‘This is a long-term situation in which Johannesburg finds itself and it’s going to take serious work to get it back into a fiscally healthy position,’ says Chris Hattingh of the Centre for Risk Analysis.

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JEREMY MAGGS: Johannesburg has been given a breathing space, with National Treasury confirming the city’s new budget is funded. But it is hardly, let me tell you, a clean bill of health.

A R23 billion backlog in irregular and wasteful expenditure, strained cash flow, service delivery issues, unpaid bills to Eskom and Rand Water all point to a struggling metro still under intense pressure.

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So I want to discuss whether this is a turnaround or maybe just a temporary reprieve. I’m going to talk to Chris Hattingh, who is executive director of the Centre for Risk Analysis.

Chris, this story is becoming more and more difficult and complex. As I speak, is this a lifeline now for Johannesburg, or Treasury just delaying the inevitable?

CHRIS HATTINGH: Jeremy, thank you very much for the opportunity to discuss this. As someone who lives in Johannesburg, I desperately do want things to function as above board, as effectively as possible, for services to be delivered, all that kind of thing. So it’s all really coming to a head now.

I do think this follows on numerous warnings that the Treasury and the Minister of Finance Enoch Godongwana, have delivered to the City of Joburg, to Mayor Dada Morero, on few instances now. So it’s part of a longer-term process.

I do think elements of it could be a shock to the system to help the city management realise the dire situation in which they find themselves, as some of them had not yet acknowledged that.

In terms of whether this actually fixes things or changes things, we’ll need to see how the city reacts to this and then what steps Treasury, maybe other government departments, national government, cabinet, what they take to support this initiative by Treasury.

Of course, the City of Joburg isn’t the only one included in this list of the equitable share payments being frozen for July. But it does point to this is a long-term situation in which Johannesburg finds itself and it’s going to take serious work to get it back into a fiscally healthy position.

JEREMY MAGGS: How can a budget be technically funded if the city is still in such financial distress?

CHRIS HATTINGH: So just in terms of basic, I guess, projections, in terms of revenue expenditure, if one looks at it from a very basic balance sheet point of view for a given budget cycle of 12 months, Treasury and the City of Joburg, in this instance, they will have assessed that those numbers match with each other and talk to each other.

So this doesn’t take into account the debts owed to creditors, all that kind of thing. So it’s only for this particular budget in isolation. I think it’s not from Treasury’s side a comment or a judgment call on the long-term fiscal situation in which the City of Johannesburg finds itself.

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I should perhaps also add, on the day that we’re recording, Thursday 9 July, according to reporting in Bloomberg, the Mayor of Johannesburg, Dada Morero, has said that the city will pay around R2.4 billion to creditors, including Rand Water and Eskom, by mid-July.

So hopefully this indicates that the city realises, look, yes, your current budget, the next projected budget is “funded”, but you need to make sure that your long-term commitments to various institutions, including Eskom and Rand Water, that those are paid. Otherwise, Treasury is going to take further steps.

JEREMY MAGGS: And therein lies the risk.

CHRIS HATTINGH: Right. Yeah, 100%. I do want to give Treasury credit for taking this step. I guess many South Africans would say it’s a local government election year, there’s no way National Treasury would do this kind of thing to the most economically important metro in the country that’s responsible for about 15% of GDP.

But it really points to where the City of Joburg finds itself, and if Treasury didn’t take this step, I guess the cycle just continues.

I don’t want to say, oh, if Treasury didn’t take this step, Johannesburg would fail tomorrow. It’s more of a long-term process in terms of things like fiscal credibility, investor sentiment, service delivery, providing to households and businesses the services for which they pay, revenue rates and tariff revenue.

But yeah, I think the risk is really to the South African economy as a whole if Johannesburg doesn’t get its house in order.

JEREMY MAGGS: A lot of this is dependent, as I understand it, or if I’m hearing you correctly, on future modelling. But Chris, we know that revenue projection is not a precise science, and there’s also mounting interest on the bill.

CHRIS HATTINGH: Yes, 100%. If we look at things like irregular expenditure, how much that has grown over the past few years amongst not only the City of Johannesburg, but most other municipalities in the country.

If one doesn’t arrest that situation, if you don’t deal with your debt repayments and the interest on that debt, you really shrink room for things like service delivery and capex (capital expenditure), investing in infrastructure, all those kinds of things that a metro ought to be providing to households and to businesses.

So I think getting Joburg right really is vitally important.

Just on the point about declining revenue, so many households and businesses have, where they were able to, invested in things like private electricity, in terms of private water reticulation as well, private security.

All of those things have also cramped revenue available to the City of Johannesburg.

So they really need to make a case for themselves as much as possible. It also comes in the context of rates that increased again in July, where rates continue to increase year after year. But do citizens and households feel that they’re receiving the services for which they pay more every year?

JEREMY MAGGS: Chris, from a risk management perspective, Treasury has chosen pressure rather than intervention or administration. Do you think that’s strong enough?

CHRIS HATTINGH: I think as an initial step it is strong in and of itself. We will have to see what steps are taken next and again how the City of Johannesburg reacts to this.

Read: Joburg to pay R2.4bn in debt to get R3.6bn funding reinstated

Does it, in rhetoric or in action, double down, or does it, in a more self-effacing, humble manner, say, look, we acknowledge these issues and we’re going to take whatever steps we and you as National Treasury think are necessary.

So yeah, I want to give Treasury credit for the initial step. We just have to see now how this process unfolds.

Just to highlight again, the context of a local government election year, that might also provide other pressure points between Treasury, between the City of Joburg, between the Gauteng government and the City of Joburg, or agreement between them.

Read: Johannesburg weighs bond sale to help fix broken infrastructure

It just adds more wrinkles to a very difficult fiscal situation in which Johannesburg finds itself.

JEREMY MAGGS: Chris Hattingh, thank you very much indeed. He is the executive director at the Centre for Risk Analysis.