Project Viability commenced during 1995 with the objective of monitoring the short-term liquidity of municipalities, including payment levels, the position with regard to arrears and the effectiveness of the credit control (collection) function. Subsequently the project was extended to include an intervention and support process in respect of municipalities identified by means of specifically developed indicators as showing possible financial problems.

Data to determine viability is collected by means of a quarterly questionnaire sent to all municipalities in South Africa. Initially the completion of questionnaires was on a voluntary basis. However, during November 1997 the minister for Provincial Affairs and Constitutional Development promulgated regulations concerning financial reporting by municipalities. In brief, the regulations made it mandatory for chief executive officers of municipalities to provide, within 21 days, the Minister or an institution designated by him, with the necessary information to determine a municipality's financial situation. In certain circumstances, exemption from this requirement may be granted by the relevant MEC.

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Questionnaires were sent to 833 urban and rural municipalities in respect of financial data as at the end of June 1998. This can then be broken down as follows:

• Total number of self-administered municipalities:
  516
  
  
• Total number of municipalities administered by a district council:
  317

The number of municipalities surveyed decreased because 10 rural municipalities are included under their relevant district councils.

Responses were received from 633 municipalities (76%) by the due date for this questionaire. It has been noted that of the 633 respondents, 19 have not yet, as at June 1998, approved their budgets municipalities. This response rate compares favourably with the 69,3% and 46,5% for the two mid-year questionnaires in 1997 and 1996. Despite the regulations making reporting mandatory, 200 or 24% of municipalities failed to reply timeously and, so far as can be ascertained, no municipality has applied for exemption. The response rate of nearly 76% is nevertheless a positive and pleasing result.

In order to track the history of municipal finances, comparative statistics are included in this report in respect of a core group of municipalities which have responded to all questionnaires sent between October 1996 and June 1998. This core group represents 272 (or 53%) of urban municipalities and can be used with confidence to determine a trend in respect of all municipalities. Unless otherwise stated, the statistics in this report refer to this core group.

The 200 non-responding municipalities are mostly rural councils with no or very little capacity to respond to the questionnaires.

This report reflects the main result for questionnaire 16, which analyses the situation as at June 1998. The more important and significant aspects are:

3.1. Capital and operating budgets

Questions regarding the capital and operating budgets are included in questionnaire 16. Collectively, the core group of municipalities have approved operating budgets of R37,36 billion. The budgets can be analysed in the following categories:

	Rb	%
Salaries, wages and allowances	11,6	25,5
Bulk purchases (water and electricity)	10,4	22,9
General expenditure	12,9	20,5
Repairs and maintenance	3,1	6,8
Capital costs	5,2	11,5
Contributions to funds	2,2	4,8
	________	________
Gross expenditure	45,4	100,0
Less charge outs	8,1
	________
Net expenditure	37,3
Income	37,3

 

The operating budgets of municipalities collectively indicate a positive ability to stabilise financial deterioration. During the period June 1997 to June 1998, debtors increased by R2 billion from R7,3 billion to R9,3 billion. If the same trend continues for the 1998-99 financial year it will require a funding source of the same magnitude to avoid a negative cashflow. The combined budgets indicate that approximately R2,2 billion was provided as contributions to various funds. This can counter the effect of a further deterioration. A closer analysis, however, reveals that contributions are made for the following purposes:

	Rm
Capital expenditure	185,5
Working capital	820,8
Bad debts	183,0
Capital development	369,7
Provisions and reserves	618,9
	________
	2 177,9
	________

The likelihood is that a substantial portion of the provisions are going to be spent on capital (R555,2 million). Municipalities should rather be encouraged to reserve these funds until credit control actions indicate the stabilisation of arrears debtors, so as to maintain a liquid position.

A further analysis indicates that the operating budgets are going to be financed from:

	Rb	%
Electricity sales	14,0	37,6
Water sales	5,3	14,2
Sewer and sanitation fees	2,3	2,3
Refuse removal fees	1,1	2,9
Subsidies	1,1	2,9
Rates	7,5	20,1
Equitable share	0,9	2,4
Other income	5,1	13,7
	________	________
Total	37,3	100,0
	________	________

Electricity sales as a portion of municipal income highlight the importance of this source in municipal finance. Municipalities will be disadvantaged when this function is transferred to other distributors, as electricity disconnections are the only effective credit control action left to municipalities. Punitive action is a necessary step in credit control, but should be linked to customer service and assistance to the indigent.

It is also noticeable that the equitable share still forms part of municipal budgets. This amount should be set aside to assist the poor to increase the effectiveness of credit control.

