Recession heightens the squeeze on municipalities

While municipalities are already battling, for a number of reasons, to cope with the demands of service delivery at local level, there are increasing signs that the global recession is becoming very local and a threat to the financial well-being of many local governments. Some may even battle to settle bills with their own providers.

Gauteng Premier Nomvula Mokonyane in late August warned that the ability of municipalities to collect revenue is being hampered by the economic downturn. It has already saddled metropolitan councils such as Tshwane and Ekurhuleni with cash flow problems.
In the meantime, a National Treasury report, analysing the financial performance of the country's 283 municipalities, has found that they are owed a staggering R50 billion. It also found that certain municipalities are so cash-strapped that they are unable to to pay their creditors.
The Treasury further advised municipalities to review their planned spending downwards to compensate for the anticipated lower income due to the recessionary economic environment.

In the face of ever increasing pressure for improved service delivery, the pressure of a general municipal election that is now only about 18 months away and recently increased remuneration packages from negotiations with trade unions, make it unlikely that municipalities will be able to follow this advice.

Against this background, a management consultant specialising in municipal business dealings has warned that businesses which do a great deal of business with municipalities, should reduce their exposure on that front and monitor payments from municipalities carefully.

Debt outstanding to businesses for 30 days or more by the Metropolitan Council of Johannesburg at the end of August, already stood at a staggering R71 million. In the case of the relatively small district municipality of Mangaung (Bloemfontein), the figure was well over R8m.

Premier Mokonyane said that more funds had to be found to help distressed municipalities. The impact of the recession on the metros needed to be addressed.
“They need to be helped with cash flow management. Some municipalities have issued municipal bonds already. Others have to apply for loans as well as look at bulk infrastructure loans from institutions,” said Anita Botha, municipal consultant of Pro-Active Management Services.

Botha was recently quoted in the Sunday newspaper "Rapport" as saying that businesses heavily dependent on doing business with municipalities should attempt to broaden and diversify their client basis.

The Treasury report raised serious concerns about Mbombela (Nelspruit) municipality in Mpumalanga and Rustenburg in North West – both 2010 Fifa Soccer World Cup host cities – which are underspending on their capital budgets. There is also concern that Mbombela and Rustenburg had spent only 53.4% and 60.5% of their adjusted capital budgets, respectively.

The report expressed concern that this may be an indication that the two cities may be depriving their residents of essential services, and channeling all their energies and a large chunk of their money towards completing their stadiums.

The metros have seen their consumer debt increase by 10% to R29.4bn in the past financial year. Gauteng seems to be the worst hit, with the City of Johannesburg alone owed R9.1bn, followed by Ekurhuleni with outstanding debt owed to it of R6.8bn.

The City of eThekwini and the City of Cape Town are both owed in the order of R4.5bn. Consumer debt owed to secondary cities has increased by a massive 36% compared to the previous year and now amounts to R8.3bn.

The report further notes that the bulk for the consumer debt to municipalities was overdue by more than 90 days. Particularly worrying was that a large number of the cash-strapped municipalities in the Northern Cape and North West were battling to pay for services such as electricity and water.
“This may indicate that municipalities in the North West and Northern Cape are no longer able to pay their creditors due to serious cash flow problems,” the report states.
In Gauteng, KwaZulu-Natal and the Western Cape, however, 98% of municipalities were meeting their obligations to their creditors.
Debt to businesses on 30 June this year stood at R4.4bn. Of this amount, more than 96% was less than 30 days outstanding.

On average, municipalities spent about 5.5% of their budgets on maintenance and repairs, but in the final quarter of last year, they only spent about 1.5%, or R2.8bn of their combined R181-billion budgets on maintenance and repairs.

While it would appear that payments to creditors were not in bad shape, with more than 90% of accounts being settled within 30 days by the end of June this year, closer scrutiny indicates that 125 of the 283 municipalities did not report on their creditors. These councils, which seem to be unable to report properly, could be more vulnerable to financial problems. This could also lead to late payments to service providers, Botha warned.