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Municipalities lousy debt collectors

Sep 04 2011 10:50
Antoinette Slabbert
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

sa economy  |  municipalities


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