Capital budgets amounting to R9,3 billion were also approved. Municipalities intend to finance these budgets from:

	Rb
External loans	980,8
Internal loans	3 455,7
MIP/RDP funds	762,3
Housing funds	894,2
Special funds	381,0
Subsidies	1 248,9
Other funds	1 586,6
	________
	9 309,5
	________

Approximately R5,4 billion is earmarked from internal financing sources (internal advances, special funds and other funds). This seems very unlikely as loan repayments only amount to R2 billion (from the operating budget). Approximately R3,4 billion must, therefore, be advanced from cash reserves.

The total cash holdings of municipalities only amount to R6,9 billion of which the Durban Corporation holds R3,5 billion. Very few municipalities will be able to access the capital market due to a lack of creditworthiness. It, therefore, appears that the capital development programmes of municipalities are far too ambitious unless debt collection improves dramatically. The only logical conclusion is that municipalities in general are going to experience further cashflow difficulties due to the ambitious capital budgets.

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The ability of municipalities to collect amounts due for service charges and rates is fundamental to stability, viability and cash flow management. Debtors have therefore been tracked since October 1996.
The following table and graph reflect outstanding debtors of the core group of municipalities.

Outstanding Debtors
	All Provinces	Grades 10-15	Grades 6-9	Grades 0-5
	R	R	R	R
October 1996	6 262 016 293	5 292 819 921	782 107 484	187 088 888
December 1996	6 468 189 630	5 430 689 132	847 159 222	190 341 276
March 1997	7 022 926 233	5 909 626 180	924 502 689	188 797 364
June 1997	7 302 584 847	6 176 627 949	904 655 635	221 301 023
September 1997	8 490 584 743	7 173 749 389	1 055 569 353	261 266 001
December 1997	8 713 089 066	7 348 475 869	1 081 434 806	283 178 364
March 1998	8 889 312 263	7 498 607 497	1 132 710 438	257 994 328
June 1998	9 360 264 568	7 926 659 531	1 155 006 289	278 598 748

Debtors Outstanding
Authorities Responding Continuously

The steady increase in debtors reflects the inability of municipalities to deal with the level of non-payment. This is due to the number of accounts in arrears, insufficient contributions for bad debts or lack of credit control policies and support measures to support indigents. It is also indicative of the ineffectiveness of the measures available to municipalities to collect outstanding debtors. The Department of Constitutional Development is developing a new credit control policy and enabling legislation to improve on current practises. However, it appears that, when considering the debtors' situation which has now reached critical proportions, the Department will have to speed up the process by issuing amended credit control guidelines as an interim measure. The annualised rate of increase is 29,69%, which indicates an unacceptable deterioration.

The following graph reflects the spread of debtors by municipal grades and indicates that the larger urban municipalities constitute 84.7% of the total debt.

The latest returns reflect an overall increase in debtors of 5,3% over March 1998 figures. The above amounts refer only to the 272 municipalities that have responded continuously to Project Viability, and may reflect a trend to gauge the overall national position. To provide a reasonably accurate measure of the level of outstanding debtors, these are reflected as a percentage of rates and service charges for the financial year to which they relate; increases can therefore be regarded as being in real terms. Debtors of 11% to 15% of turnover, representing six to eight weeks, are accepted as the norm in municipalities.

The following table and graph reflect the actual level of debtors as a percentage of rates and service charges (turnover).

	All Provinces	Grades 10-15	Grades 6-9	Grades 0-5
	%	%	%	%
October 1996	22	22	23	32
December 1996	23	22	25	32
March 1997	25	24	28	32
June 1997	26	26	27	37
September 1997	30	30	31	44
December 1997	31	30	32	48
March 1998	32	31	34	44
June 1998	33	33	34	47

Debtors as a Percentage of Rates and Service Charges

Based on population figures supplied by municipalities, the debtors, including business debtors, per head of population was R301 as at June 1998.

The total outstanding debtors of all municipalities responding to the latest questionnaire (633 or 75,99%) is:

Province	R
Eastern Cape	855 097 982
Free State	626 816 420
Gauteng	5 224 368 430
KwaZulu-Natal	1 062 383 724
Mpumalanga	424 353 174
Northern Cape	222 558 243
Northern Province	112 149 237
North West	438 768 489
Western Cape	1 320 370 454
Total	10 286 866 153

If the level of outstanding debtors were to decrease from the unacceptable level of 33% (17 weeks) of rates and service charges income to the norm of 11% to15% (6 to 8 weeks), R1,9 billion to R2,3 billion unnecessarily tied up in debtors would be released. This massive amount could be better invested in, for example, infrastructure programmes.

