Is Johannesburg going bust?

Johannesburg, Africa's most powerful commercial centre, is facing a liquidity meltdown.

The city tabled its R33-billion budget for the new financial year last week, raising electricity and services charges significantly in the process.

At the same meeting, the city asked the council to approve R4.4-billion in short-term loans to "bridge cash-flow mismatches".

The loans will come in the form of a R3.5-billion commercial paper and a R920-million general banking facility. A commercial paper is a short-term loan used to finance pressing liabilities, while banking facilities are generally used to bridge short-term liquidity shortfalls.

The city blamed its cash-flow problems on the National Treasury, saying it did not control the movement of treasury funds.

Johannesburg's finance chief, Geoffrey Makhubo, said: "Sometimes we start projects while we are waiting for treasury grants. When those grants come, we repay [loans]. We don't want to delay service delivery while waiting for grants."

But National Treasury spokesman Lindani Mbunyuza said there was a constant flow of funds to municipalities, starting on July 7 - the first week of the municipal financial year - and followed by two more tranches, on November 25 and March 25.

Municipalities also receive conditional grants on a monthly or quarterly basis.

Makhubo described the requested R4.4-billion in short-term loans as "a cash management tool".

However, economist Chris Hart was critical of the city's appetite for short-term loans.

"When a local authority incurs debt, it should be for a long-term capital project, which improves the lives of ratepayers.

''If you incur debt for consumption or for incidental shortfalls, it's not right. These loans help delay dealing with management problems. It sounds like they are hiding problems instead of dealing with them," Hart said.

The exposure of the city's liquidity crisis follows a damning qualified report for 2009/2010 by the auditor-general released last week, that showed Johannesburg had incurred a R1.4-billion loss in water and electricity distribution.

The city had had unqualified audits for three consecutive years.

But its financial woes begin in August 2009 when it had to sacrifice R1-billion of its budget to fund the completion of FNB stadium, which hosted the opening and closing ceremonies of last year's soccer World Cup.

The city had started the 2008/09 financial year with a surplus, but ended it with a R510-million deficit.

The city's financial problems worsened with the billing crisis that arose when ratepayers were sent massively inflated accounts.

The Times reported in January that the city had failed to collect R300-million in rates and taxes by the first quarter of the last financial year. That amount is expected to have grown significantly since then.

Johannesburg has displayed a pattern of regular borrowing. It has:

•  Issued seven municipal bonds worth R6.6-billion. The city initially had bonds worth R7.7-billion, but in March last year it finished servicing the first R1-billion bond it issued in 2004;
• Taken 21 loans worth a total of R2.44-billion from commercial banks; and
• Taken 26 loans totalling R1.85-billion from development finance institutions.

The cash crisis has long-term implications for the city.

Although it has an AA- credit rating, agencies are monitoring Johannesburg's liquidity and gearing closely, and it could be downgraded to A. (Gearing is a financial tool used to measure and evaluate the degree to which an entity's activities are funded by the owner as opposed to creditors.)

Most of Johannesburg's capital projects are funded through long-term loans.

"The City of Johannesburg has its own issues that are being monitored closely by the rating agencies, such as the gearing levels and liquidity," according to council documents tabled at last week's council meeting.

Furthermore, the documents say, investors tend to rate the city's credit risk as a single A because of the levels of gearing on the municipality's balance sheet, relative to that of other municipalities.

Mayor Parks Tau said yesterday the worst of the liquidity challenges (which he conceded were the result of the shortfall for FNB stadium and the billing crisis), were ''now over''.

''In the current financial year, as billing stabilises, revenue is improving,'' Tau said.

To further improve its cash flow, Tau said, the city was looking at leveraging non-core strategic assets such as outdoor advertising.

It was also undertaking an extensive review of its spending.