Why the first step in a municipal financial turnaround should have nothing to do with finances

Author: Kim Walsh (Managing Director and Senior Consultant)

National Treasury’s most recent annual report on the state of local government finances indicated that 165 of the 257 municipalities in South Africa (64%) were classified as being in financial distress at the end of the 2020/21 municipal financial year. This is an extraordinary number and seems to climb every year.  

The response to financial crisis in a municipality is often to put a financial turnaround strategy in place. These are, in at least some cases, technically excellent, well-thought-out plans and yet most fail, and (although I stand to be corrected here) there are few if any examples of a municipality that has seen sustained financial turnaround resulting from these strategies. Why is this? 

I believe that it is because the conditions for financial turnaround strategies to succeed are not in place, and these conditions relate largely to leadership and governance.  

This is supported by a 2018 World Bank framework on turnarounds for water utilities. Many of the recommendations in that document apply to municipalities more broadly, and not only to water utilities. It is notable that the World Bank’s recommended first two phases include checking whether the conditions are in place for success; and then creating the space for change. Only when these two things have been done does the framework move on to implementing a set of actions and creating sustained turnaround. 

Are the conditions in place to allow for success? 

The World Bank’s first phase in a water utility turnaround is ‘Phase 0: Diagnose’. In addition to the expected activities of evaluating the performance of the utility and identifying gaps, this phase includes an assessment of whether the conditions are in place to allow for success. This includes determining whether “the utility has a government champion and a competent manager with a minimum level of autonomy.” (Soppe, Janson and Piantini, 2018, p. 47). If the conditions for success are not in place, the World Bank suggests that a turnaround should not proceed at all, and that effort should rather go into putting the conditions for success in place. 

This should not be ground-breaking, but I think that it is. Many of the things required in a financial turnaround strategy are unpalatable. Things like containing employee related costs by managing overtime or reviewing allowances; or implementing credit control and debt collection policies more rigorously by restricting the provision of water or electricity (or cutting them off entirely). If there is not a strong leader in place, who is willing to make the hard choices and has the autonomy to implement action on issues such as these, and if that leader does not have the committed backing of their political counterparts, the most pressing reasons for financial crisis simply will not be addressed. As long as issues such as payment for services are used as trading pieces for political capital, a financial turnaround strategy is nothing more than an elegant document. 

How do we create the space for change? 

Once a diagnosis has been undertaken, there is a clear understanding of the problem and the conditions for success are in place, the World Bank suggests that the next step is to create the space for change. Here again, I agree. 

I believe that one of the features of financial crisis in many municipalities is a breakdown of trust between local politicians and municipal administrations, and the businesses and communities that they are meant to serve. In many cases, households and businesses have lost faith that municipalities will spend the money that they collect through tariffs and property taxes to provide services. This has led to a decline in willingness to pay. Achieving financial turnaround requires restoring that trust. The World Bank turnaround framework refers to this as creating credibility and suggests that it is achieved by making clear, transparent commitments to short-term, high impact actions; and then ensuring that these actions are delivered on, and that this delivery is well communicated. As credibility increases, space is created for more complex and difficult changes.  

The framework includes extensive stakeholder engagement to ensure that stakeholders are brought along with the turnaround process in a deliberate and meaningful way. This speaks to creating a culture of open, transparent communication between municipalities and the businesses and communities that they serve and restoring a relationship of trust.  

Can we do it? 

I have provided consulting services related to municipal finances for 17 years now and it sometimes feels that I have been on the sidelines of a steady decline in the financial health of our municipalities. I believe that there is hope for turnaround, but I agree with the World Bank that, before rushing to roll out financial turnaround strategies, we need to make sure that the conditions for change are in place and create the space for the change that we need. This requires strong municipal leadership and politicians willing to work together with municipal administrations to make changes in the interests of the communities and businesses of South Africa. I am certain that these leaders and politicians are out there. They need all of our support. 

Reference: Soppe, G., N. Janson, and S. Piantini. 2018. “Water Utility Turnaround Framework: A Guide for Improving Performance.” World Bank, Washington, DC.