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Bank balances and investments held by municipalities reflect the end result of continued high non-payment and serve as a useful check on results. The following table and graph reflect the situation as at 30 June 1998:

	All Provinces	Grades 10-15	Grades 6-9	Grades 0-5
	R	R	R	R
October 1996	5 506 460 402	4 603 138 262	695 736 942	207 585 198
December 1996	4 813 344 933	3 975 750 758	658 901 306	178 692 869
March 1997	6 203 569 292	5 259 143 227	738 505 128	205 920 937
June 1997	6 397 694 172	5 537 867 511	677 118 341	182 708 320
September 1997	6 686 238 401	5 765 868 410	710 748 103	209 621 888
December 1997	6 659 861 172	5 585 573 031	854 266 421	220 021 720
March 1998	7 448 664 885	6 460 254 980	754 343 464	234 066 441
June 1998	6 906 211 227	5 840 036 022	834 495 140	231 680 065

The balances at June 1998 reflect a value of R6,9 billion, a decrease of 7% over March 1998. However, from a national perspective, sufficient cash and investment capacity does not exist to cover the outstanding debtors of R9,36 billion (core group).

The decrease in cash and investment can be attributed to the number of municipalities in overdraft. This is reflected in the following tables:

	All Provinces	Grades 10-15	Grades 6-9	Grades 0-5
	R	R	R	R
October 1996	71	4	20	47
December 1996	75	9	21	45
March 1997	64	6	18	40
June 1997	83	9	24	50
September 1997	64	7	19	35
December 1997	76	9	23	44
March 1998	65	5	17	43
June 1998	82	8	23	51

	All Provinces	Grades 10-15	Grades 6-9	Grades 0-5
	R	R	R	R
October 1996	-76 099 630	-39 830 471	-23 956 715	-12 312 444
December 1996	-118 293 301	-63 574 894	-35 999 729	-18 718 678
March 1997	-219 968 400	-172 982 435	-32 694 318	-14 291 647
June 1997	-337 785 997	-260 235 107	-54 580 725	-22 970 165
September 1997	-304 712 558	-245 095 706	-47 751 448	-11 865 404
December 1997	-157 168 337	-75 007 569	-66 470 800	-15 689 968
March 1998	-117 357 738	-66 454 032	-36 322 810	-14 580 896
June 1998	-521 175 775	-435 671 376	-57 943 251	-27 561 148

The sharp increase in the grades 10 to 15 overdraft amount is attributed to the Pretoria TMS which has a negative bank balance as at 30 June 1998 of R362 million.

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Accounts
Regular Payments
Follow - up Actions
Ability to Apply Credit Control Procedure

Credit control questions were used to test whether municipalities are physically executing functions associated with normal follow-up in the case of defaulting debtors. Respondents were asked a series of questions regarding legal action, disconnection of services, evictions and general controllability.

7.1. Accounts

A fundamental credit control method is to ensure that regular monthly accounts are rendered to all residents / consumers. An analysis revealed the following:

Ability to render accounts to all areas
	All Provinces	Grades 10-15	Grades 6-9	Grades 0-5
	%	%	%	%
October 1996	94	85	97	95
December 1996	93	80	97	95
March 1997	95	83	97	98
June 1997	96	87	99	97
September 1997	97	91	99	98
December 1997	97	93	100	97
March 1998	97	87	100	98
June 1998	96	87	100	97

Ability to Render Accounts
to all Areas

The ability to render accounts to all areas now applies to 96% of municipalities.

7.2. Regular payments

Regular payers are indicated by using a percentage as follows:

Percentage of regular payers
	All Provinces	Grades 10-15	Grades 6-9	Grades 0-5
	%	%	%	%
October 1996	69	69	69	63
December 1996	69	70	70	62
March 1997	67	67	69	62
June 1997	71	71	73	63
September 1997	71	71	72	65
December 1997	69	69	69	63
March 1998	71	72	68	65
June 1998	73	74	74	66

The percentage of regular payers has increased to approximately 73%. However, during the period October 1996 to June 1998, the number of accounts issued to consumers increased by 1 019 333 (or 22%) from 4 595 754 to 5 615 087.

7.3. Follow-up actions

The relevant statistics in respect of electricity disconnections and reconnections are attached. The marked difference between disconnections and reconnections is still evident. This may be attributed to illegal reconnections that cannot be quantified in terms of numbers and the potential substantial loss of income.

