Municipal Consumer Debt
Definition
Municipal consumer debt (MCD) refers to the non-payment by ratepayers for municipal services such as water, sanitation, electricity, refuses removal and property rates, as well other obligations such as traffic fines.
Latest figures and composition
National Treasury’s latest Local Government and Expenditure Report puts aggregate MCD at R143.6 billion at the end of the 1 July 2017 to 30 September 2017 quarter. This is an increase of R15.2 billion from the previous quarter.
Households account for 70.8% of the R143.6 billion, government 5.7% and business the bulk of the balance.
Metropolitan municipalities are owed R72.8 billion (half of total MCD). The four largest contributors are the City of Johannesburg (R18.8 billion), Ekurhuleni Metro (R 14.4 billion), City of Tshwane (R10.9 billion) and eThekwini (R9.3 billion). Households accounted for 76% of the R72.8 billion, business 19.1% and government 2.6%.
Secondary city municipalities are owed R 29.3 billion or 20.4% of total MCD. Households accounted for 65.6% of the R29.3 billion and no figures were given for the balance.
Regards potential MCD recovery, Treasury stated the following:
“It needs to be acknowledged that not all the outstanding debt of R143.6 billion is realistically collectable, as these amounts are inclusive of debt older than 90 days (historic debt that has accumulated over an extended period), interest on arrears and other recoveries.
If consumer debt is limited to below 90 days, then the actual realistically collectable amount is estimated at R31.9 billion. This should not be interpreted that the National Treasury by implication suggests that the balance must be written-off by municipalities.”
Causes for household non-payment
Inability to pay, inaccurate billing and poor credit control, as well as customer dissatisfaction due poor service delivery are the main reasons cited by government officials and researchers for municipal household customers defaulting on payments.
Inability to pay as a result of poverty is a common cause cited for default. Despite this, the Department of Cooperative Governance (CGoTA) says that tariffs for electricity and water are currently not cost reflective and should be higher. [1] The government’s tariff-setting policy is based on covering costs without consideration for what people are willing or able to spend. Importantly, in Eskom’s latest application to the National Energy Regulator of South Africa (NERSA) for an over 19% increase in rates, Eskom failed to mention any plans to improvement cost management.
According to governments Free Basic Services (FBS) policy, indigents are exempt from having to pay for basic services below a certain threshold. Municipalities use a variety of ways to target indigents. In the case of an indigent register, municipalities do not regularly update this information, which means that indigents may be counted as (illegal) defaulters and so falsely inflate the extent of consumer debt. [2]
Directly linked to the above, Minister of Cooperative Governance Des van Rooyen as well as researchers from Deloitte Consulting have stated that “many municipalities” are just not economically viable given their economic base, demographics, etc. [3]&[4]
Incorrect billing continues to negatively affect the integrity of local authorities. Poor performance in this area often results in paying customers being categorised as defaulters which can exacerbate an unwillingness to pay. Irregular metering systems were emphasized in annual reports by Statistics South Africa over the past several years. [5] A lack of capacity within municipalities has been blamed for ongoing incorrect billing. Furthermore, the collection of money is often not done efficiently according Municipal IQ managing director Kevin Allan. [6]
Rate-payer dissatisfaction with poor municipal service delivery has been a well publicised over the years, especially due the violent protests that have often resulted. There can be little doubt that this too has contributed to unwillingness to pay. Government officials and researchers posit that it is linked to a ‘culture on non-payment’ going back to the apartheid rates boycotts when rate-payers refused to pay as a protest against the government.
There are another two lesser explored reasons for household non-payment. Firstly, where compliance with billing by local authorities is expected to positively relate to the severity of sanction for non-payment, the opposite is true in South Africa. Researchers believe this could be because the sanction is perceived to be unfair or extreme and thus met with a strong refusal to pay. Lastly, where non-payment has become a norm, people may not consider non-compliance a big issue. [7]
Causes for non-payment by business
While data on non-payment by business is available, the reasons are not well documented. In 2011 however, Business Unity South Africa (BUSA) were approached to give their views on the matter. The reasons given were similar to above:
- irregular billing,
- incorrect billing,
- unhappiness with service,
- high tariffs, and
- others do not pay (given as the least likely reason because it would undermine the sustainability of enterprises). [8]
Causes for non-payment by government
Government departments have in the past noted the following reasons for non-payment:
- slowness in generating invoices or property rates schedules,
- inaccurate verification and reconciliation,
- inappropriate billing systems,
- unreasonable interest rate charges and
- reforms in a particular sector negatively affecting another sector.
