Financial Mail

Facing a terrible tangle

- Troye Lund lundt@fm.co.za

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.

 ??  ?? Derek Powell Debt to municipali­ties could reach R130bn by next year
Derek Powell Debt to municipali­ties could reach R130bn by next year

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