Municipalities lousy debt collectors

2011-09-04 10:50

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.

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  • Mike N - 2011-09-04 11:20

    West Cape is the best because the ANC is not in charge, it is that simple.

  • BigD - 2011-09-05 06:37

    I have a different view the the bad collections. So many people are struggeling to make ends meet. The rises in rates and taxes plus the huge electricity increases have taken the cost of these services beyond so many people. On the other hand many people that owe the municipalities funds just refuse to pay due to no service delivery.

  • Jamie - 2011-09-05 07:32

    In reality most of these unpaid debts are actually billing errors by the councils, are will never be collected.

  • bouttell1 - 2011-09-05 08:10

    Maybe giving away so much electricity and water has a bearing least it would if someone operating a spaza shop gave away half of his stock...would it not ????

  • Lesbu Trading - 2011-09-14 13:06

    Liquidity might be a problem I would agree to a certan extend however the study does not address the problem on why and what causes the liquidity problem in the first place. First the eskom takes a large some of money to supply electricity, that electricity is only supplied to the urban areas and not the locations, when you collect you switch of the power and people come and make arrangements to pay and at times they dont stick to and in the location the power is supplied by eskom where you cant switch and they use water, sewer, garbage collected and when the account comes you cant pinalize for non payment, that money due cannot be collected. Secondly most municialities focus on thier non-core function (water, sewer, roads & etc. The interferance by politicians on administration, the unfunded mandates, well of course the unabated looting state funds, incorrect model of budgeting and the controlling of the budget veruses the cash in the bank. You find that cash book is in the million while the bank balance is -R20m. There are a whole lot more reasons for the liquidy issues however municiplities if could focus in their core business it would have been better and electricity should be taken back to eskom. Most poeple in the locations and in urban areas are not paying for their services and by default the muncipalities can provide services without bieng paid by the majority of the population they are serving.

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