o For example, when government moved the payment of property rates from the Department of Public Works to their provincial counterparts, insufficient planning resulted in a bottleneck in payments, as well as disputes over who is responsible for historical amounts owing to municipalities. [9]
Consequences
In delivering his report on the audit outcomes of 270 municipalities for 2015-16, Auditor General Kimi Makwetu stated that serious government intervention was required at 85 municipalities “due to poor debt collection and a lack of revenue generation” [10]
Despite having some of the highest MCD in the country, the Ekurhuleni Metro and Ethekwini Metro spokespersons both claim that the effect of household defaults has had no material effect on service delivery. For the City of Johannesburg however, strategic advisor to the MMC of finance, Rendani Tshivhase, says that MCD has affected service delivery. [11]
MCD can have a number of negative impacts. It can undermine the cash position of municipalities thereby limiting their capacity to fulfill constitutionally mandated responsibilities. It can reduce finance available for the delivery of basic services, as well as infrastructure maintenance and upgrading. The financial strains can also overburden the existing tax base by increasing the need for subsidisation from rich rate-payers.
Regarding service delivery for the most vulnerable in our society, the roll out of Free Basic Services (FBS) for the indigent is funded via the local government equitable share allocation (LES) and the municipalities’ own-revenue. Non-payment constrains the amount of own-revenue at a municipality’s disposal, thereby hindering access to and delivery of FBS. [8]
MCD’s affect on cash flow also affects the ability to pay creditors, the largest being Eskom. According to the 2016-17 Annual National Treasury Report, as at 31 December 2016, municipal arrears owed to Eskom stood at R9.7 bn.
Government’s response to MCD
Historically, the Department of Cooperative Governance (CoGTA) has been tasked with improving the MCD situation. Its latest programme called Municipal Finance was announced in 2017:
“Municipal Finance provides support and technical capacity to municipalities on municipal finance policies such as audit plans, financial management, revenue enhancement, tariff setting and modeling, free basic services and procurement policies.” [12]
There is little evidence of a real plan of execution and monitoring for Municipal Finance. Searching through CoGTA’s Annual Reports, Annual Performance Plans and all other documents and presentations available on the CoGTA’s website yields no information. Municipal Finance was allocated R22.5 million in 2016/17 and under-spent by R16.6 million.
Government has handled debt recovery since as far back as 1996, when it launched the Masakhane Campaign. This was followed by Project Viability, Project Consolidate and the Local Government Turnaround Strategy (LGTAS). All of these had roughly the same objectives as Municipal Finance but all showed limited success.
Regarding these programmes, the Financial and Fiscal Commission stated in the Submission for the Division of Revenue 2012, that “Based on available data on municipal consumer debt, these projects do not appear to have had a significant impact. Yet, despite the limited impact, new programmes continue to be established. … government does not appear to evaluate what went wrong with failed reform attempts before implementing new programmes,” [13]
In February 2017 National Treasury got involved and announced Enhanced Revenue Management as one of four “game changers” in a plan to help municipalities reduce costs and improve financial management. Here too there is no publicly available evidence of a concrete plan.
