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Joburg: We're not in financial crisis

Jul 06 2011 14:00 Sapa

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Johannesburg - The City of Johannesburg on Wednesday dismissed reports that it faces a financial crisis.

The city's financial position was robust and healthy and it would continue to be responsibly managed to ensure communities' needs and expectations were met, said mayoral committee on finance member councillor Geoff Makhubo.

The city was responding to a report in The Times newspaper indicating that Johannesburg faced a "liquidity meltdown".

The newspaper reported that the City of Johannesburg had asked the council to approve R4.4bn in short-term loans to "bridge cash flow mismatches".

Makhubo said that in the run up to the 2010 Soccer World Cup, the city deliberately intensified its capital investment programme.

While this stretched the prudential ratios, the intention was to gradually work these down in the medium term.

"Escalations in the construction industry in the build-up to the World Cup resulted in the city utilising its internal cash reserves to ensure that readiness for the international event was attained.

"Thus, the normal cash reserves that would be available to manage periodic cash flow mismatches were depleted," he said.

Cash flow mismatches also arose in the normal course of business, from the timing differences between when cash was used and when operating funds were received.

"An example is the Eskom tariff increases which are borne by the city in July and only realised as income from the customers at the new tariff in September."

Another example was the government's grant allocation, which was used to implement projects such as the Bus Rapid Transit system.

"Such grants come periodically, whilst our expenditure programmes for the daily running of the city are continuous," Makhubo said.

He said service delivery in the city had not slowed down.

The Times reported that the loan would be in the form of R3.5bn commercial paper and a R920m general banking facility.

Commercial paper, according to the report, is a low interest, short-term loan for financing short-term liabilities and banking facilities and is used to bridge "short-term liquidity shortfalls".

Makhubo said the commercial paper was cost effective and was done "at the back of the anticipated grants and therefore the risk if any for the investors is minimised".

He said commercial paper issued this financial year had been used to bridge cash flow mismatches and complied with the requirements of the Municipal Finance Management Act.

The act requires the repayment of any short-term debt before the end of the financial year.

Makhubo said all commercial paper issued in the past financial year had been redeemed on time.

"Given the size of the city's approved budget of R33bn for the 2011/12 financial year, it is prudent to put in place facilities of up to R3.4bn to manage liquidity mismatches as and when they arise."

The Times quoted economist Chris Hart criticising the City's appetite for short-term loans.

"When a local authority incurs debt, it should be for a long-term capital project, which improves the lives of ratepayers," he told the paper.

"If you incur debt for consumption or for incidental shortfalls, it's not right. These loans help delay dealing with management problems. It sounds like they are hiding problems instead of dealing with them," he said.
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