Glenn Hollands

Auditor-General Shauket Fakie grabbed the headlines when he disclosed that the top 50 municipalities had collectively accumulated more than R19bn of unpaid debt. However, one of the reasons that the AG was able to make this rather shocking finding was because these 50 municipalities actually produce financial statements – many do not. Twenty seven municipalities had not submitted financial statements by March 2006, more than a year after the due date. In the Eastern Cape, there is also a pattern of withdrawing financials after submission because documentation is missing – a trend which the AG has vowed to clamp down on. These practices create a situation where even the current report of the AG is only a partial reflection of what is happening financially in municipalities.

For 2004, only 95 or 34% of the 284 municipal audits could be finalised by the end of April 2005 and 61% were qualified i.e. the AG had insufficient information on which to express a full audit opinion. Where audit opinions were expressed, 11% were unfavourable and 3% were issued with disclaimers. These factors usually indicate irregularity or incapacity in the financial management responsibility of the municipality. South African citizens who largely rely on the AG for accurate information on the state of municipal finance management, can get little reliable insight when municipalities provide the AG with very little on which to base an accurate assessment. Auditor-General in the Eastern Cape, Singa Ngqwala, recently proposed that the problem of late submission of financials be addressed by making these deadlines part of the performance agreements for municipal finance officers. Technical or legal solutions to improved financial accountability have an indifferent track record, however, and increasingly the non-government sector is being considered as a remedy.

Municipal debt is nothing new but the patterns that it manifests can be important. The distribution of the R19bn debt across municipalities is quite uneven. Johannesburg alone accounts for R7.2bn. Growing levels of debt have been a constant factor in previous AG reports. For small and predominantly rural municipalities, debt or financial dependence may be regarded as an inevitable part of their existence. For larger Metros it is less easily explained. A conventional excuse for poor debt recovery is that a growing burden of indigent service consumers and the formalisation of Free Basic Services make mounting municipal debt inevitable. However to sustain such an argument municipalities should first demonstrate that financial transfers from national government, in particular the Equitable Share grant has been effectively deployed to support the operating costs of providing basic services to the poor. Only once this is demonstrated can there be a convincing argument for mounting debt as a result of inequitable and inadequate financial transfers to the local level. Small municipalities, particularly in the Eastern Cape, may have some difficulty in showing effective and responsible use of existing grants.

At an Afesis-corplan seminar in June 2006, Mthobeli Kolisa of Palmer Development Group cited Qaukeni and Mnquma municipalities in highlighting examples of expenditure that contradict the budget or are based on inconsistencies and unrealistic financial projections. Kolisa noted that councils and communities do not currently have the capacity to engage meaningfully, make informed opinions or understand the implications of these figures. Kolisa urged other spheres of government and the NGO sector to help build these capabilities. This suggestion was endorsed by officials from the Eastern Cape Provincial Treasury who called for closer partnerships with NGO programmes designed to strengthen financial reporting by municipalities to local civil society.

In the case of the top 50 municipalities, this may be a difficult point to argue, as a significant part of the debt seems to accrue to fairly wealth creditors. In the Cape Town Metro, the provincial government apparently owes the municipality R79m for rates and services. In June 2006, the Metro took the drastic step of cutting services to some provincial government departments. The province’s local government department only had its electricity and water reconnected after it paid R242 000 of a R724 000 debt. Other institutions, however, have taken issue with the Metro’s billing procedures. Cape Town International Airport, which allegedly owes more than R50m, said through its communications officer, Deidre Hendricks, that a contested 2003 increase of 900% in rates and taxes, lay at the centre of the dispute. The company claimed to have been in negotiations with council over the issue and to have already paid a provisional amount for 2004/2005. Conspicuously affluent institutions like the five-star Arabella-Sheraton Grand Hotel, which apparently owes R15m, also contests the debt. Arabella-Sheraton marketing manager, Ashleigh Lines, said that the rates bill was based on a valuation that was R100m too high and that the company expected to receive a substantial credit note for outstanding rates.  Western Province Rugby, which allegedly owes the Metro R9,3m, claims it does not owe council “one cent” and that the outstanding amount is based on a dispute going back to 1997 over a levy for traffic services provided during matches.