Nevertheless, some municipalities have successfully implemented creative measures to improve billing and collection. For example, eThekwini Municipality uses annual aerial photographic surveys to produce maps that indicate recently constructed properties that show the precise location of all connected and unconnected properties [15]. They also employ dedicated staff to focus on the recovery of government and top debtors. The City of Cape Town also has a dedicated section that focuses on the top 1 000 debtors. Theewaterskloof emphasises the use of customer profiling and regular updating of its indigent register. [15]
There are in place legislative provisions intended to guide municipalities in managing their revenue, such as the Municipal Finance Management Act (MFMA) and Municipal Systems Act (MSA). The MSA has a chapter on credit control and debt collection, including methods municipalities may employ in trying to recover amounts owed, including pay-off arrangements, termination/restriction of services, seizure of property or attachment of rent payable on a property. [16] However, total cut-offs are not possible for certain services such as water as it is considered a basic human right. Also, cut-offs combined with high unemployment, poverty as well as service delivery dissatisfaction has often lead to violent protest. [17]
Eskom and the Department of Water and Sanitation responses to MCD
As mentioned above, MCD affects the municipalities’ cash flow and their ability to pay creditors. The largest of these creditors are Eskom and the Department of Water and Sanitation (DWS).
By June 2017, total municipal debt owed to Eskom came to R11.5 billion. At this point Eskom issued default letters to 58 municipalities, followed by 22 public notices stating that it would be interrupting power supply if the municipalities did not honour their debt agreements. According to Eskom, the public notices in the local newspapers gave rate-payers the opportunity to provide input to Eskom and engage their municipality on why it wasn’t paying its creditors. The SOE claimed to have exhausted all other mechanisms. [18]
In August 2017, the Minister of Cooperative Governance stated that Eskom had agreed to align its credit policy to that of the municipalities and change the credit deadline from 15 to 30 days in order to ease the pressure. [3]
The Department of Water and Sanitation adopted a similar strategy. In November 2017, Minister Nomvula Mokonyane sent a notice to municipalities that the DWS will be invoking Section 216(2) of the Constitution, which enables the National Treasury to withhold grant funding due to the persistent breach of the MFMA.
DWS also initiated stakeholder consultations in terms of the Inter-governmental Relations Act and embarked on a legal process
“These processes were initiated as early as two years ago [2015] and to this end, six court judgments have been issued in favour of the Department. Fifty nine court summonses have also been issued and another 121 municipalities are involved in legal collection processes. Despite all these interventions, the water debt at municipal level continues to escalate.”
The department acknowledged that by cutting off the municipalities, households that were up to date with their payments would also be affected. This however could not be helped it said. [19]
Conclusion
Municipal consumer debt is a complex challenge that requires multi-faceted solutions. Addressing the challenge requires not only interventions aimed at promoting greater levels of payment by consumers but also, perhaps more importantly, improvements to municipal service delivery and administrative processes.
Where municipalities do not have the financial and human resources to upgrade and employ more sophisticated administrative and billing systems, consideration should be given to either outsourcing the function, permissible in terms of Section 76(b) of the Municipal Systems Act. Municipalities should also explore the relatively less complicated solution of leveraging the experience of their counterparts who are capably managing their billing and collection functions. [20]
[1] Minister Des van Rooyen, 2017
[2] Financial and Fiscal Commission Submission for the 2012/13 Division of Revenue, 2013, p166
[3] https://mg.co.za/article/2017-08-30-48-municipalities-still-owe-eskom-billions-des-van-rooyen
[4] https://www2.deloitte.com/za/en/pages/risk/articles/municipal-services-spotlight.html /
[5] Debt Owed to Municipalities, Poor Billing and Critical Success Factors to Billing, 2014, p27
[7] Financial and Fiscal Commission Submission for the 2012/13 Division of Revenue, 2013, p158
[8] Financial and Fiscal Commission Submission for the 2012/13 Division of Revenue, 2013, p163
[9] Financial and Fiscal Commission Submission for the 2012/13 Division of Revenue, 2013, p163
[10] https://www.fin24.com/Economy/how-poor-debt-collection-cripples-municipalities-20160601
[12] Department of Cooperative Governance Annual Report, 2016 -17
[13] Financial and Fiscal Commission Submission for the 2012/13 Division of Revenue, 2013, p165
[14] World Bank, 2008
[15] Financial and Fiscal Commission Submission for the 2012/13 Division of Revenue, 2013, p167
[16] Financial and Fiscal Commission Submission for the 2012/13 Division of Revenue, 2013, p164
[17] Financial and Fiscal Commission Submission for the 2012/13 Division of Revenue, 2013, p158
[20] Financial and Fiscal Commission Submission for the 2012/13 Division of Revenue, 2013, p167-168