On 30 June 2008 the Nelson Mandela Bay Municipality had R1.9 billion in cash and short term investments in the bank.
A few months later, the NMBM received an AA2za Credit Rating from Moody’s, the fourth highest rating of any South African Municipality.
At the end of that financial year, on 30 June 2009, the NMBM Operating Account showed a surplus (profit) of R1.0 billion for the year just ended.
In April 2010 the Global Credit Rating Company gave the NMBM an A+ credit rating (long term) and A1 (short term). Both are considered excellent, and are investment grade ratings.
Two months later, on 30 June 2010 (the end of the Financial Year), the NMBM operating account showed another surplus, this time of R449 million, and its Balance Sheet showed cash and short term investments of R630 million. For three years the Auditor General has given the NMBM unqualified audits (i.e. the Financial Statements as presented are, to the Auditor General, correct in every aspect).
Two months after the June 2010 Financial Statements, in August 2010, the NMBM ran out of cash, entirely, and could barely pay its staff salaries. It could not pay its trade creditors, causing a crisis of confidence in the institution, and much financial tension in its many suppliers.
What had gone wrong, and why so suddenly?
To explain this sudden disaster, and the solutions proposed for it, the NMBM brought out a Financial Recovery Plan in January 2011. This included five pages of bullet-pointed shortcomings and issues that had contributed to the cash collapse. Much of this is correct, and well-known: other levels of government have not been paying up timeously; neither have Metro debtors; too much money has been contributed to housing provision and the World Cup; recent municipal budgets have been too ambitious and not cash-backed. And much else. The usual suspects.
To get to the core of the problem, one needs to dig into the Financial Statements (as of 30 June 2010, two months before the crisis began).
As mentioned already, the Operating Account ran large surpluses in each of the last two years (R1.0 billion in 2008/2009 and R449 million in 2009/2010), so plainly the problem is not there. The problem appears to have been the funding of massive capital expenditure, and this is best understood by looking at the Cash Flow Statement.
Capital Goods (buildings, pipelines, roads, etc.) can be paid for out of four sources: Specific Government Grants received for that purpose; Bankloans raised for capital expenditure; appropriating the surpluses of the operating account and finally out of cash reserves.
In the NMBM, over the last two years, the following appears to have happened:
|Financial Year 2008/09||Financial Year 2009/10|
|Cash Spent on Capital Goods||R2.3 billion||R2.3 billion|
|Paid for by|
|Specific Government Grants received||R1.0 billion||R1.0 billion|
|Bankloans raised (repaid)||+R0.07 billion||R1.1 billion|
|Entire cash surplus on Operating Account appropriated||R0.35 billion||R0.06 billion|
|To be funded ex Cash Reserves||R1.0 billion||R0.26 billion|
|Cash at Beginning of Year||R1.9 billion||R0.9 billion|
|Cash at End of Year||R0.9 billion||R0.6 billion|
The above sets out the core of the problem: over the last two years, in Cash Flow, the NMBM spent R4.6 billion on capital projects. This was paid for by R2.0 billion in government Grants; R1.1 billion in new bankloans raised, and R0.4 billion in surpluses from the operating account.
This left R1.2 billion to be funded ex cash holdings, which dropped from R1.9 billion on 30 June 2008 to R0.6 billion on 30 June 2010. And, as of this date, trade creditors to be paid amounted to R1.2 billion (against cash holdings of R630 million), and as such the crisis was clearly in place by 30 June 2010.
And simply explained.
Huge capital spending, vastly more than available resources could afford, had to be paid for by running down to zero, in two years, the Metro’s cash holdings.
The major culprits?
Total spending, in the Metro, relating to the 2010 World Cup was R3.4 billion. Of this National Treasury paid R2.3 billion and Province R222 million. This left the NMBM with R880 million to fund from its own resources. This is three quarters of all the expenditure that depleted the Metro’s cash resources.
The World Cup was great, but it came at a huge cost. I leave it to the readers of this column to decide whether a world-class stadium (R2.1 billion); mostly unused transportation infrastructure (R852 million); a training venue (R104 million); “Safety and Security” (R105 million) and “City Regeneration Projects” of R90 million, were worth the cost of entirely depleting the Metro’s cash holdings.