There appear to be gaps in the information about big business debt to municipalities. Government characterises this as simple refusal to pay while the alleged debtors claim poor billing procedures or local financial policies that are in dispute. Given the gap in institutional capacity between municipalities and the private sector, many may choose to believe the latter. Reinforcing this view is the AG’s statistic that on average it takes the top 23 municipalities (which are amongst the 50 classified by the National Treasury as having “high capacity”) an average of 136 days to recover money owed to them. This is much longer than the acceptable norm for business.  Nor is it simply a case of waiting for the big debtors to hand over the money; the AG notes that R12bn or about 70% is regarded as irrecoverable bad debt. The AG’s remarks also suggest that municipal debt is being regularised i.e. municipalities are planning financially for non-recovery of debt. The AG noted that it was “quite staggering the provisions for bad debt that are being made.”

What is likely to turn this worrying situation around? Clearly SALGA as the organised form of local government has some responsibility to engender good governance and fiscal propriety amongst its members. Much of the organisation’s training interventions and resource distribution are in fact devoted to the above principles. SALGA also rarely misses an opportunity to affirm these principles in its public statements. However, in terms of leading by example as an institution, SALGA has created a poor precedent. The majority of its income is derived from members’ levies, however, the AG reported that about R135m or 71% of the total levies due for the 2004/2005 financial year had not been collected. SALGA it seems was happy to follow the example set by many of its member municipalities and rely on government grants or donations. Like its more greedy councillors, SALGA personnel also paid themselves very high salaries. Despite the fact that it only filled 61% of its approved posts the organisation managed to increase its salary budget between the 2004/2005 and 2005/2006 financial year from R39m to R49,4m or 27%. The AG also found that from a sample of 40 employees, 25 or 62.5 % were remunerated outside the approved salary framework.

If government cannot reverse the worrying trends outlined in the AG’s report, perhaps the private sector will play a role in reigning in wasteful local authorities. The examples of Arabella-Sheraton and Western Province Rugby seem to suggest that large corporations will not stand for being ripped-off by extravagant municipalities. This hope, however, may be misplaced. Alluding to the recent AG report, Hilary Joffe of Business Day recently noted that “If SA’s municipalities were companies, bankers might be going out of their way to avoid lending to them…” Instead Joffe noted that “far from taking flight from the municipal market, banks are queuing up to lend to the larger municipalities, advancing long-term unsecured loans at rates which, in the jargon, may be “submarket”, or even “sub-submarket”, with margins squeezed right down.”  While Joffe notes the benefits this may have for municipal infrastructure investment, the behaviour of the banks seems curious. Social investment imperatives are an inadequate explanation of the bank’s apparent willingness to suspend their critical faculties and renowned financial conservatism. Joffe suggest that the ostensible reason may be the financial sector charter, which requires the banks to commit R25bn to “transformational infrastructure”. More importantly the concern that “good business sense” may be lacking in these investments could be misplaced. As Joffe notes, 284 municipalities that account for millions of transactions daily are an attractive market for banking services, and soft loans may be the foot in the municipal door to access that market.  But Joffe’s most convincing rationale is that municipalities are never liquidated; they are always bailed out by national government. Thus what may seem like a dodgy investment is in fact quite secure. Anyone looking to increased pressure from the banking sector for good governance and fiscal responsibility may, therefore, be sorely disappointed.

Sources: Cape Times, 27 June 2006; Auditor-General Presentation to SALGA, 26 June 2006 & News Release, 10 July 2006; Business Day, 12 June 2006 & 4 July 2006

The Local Government Transformer, Vol 12. No. 4, August/September 2006