STOPPING THE MUNICIPAL ROT
In a last-ditch attempt to wrest the municipal sector back from the brink of financial collapse, the National Treasury is using a R57bn debt-relief plan to change the culture of impunity that has reduced many municipalities to ruin
he National Treasury’s plan to write off R57bn of municipal arrears to Eskom over the next three years with strict conditionalities is a bold perhaps naive attempt to restore basic financial management in a sector that has spiralled into debt and dysfunction.
The intent is to use the debt writeoff to address the persistent culture of financial mismanagement that has brought the local government sector to the brink of collapse. As things stand, nearly two-thirds of South Africa’s municipalities are in financial distress.
Local government experts have been warning for years that the country has reached the point where to do nothing is to risk the total failure and collapse of many municipalities. According to the Treasury, 165 of the country’s 257 municipalities have collectively run up R57bn in Eskom debt, with 43 of these operating “in crisis” mode.
A year ago, outgoing Treasury director-general Dondo Mogajane admitted that the finance department could no longer cope with the extent of the crisis, especially as its roots are political, not just technical.
In a media workshop last week, Treasury officials admitted that all of the government’s attempts to halt the municipal debt spiral even to the extent of withholding annual budget transfers from serial offenders have achieved no visible results.
Some municipalities are “financially gridlocked”, they explained, and require “radical change” to halt their descent deeper into bankruptcy.
The crux of the problem, according to the Treasury, is a leadership culture of not enforcing debt collection and a
Tconsumer culture of refusing to pay for services, coupled with a host of municipal inefficiencies. These include bloated staffing, not maintaining revenue-generating assets, providing unlimited basic services, and charging tariffs that do not cover the costs of service provision.
The remedy is to insist that in exchange for a 100% write-off of their Eskom debt over three years, qualifying municipalities must meet 14 stringent conditions each month for 36 months. These will be strictly policed by provincial treasuries and must be signed off by the National Treasury monthly.
The process will take place in three tranches. If a municipality meets all the conditions for the next 12 months, they will have 33% of their Eskom arrears written off in April 2024. If they comply for the 12 months after that, they will have the next third of their debt written off in April 2025, and so on until all their debt is expunged by April 2026.
However, if a municipality fails to comply in any given month it will have to remedy the defects and reapply to join the programme or immediately have to start repaying its Eskom arrears, with interest and penalties though any amounts already written off will remain so.
On paper, the 14 conditions are exacting and will require intense support from provincial treasuries if they are to be achieved. They’ll also require unprecedented commitment from municipalities a tall order given their current state of dysfunction.
For instance, municipalities must pay their current Eskom accounts each month within 30 days, impose cost-reflective tariffs, cut off water and electricity to consumers who fail to pay for services unless they’re indigent, progressively install prepaid electricity meters, adopt funded budgets, and ring-fence water and electricity revenue, paying these bulk service providers before using the funds for other purposes.
An essential part of the plan is to improve municipalities’ revenue-raising capacity because, unless debt collection can be restored, the sector will immediately start accumulating debt again. Municipalities must achieve revenue collection rates of 80% in year one, 85% in year two and 95% in year three.
According to local governance ratings agency Ratings Afrika (RA), the municipal sector’s revenue collection rate averaged 79.3% in 2021, with the Western Cape in the lead with
93%. The metros’ average collection rate was 87.3%, led by Cape Town with 98.5%.
“The toughest condition is the [revenue] collection one,” says National Treasury revenue policy co-ordinator Marli van der Woude.
“No business can operate if you don’t collect your revenue and a municipality is no different. But that asks for a culture change; it asks for a different approach.”
Despite the strict wording of the debt-relief plan, the Treasury will be more lenient in practice. For instance,
it will allow municipalities up to five years to phase in cost-reflective tariffs and some time to achieve funded budgets, provided there is a credible plan in place to do so.
It says that while the conditions may seem onerous, they are necessary to force local government to practise proper financial controls.
“Most of these conditions relate to basic financial management best practices things that have been in the municipal space for a long time which municipalities have been required to implement but they have not,” says Van der Woude.
“We really do think that municipalities are able to achieve these conditions. It’s whether there is a commitment to want to do that. And that’s what we want to achieve, to see that behaviour change.”
According to the South African Local Government Association (Salga), which pushed for the debt write-off, the move has the potential to improve financial management and revenue collection, as well as the overall sustainability of municipal services and finances.
“If successfully implemented, these measures could free up revenue for municipalities to maintain their current bulk accounts, pay other creditor current accounts, and provide a reliable basic level of services,” says Salga in a statement.
However, it warns that municipalities will require extensive support from the national and provincial governments to update indigent registers, establish good billing and revenue management systems, implement credit control measures and undertake cost-of-supply studies, among other things.
Eleanore Bouw Spies, the DA’s shadow minister of co-operative governance & traditional affairs, agrees. The problem, she says, is that the plan assumes dysfunctional municipalities have the internal controls and functional revenue management systems to comply with the set conditions. In fact, she explains, these are “severely lacking”.
“While the National Treasury claims that it will address these weaknesses through municipal revenue-enhancement initiatives, the truth is that [its initiatives] have not made much of a difference as municipalities have continued to regress on revenue management,” she says.
RA, while acutely aware of South Africa’s general lack of municipal financial sustainability, also has “strong concerns” regarding the strictness of the debt-relief conditions.
The agency’s CEO, Charl Kocks, believes that very few, if any, of the municipalities that are in long-term default on their Eskom accounts will be able to comply with the conditions either fully or substantially, even over the medium term.
“Inevitably such municipalities will soon be ruled noncompliant and would have to apply anew more importantly, the rolling 12-month compliance measurement periods would start from scratch. The result could well be a collapse of the plan, with possible negative knock-on effects for the debt relief to which Eskom could be entitled.”
(If Eskom is to receive the R254bn bailout announced in the 2023 national budget, it has to write off municipal debt as a precondition.)
Another major problem, and one which the Treasury’s technocratic approach fails to acknowledge, is that of affordability. Local government is where rising poverty and unemployment have collided most forcefully with steep electricity and water tariff hikes.
The reality is that bulk tariffs have become increasingly unaffordable to rising numbers of households. This stands squarely in the way of improving revenue collection, though the Western Cape shows what is possible even in a tough economic climate.
The danger is that playing hardball with embattled consumers by charging cost-reflective tariffs and cutting off their water and electricity could heighten social protest something no municipality is going to willingly invite upon itself.
So, what must be done for the debtrelief plan to work? The DA believes participating municipalities should be made to sign up to financial recovery plans and put functional billing and credit control systems in place upfront.
When it comes to changing the culture of nonpayment, the opposition party would prefer to use a carrot rather than a stick approach, suggesting, for example, that residents in high-default areas who keep their accounts up to date for a set period should be eligible for, say, one month of free electricity.
RA says strong incentives will also be needed to get municipal councils and management to change their behaviour. Its counterproposal also favours a “carrot approach” in which partial compliance would allow for a partial annual debt write-off.
The bottom line is that South Africa’s municipal sector is, with very few exceptions, collapsing financially. The situation has led to a breakdown in service delivery in many towns and could further fuel political unrest, with catastrophic consequences for residents and businesses.
The Treasury is grasping the opportunity of a debt write-off to try to wrest the sector back from the brink, but unless South Africa’s political and administrative leadership is willing to do things differently, the sector will continue its downward spiral. If so, the value destruction and damage to people’s livelihoods and wellbeing will continue apace.