or two points below the then prevailing prime interest rate.

The interest rate of its latest loan acquired by CoJ was set a five percentage points above JIBAR (the Johannesburg Interbank Average Rate reference rate for existing loans and valuations determined by the SA Reserve Bank). This is a significant premium and results in the interest rate for that 15-year loan being set at 13.12% (November 2024). This is the highest interest rate paid by the City in the past few decades. Furthermore that loan was secured via Agence Francaise De Developpement (AFD) the same organisation that has provided Cape Town with most of its loans (at the lower interest rate).

Clearly Banks think CoJ a higher financial risk than Cape Town and are a able to leverage a premium on loans incurred by it. The question arises as to what this says about CoJ governance (other than it resulting in higher costs to those who have to fund the repayment). Good governance requires efficient delivery and obtaining loans at three of more percentage points higher than what it available to sister cities indicates a deficit if governance quality. A premium of three percent (a crude estimate of the difference between the interest rate paid by Cape Town and that paid by Johannesburg) currently costs Johannesburg residents about R600-million each year. Repayments on this and other loans will temper the ability of CoJ to deliver public goods for over the next 15 years.

In all fairness the R600-million is a drop in the ocean of current CoJ inefficiencies. The amount pales in comparison to the 46% spent on bulk water that can’t be accounted approximately (a loss of R5-billion a year) or the R800-million (over and above all the revenue generated from electricity sales) transferred from other resources to ESKOM because the city is unable to generate sufficient revenue from electricity sales.

The cumulative impact of funding the deficit between revenue and expenses related to bulk electricity services, water losses and excess interest payments amount to ten percent of the city’s total annual revenue. While this may seem to be of marginal to the total budget this cursory examination of financial accounts do not reflect the most egregious failures.

Underspending by CoJ on servicing and maintaining infrastructure is well documented by, inter alia, National Treasury. Most municipalities (including CoJ) spend only about one-third of the amount stipulated by National Treasury on the maintenance of “Property, Plant and Equipment”. The poor maintenance of assets results in the premature depreciation of the assets and heightened repair costs. An illustrative example is that of the city’s road network. The deterioration of the road network shows that the CoJ is unable to systematically preserve the condition (or value) of a pivotal public asset. Deterioration of the road network has given rise to calls for additional road financing rather than attempts to address the cause of the accelerated decline. For decades Johannesburg Roads Agency has failed to prevent the degradation of the road network via routine sealing or the timeous repairs of damage created by Johannesburg Water and City Power. Routine care and maintenance would have slowed the decline of the road network.

Johannesburg Roads Agency attributes their failure to the city’s failure to allocate a budget for road maintenance (despite sealing being massively cheaper than road repair). The failure to allocate money for a cost effective solution is clearly a deficit in governance and suggests that the governance deficit may be rooted in the budgeting system i.e. in the political process. The situation demonstrated by CoJ roads is replicated across the water, electricity and sewerage infrastructure. In general the city tends to repair infrastructure only after significant social costs have already been incurred. Traffic lights, for example, tend to be repaired after weeks or months of traffic congestion and preventable collisions. Similarly water leaks are repaired days or weeks after the wastage becomes apparent and the surrounding roads have been eroded. Repairs to the road infrastructure caused by other CoJ agencies may take place months or years after roads users have been exposed to hazards and vehicular damage. CoJ’s culture of simply “kicking the can down the road” may have crossed a threshold beyond which recovery is not possible.

Even when the latter factors are ignored the inefficiencies of CoJ are profound and there is little reason not to attribute them to governance failures. However the key question is why these failures have been allowed to persist for decades. At stake is the functioning of the economic heartland of the country and despite the clear benefits no remedy for the poor governance is apparent. Naturally the question arises as to who benefits from the sustained malais. Some individuals and companies have a superficial interest in maintaining the status quo. This includes companies that benefit from contracts to delivery emergency supplies of water and those consortia that facilitate the industrial-scale theft of electricity and so on. More pertinent may be the perception (clearly demonstrated by other State Owned Companies) that crises are an opportunity to leverage additional funding from the National Treasury. Such funding presents an opportunity for municipal officials and political representatives to obtain resources to sponsor their patronage networks (rather than a way to provide public goods).

Bloomberg, for example, estimated that R221-billion is needed for the city to catch up with maintenance and overdue upgrades to the road, water and electricity infrastructure. This is the equivalent to CoJ’s full revenue for three years. Alternatively – if this funding was made available at the same rate as the latest loan annual repayments would amount to almost 40% of CoJ revenue. The capacity of the city to manage any hypothetical reconstruction program is belied by their inability to manage the current situation.

The situation can only only be addressed by a governance regime that is able to raise the question as to what the economic and social costs of failing to address the current governance failures will be. Failure to change from the current trajectory will merely result in ever increasing rent seeking as “non-exchange income” is leveraged as revenue from service provision collapses. Rent seeking by the CoJ will probably result in ever-higher higher taxation of households who own their homes, use of solar power or have acquired boreholes to ensure regular water supplies. This response is sure to be the death spiral of a city that once had the pretense of being “a world class African city”.

Source: https://substack.com/home/post/p-154460557

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