The government is considering taking drastic measures, including withholding equitable share to municipalities that fail to pay their water bills, in an attempt to save the country’s ailing water boards from financial ruin.
Business Day understands that the department of water & sanitation briefed legislators last week on plans to ensure the financial viability of water boards, which were owed R16.1bn by municipalities by the end of December. This includes R10.9bn that is overdue for more than three months.
In a presentation seen by Business Day, the department said water boards should be financially sustainable and able to raise capital from the market for infrastructure projects.
However, the presentation warns that the poor financial position of water boards affects ratings by ratings agencies, with a resultant negative effect on investors’ willingness to invest in the capital programmes.
“These conditions indicate that a material uncertainty exists that may cast significant doubt on the water boards’ ability to continue as a going concern,” the presentation reads.
“It will result in the water boards not [being] able to provide water to municipalities. These factors will play a role when lenders determine the risk involved in lending money to the water boards and will certainly increase the interest rates on these loans (if any) which will result in increased costs to the water users.”
To address the billing and revenue collection of the country’s 257 municipalities, a workshop was held and attended by the department, the National Treasury, the SA Local Government Association (Salga, representing municipalities) and the department of co-operative governance & traditional affairs.
The resolution of the meeting was to draft standardised operating processes for debt recovery, covering both the water boards and the Water Trading Entity, whose primary role is to manage water infrastructure and resources, and the sale of raw water.
The presentation noted that five water boards — Amatola, Bloem, Lepelle, Mhlathuze and Rand Water — are performing below 80% of planned targets and that this directly affects their ability to deliver services.
The department of water & sanitation warned that should intergovernmental relations framework provisions, meant to ease collaboration between the three spheres of government, fail to resolve the nonpayment issues by municipalities, the following steps would be implemented:
- Collaboration with the National Treasury to withhold equitable share allocations for municipalities not paying their current invoices from water boards.
- Bulk prepaid meters installed by water boards for municipalities to supply a specific volume.
- Deposits could also be paid by municipalities to cover short-term nonpayment obligations.
- Consistent enforcement of water limitations/restrictions for nonpaying municipalities.
- Legal processes to attach municipal bank accounts where necessary.
In written responses, the Treasury said municipalities not honouring their financial obligations affects the sustainability of the water sector and compromises the realisation of a developmental local government.
“In this context, the withholding of the equitable share allocation is considered a punitive measure during the process of support and only applied as the last resort to correct a situation that reached the extent of a serious or persistent breach of the measures established in terms of section 216 of the constitution,” the Treasury said.
“If a municipality’s failure to pay its bulk water in conjunction with other factors amounts to a persistent breach of the constitution, the National Treasury is obliged to enforce section 216 (2) of the constitution to bring about and restore prudent financial management. However, what is more concerning is a trend that withholding the equitable share induces immediate financial crisis in some municipalities.”
The Treasury supports the proposal that deposits be paid by municipalities to cover short-term nonpayment obligations.
“While consumer deposits by nature [need] to be reimbursed to the account holder at some point ... any change in a municipal account holder coincides with a ‘replacement’ deposit that would be increased to accommodate inflation and the risk associated with the specific consumer,” the department said.
“As such, consumer deposits, if cash-backed, could theoretically be applied over the short term to honour the municipality water board payment obligations. It needs, however, to be approached with caution and as a last resort as part of the municipality’s medium-term financial strategy to again cash back the consumer deposits within the MTREF and gear for an overall improved municipal financial health.”
Unaffordability
The MTREF is the medium-term revenue and expenditure framework prepared and approved by a municipality in terms of the Municipal Finance Management Act.
Salga has put forward several proposals to remedy the situation. These include revising payment arrangements in line with affordability based on assessments, ring-fencing the debt and suspending interest and providing incentives to incrementally write off arrears debt.
Lubabalo Luyaba, a water specialist at Salga, said consideration must be given to the effect of actions on general municipal functioning, stability and subsequently service delivery.
“Simple solutions like withholding the equitable share do not acknowledge or deal with the underlying issues such as unaffordability of bulk-water tariffs (which are then passed onto communities); subsidies to municipalities for free basic services, such as the equitable share, that are not cost-reflective; and ageing infrastructure that municipalities are unable to replace quickly enough.”
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