Municipal debtors management critical

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Managing the debtor book is critical to ensuring stable cash flows for any municipality, and has great impact on its ability in delivering services to its constituents.

According to the latest Global Credit Ratings (GCR) Local Authorities’ Bulletin for the 2016 financial year, collecting rates and taxes remained a challenge for local government agencies and the levies owed to these institutions remain at high levels.

Under-provisioning

“The data indicates that the situation is improving. Overall municipal consumer debt grew by just 5% last year to R38.6 billion, much lower than the 15% overall rise in overall income from current rates and outstanding debtors,” says Eyal Shevel, Sector Head of Corporate and Public Sector Ratings at GCR.

Although net consumer debtors in the metros rose by 12%, this too was below the growth rate in services income. More importantly, the gross consumer debtors balance increased by a lower 7% suggesting that a higher percentage of the outstanding debtors book is being collected.

The differential in growth rates could then be attributed to a relatively lower 4% increase in the levels of provisions. While bad debt provisions have increased substantially in recent years across metros, much of this related to historical under-provisioning.

Outstanding payments

“Most metros now report provisions that fully cover debtors over 90 days in line with prudent provisioning guidelines, and accordingly, several metros expect their annual provisioning charge to decrease going forward, to reflect only the expected incidence of non-payment for current debtors.”

In the smaller municipalities, however, net debtors as a percentage of overall income remains high at around 25%, above the level for metros.

“This is likely the result of less collections capacity in these areas, and a greater incidence of residents in these areas being unemployed,” says Shevel.

Other debtors includes a range of transactions for which municipalities are owed money, including rental and equipment leases income, value-added tax receivables and outstanding payments from the National or Provincial Government for projects carried out on their behalf.

“Outstanding intergovernmental payments have put great strain on some of the metros balance sheets,” says Shevel. “In eThekwini for example, the municipality is still awaiting payment from the Department of Human Settlement, for undertaking social housing projects on their behalf.”

“Payments are usually forthcoming when the departments receive their budgets, but in the interim the larger cities are expected to utilise their internal resources to fund projects of other state departments,” says Shevel.

Gains uneven

Meanwhile, the bulletin demonstrates municipal income has been increasing over recent years, with most of the large metros and municipalities reporting a relatively strong financial position. Part of this has derived from the improvement in debtor collections, which have boosted the cash positions of the metros.

However, the gains have been uneven, with larger metros and municipalities showing much healthier financial metrics than some of the smaller, rural ones.

“This could partly be attributed to the scarcity of skills in the rural areas, which has hampered service delivery, as well as the much weaker tax base in these areas,” says Shevel.

Growing migration

“In fact, many of the positive trends pertained in the report do not apply to the rural municipalities, where service delivery and the financial position has actually deteriorated.”

This has contributed substantially to the growing migration to the large cities, which in turn has added to the backlogs facing larger municipalities in rolling out services to residents.

Tackling the financial problems faced by smaller municipalities will require substantial involvement and oversight from the national government, as well as some knowledge sharing from the larger municipalities.

“What is critical is ensuring that corporate governance best practice is implemented and enforced across the board,” adds Shevel.


Eyal Shevel | Sector Head of Corporate and Public Sector Ratings | Global Credit Ratings (GCR) | http://www.globalratings.net/ | shevel@globalratings.net |


 

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