Data provided by iNet BFA
Loading...
See More

Municipalities lousy debt collectors

Sep 04 2011 10:50 Antoinette Slabbert

Related Articles

Debt to metro councils rises

Municipality seeks R1.3bn grant

MPs urged to put screws on councils

Municipalities' misuse of money rockets

Gauteng to spend R1.5bn on delivery

Sheriff seizes municipality's fire engines

 
Johannesburg - It may be getting increasingly risky to do business with municipalities.

This has emerged from rating agency Ratings Afrika’s latest analysis of the financial statements of 105 of the country's biggest municipalities.

According to this analysis, at the end of the 2010 financial year municipalities in the Free State and Gauteng did not have sufficient current assets to cover their current liabilities. This means that their cash and collectable consumer debt was insufficient to pay service providers and cover short-term debt.

In these two provinces the metro councils of Ekurhuleni, Tshwane, Johannesburg and Mangaung were below the critical level of liquidity.

Leon Claassen of Ratings Afrika, who did the analyses, said municipalities should have finalised their financial statements for the 2011 financial year last past week. The information is expected to be released in September, after which one will be able to see the current position.

Claassen however pointed out that the problems with Johannesburg's accounting system in the 2011 financial year became critical and the council's position is therefore likely to have aggravated. He expects that the situation in other metros will be substantially unchanged.

On the surface the situation in North West does not appear bad, but that is thanks to the relatively healthy finances of Tlokwe (Potchefstroom), said Claassen. This large town has positively affected the combined figures of the test sample in North West.

With the exception of North West, Western Cape municipalities' liquidity position is the best.

Claassen said liquidity problems arise mainly from poor collection of consumer debt.

In this regard collection rates by the Free State (74.1%) and Mpumalanga (77.6%) are the worst. Businesses with such ongoing collection rates would go bankrupt, he said.

The amount of uncollected consumer debt for the 2010 financial year is more than R10bn.

This is money that could be ploughed back into highly critical infrastructure to improve the living conditions of many South Africans, said Claassen. The amount is furthermore equal to about a third of government’s R30.2bn contribution to the municipal budgets.

Over the years poor debt collection has led to an accumulation of bad debt. For the 105 municipalities the total is R52bn.

Provision has been made for writing off 60% of that figure, which implies that the councils believe they can together still collect some R22bn of this debt.

Claassen says the situation is however worse than that indicated by the financial statements because there is generally an underprovision for bad debt.

Judging from the large amounts, he said, it appears that the financial problem leading to poor service delivery is not related to funding, but rather to poor management of debt collection.

Claassen said that a further consequence of poor liquidity is that municipalities cannot build up reserves. This reduces their ability to withstand unforeseen financial shocks like natural disasters.

Liquidity is expressed as an operating ratio, which for municipalities should ideally be between 2.5 and 3, said Claassen. On June 30 last year the average for the 105 municipalities was however 1.3, with the eight metros scoring as follows:

  • Buffalo City1.3
  • Cape Town 1.4
  • Ekurhuleni 0.7

  • eThekwini 1.2
  • Johannesburg 0.6
  • Mangaung 0.5
  • Nelson Mandela Bay 1.1; and
  • Tshwane 0.8.

(A ratio of under 1 means that in the short term there is insufficient money to pay creditors and repay short-term loans.)

According to Ratings Afrika, the financial sustainability of local authorities is threatened by an absence of liquidity.

 - For more business news in Afrikaans, go to Sake24.com.

sa economy  |  municipalities
NEXT ON FIN24X

 
 
 

Read Fin24’s Comments Policy

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
5 comments
Add your comment
Comment 0 characters remaining
 

Company Snapshot

We're talking about:

Small Business

A cash flow crunch often occurs in small businesses trying to balance cash coming in with cash going out. Watch this video to help you improve.
 
 

OneRandMan learns how money really works

National Savings Month is not only this month, it is every month from your very first salary slip, an expert warns OneRandMan and all South Africans.

 
 

Start saving...

Time the key for retirement saving
Dummy's guide to saving
Save money with affordable account
All about endowments

Money Clinic

Money Clinic
Do you have a question about your finances? We'll get an expert opinion.
Click here...
Loading...