Electricity Disconnections
	All Provinces	Grades 10-15	Grades 6-9	Grades 0-5
October 1996	66 959	56 635	8 688	1 637
December 1996	50 037	40 992	7 849	1 196
March 1997	62 458	51 045	10 187	1 227
June 1997	71 937	60 053	10 645	1 239
September 1997	67 643	54 655	11 469	1 520
December 1997	61 858	50 238	10 088	1 532
March 1998	85 148	68 443	14 576	2 129
June 1998	90 389	74 724	13 840	1 825

Electricity Reconnections
	All Provinces	Grades 10-15	Grades 6-9	Grades 0-5
October 1996	47 761	40 504	6 044	1 213
December 1996	35 173	28 512	5 689	972
March 1997	36 171	27 516	7 689	966
June 1997	42 435	33 832	7 628	975
September 1997	41 795	33 044	7 605	1 146
December 1997	36 653	28 969	6 524	1 160
March 1998	45 269	35 390	8 292	1 587
June 1998	42 536	32 065	9 027	1 443

Between March 1998 and June 1998, disconnections increased by 5 241 or 6% from 85 148 to 90 389 overall. Notwithstanding that a moratorium may have been applied by some municipalities, this represents an all-time high since the inception of Project Viability. The distortion between disconnection and reconnections is disturbing and may indicate substantial theft of electricity and tampering with service networks.

7.4. Ability to apply credit control procedures

In response to the question as to what extent municipalities could apply normal credit control procedures, the following results were obtained:

Credit Control
	All Provinces	Grades 10-15	Grades 6-9	Grades 0-5
	%	%	%	%
Full
October 1996	46	43	47	46
December 1996	46	46	49	45
March 1997	49	43	49	50
June 1997	49	46	48	51
September 1997	50	50	48	51
December 1997	54	48	52	56
March 1998	57	57	53	58
June 1998	57	57	55	59

	All Provinces	Grades 10-15	Grades 6-9	Grades 0-5
Restricted
October 1996	49	48	51	48
December 1996	48	43	51	48
March 1997	46	46	49	44
June 1997	47	52	49	44
September 1997	47	50	49	45
December 1997	45	52	47	42
March 1998	43	43	47	40
June 1998	40	41	45	38

	All Provinces	Grades 10-15	Grades 6-9	Grades 0-5
None
October 1996	4	0	1	6
December 1996	4	2	0	6
March 1997	4	2	1	6
June 1997	3	0	3	5
September 1997	3	0	3	4
December 1997	1	0	1	1
March 1998	1	0	0	1
June 1998	2	2	0	3

Relatively few municipalities (2%) found themselves unable to follow any credit control procedures. This has increased since March 1998 due to the lower-grade municipalities experiencing personnel shortages. Approximately 40% of cities and towns continued to have some evidence of a restricted ability to apply procedures.

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Since March 1997 a question has been included to track the number of municipalities that have missed an external debt service payment. The table reflects the situation of the core group.

MISSED A DEBT SERVICE PAYMENT ON AN EXTERNAL LOAN
	All Provinces	Grades 10-15	Grades 6-9	Grades 0-5
March 1997	10	1	2	7
June 1997	8	1	0	7
September 1997	9	1	3	5
December 1997	13	0	5	8
March 1998	14	1	5	9
June 1998	13	1	6	6

This is, however, not a true reflection as 21 other municipalities (not in the core group) have also indicated that they have defaulted on debt repayments. The names of all defaulting municipalities are included in 'Annexure D'.

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High-level indicators were used to determine whether a municipality has cash-flow difficulties, or is sliding towards such a situation.
The main indicators used were:

1. World Bank criteria
   • Cash + investments + monthly income (discounted by 10%) to monthly salary / wage bill.
     
   • Cash + investments + monthly income (discounted by 10%) to total monthly current expenditure.
2. Project Viability criteria
   • Cash + investments to monthly salary / wage bill.

A list reflecting municipalities that do not meet the criteria of either the World Bank or Project Viability is compiled and made available on a quarterly basis. The June 1998 list indicates that 110 municipalities do not meet either of the indicators.

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Information gathered since the inception of Project Viability is contained in a consolidated database which is regarded as the most comprehensive on local government finance in South Africa. The database is updated and maintained by the Department of Constitutional Development. The information covers individual municipalities and reflects provincial and national profiles, and is available on-line to all provincial administrators.

The continuing deterioration of municipal finances is amplified by:

• The continuing escalation of debtors.
  
• Ineffectiveness of the measures available to collect outstanding debtors.
  
• Apparent lack of capacity in municipalities not responding and those unable to meet the due dates for returning questionnaires.
  

An encouraging aspect of the 1998-99 operating budgets is the manner in which these budgets have been compiled. For the first time municipalities have collectively provided for a contribution to funds (R2,2 billion) which equal the increase in debtors over the last financial year. This means that collectively municipalities have demonstrated their ability to produce cash-funded budgets. The detailed analysis of this expenditure vote, however, reveals that a large portion of the contribution is going to be spent on capital (R555,2 million). If municipalities can retain these funds the negative cash flows can be averted. A directive by provinces in this regard is urgently required. The finalisation of guidelines regarding indigent support would also assist municipalities.

Z. Titus
DIRECTOR-GENERAL
DEPARTMENT OF CONSTITUTIONAL DEVELOPMENT

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