Facing a terrible tangle
Treasury’s bid to force 59 defaulting municipalities to honour their debt to Eskom and to water boards, by withholding their equitable share of the national budget, has compelled 47 local councils to sign repayment agreements with the utilities.
Eskom is not happy with some repayment plans, saying they are too slow. But it’s also not certain whether municipalities will be able to stick to the repayment plans.
The SA Local Government Association (Salga) says if treasury is going to use a “blunt” instrument on municipalities it should apply the same approach for debtors who now owe municipalities R100bn in unpaid rates and taxes. This is equivalent to half the total revenue they raise in a year and is increasing dramatically.
The amount municipalities are owed was R46bn in 2007 and projections by Derek Powell and Michael O’Donovan at the University of the Western Cape are that it will increase to R130bn by next year unless addressed urgently.
Government departments owe R4,7bn in unpaid bills, which is half the R9,4bn that municipalities owe Eskom (of that, R4bn is current). Municipalities owe water boards R3,6bn (R1,3bn current and R2,3bn arrears).
Though government debt to municipalities is only 5% of the total debt owed to them, the rate at which government’s share of the debt has been increasing reveals confusion created by the state’s incomplete asset register as well as the way in which departments have been allowed to withhold payment, especially on disputed bills.
The main culprits for nonpayment are the national and provincial departments of public works because they own most of the state’s properties. Almost 90% of the debt owed by national departments is owed by the national department of public works. The R1,4bn owed by the national department is now equivalent to 20% of its R6,4bn budget allocation in 2015. More than half the provincial debt (R1,1bn) to municipalities is owed by the provincial departments of public works, roads and transport.
Treasury and the department of co-operative governance & traditional affairs (Cogta) are confident that a task team, led by public works, is getting a grip on state debt to municipalities, but treasury is forging ahead with strong action against nonpaying municipalities. In March it withheld the equitable share grant to 59 local councils in an attempt to get them to honour their con- stitutional obligations and resolve debt for the bulk water and electricity they buy and sell on to consumers. The crippling effect of this move is highlighted by the fact that the equitable share grant accounts for between 31% and 37% of the affected municipalities’ total operating revenue.
Salga lodged a dispute that questioned the legality of treasury’s action (because equitable share is an unconditional grant). Treasury started meeting municipalities to find out why they were not paying. It has been releasing money on a case-by-case basis, depending on why they are not paying. Now 47 municipalities have signed repayment agreements and have their full tranche of equitable share, nine have received a portion and three have received nothing. These include Ventersdorp in the North West, Renosterberg in the Northern Cape and Ngwathe in the Free State.
“There are some municipalities that are not charging tariffs to cover the full costs of services, and are not exercising effective credit control. But there are others that face real challenges which seriously impact on their ability to pay,” says Salga executive director of municipal infrastructure services Jean de la Harpe. She says provincial and national governments are beginning to understand the impossible situation some municipalities find themselves in.
For example, local municipalities, which provide water on behalf of a district municipality, do not get the equitable share money for water. They have very limited rates bases and are subsidising the provision of free basic water for the poor. There’s no contract between the district and local council to divide up the equitable share money, yet the local council is being held to account for nonpayment to the water board.
Ownership of infrastructure is another challenge. In one case, illegal water connections and poorly maintained infrastructure resulted in a municipality receiving only 60% of the bulk water it was billed for. In this case the water board argues that it does not own the pipeline infrastructure and the municipality argues that it doesn’t either.
Salga also argues that Eskom is overstating its claim that municipal debt is crippling. Though the R4bn that municipalities owe Eskom is significant, it is equivalent to 8% of the total R60bn bulk electricity supplied to municipalities each year.
“Why is treasury not withholding money to provinces and national government departments [until they pay municipalities]?” asks De la Harpe. She says Salga is advising municipalities to implement their credit-control policies and cut services to everybody, including state departments, business and others who are in arrears.
“Obviously we do not want to see clinics and schools being cut off but the debt is ballooning. We must avoid a situation where services collapse because the revenue is simply not there to sustain them. Municipalities cannot continue like this,” she adds.
Powell and O’Donovan raise the same questions about why the equitable share allocation to defaulting departments is not also suspended for persistent nonpayment and add: “National and provincial governments have a constitutional duty to support municipalities — wouldn’t paying their debts be a practical way to do that?”
Lerato Thwane, chief director of finance at Cogta, says the issue of state debt to municipalities is complex. She says progress is being made on payment of undisputed debts, but disputed debt is a more stubborn problem to resolve. But she confirms that the Forum of SA Directors-General has agreed that departments must now pay a minimum of 80% of this disputed debt while they query it with municipalities.
“We are therefore still looking forward to the positive results of this decision when we get the next municipal financial report, released quarterly,” says Thwane.