To propose incentives to encourage repayment of arrears and prompt payment of current accounts where appropriate.

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1 COJ : COUNCIL COJ : MAYORAL COMMITTEE FINANCE AND ECONOMIC DEVELOPMENT (REVENUE) PROGRESSIVE DEBT WRITE-OFF PROGRAMME AND INCENTIVISED REPAYMENT PROGRAMME 1 STRATEGIC THRUST Good Governance and Service Delivery 2 OBJECTIVE To propose incentives to encourage repayment of arrears and prompt payment of current accounts where appropriate. 3 DISCUSSION 3.1 Background As part of a comprehensive approach to deal with the City s debtors book, a number of credit control initiatives are underway. These include the following: 1. Promulgation of the revised credit control policy; 2. Implementation of the revised credit control policy; 3. Revamping of the Special Cases policy; 4. Implementation of the revamped Special Cases policy; 5. Internal and external communication including Councillor workshop; 6. Progressive writing off of debt; 7. Incentivised repayment programme. Item numbers 1 5 are in various stages of completion and implementation whereas item numbers 6 & 7 are addressed herein. 3.2 Progressive debt write-off programme Council has previously approved an initiative by Johannesburg Water to progressively write off arrears, in deemed consumption areas, over 36 months and based upon the installation and servicing of prepaid water meters. The project will be rolled out over a period of 7 years in Soweto, Orange Farm, Ivory Park and Alexandra. As the water supply and infrastructure is upgraded in the respective townships, so are the community members engaged with a view to applying for the installation of a pre-paid water meter whereupon the consumer s water arrears are 1/36 th per month provided the pre-paid water meter is serviced via the purchase of coupons. Johannesburg Water advises that the implementation of the project is successful and addresses the affordability and access to water simultaneously whilst a culture of payment in engendered with the incentive of having the historical arrears proportionately written off over an extended period of time on condition that the customer manages his pre-paid water meter. 1

2 To leverage the positive impact of the model and bring holistic relief to the consumer from the City of Joburg, as the overarching custodian, it is recommended that the total historical debt be brought into the progressive write off programme on exactly the same basis of performance and incentive. Accordingly the customer will be obliged to accept a pre-paid electricity meter to qualify for the progressive write off of the composite debt over the matching period. Application for the pre-paid electricity meter must be made within the first 12 months of acceptance onto the progressive debt write-off programme. The cost of installation of the meter to be carried by City Power whilst the cost of the meter to be borne by the customer. Pending the application, supply and installation of the pre-paid electricity meter and post incorporation into the progressive debt write-off programme, the customer will be obliged to pay the current portion of the electricity account whilst the arrears will be incorporated into the composite debt and written 1/36 th monthly. Any default under the prevailing Gcin amanzi Project will apply unilaterally to the composite debt i.e. meter tampering or irregular purchase of coupons. 3.3 Incentivised Repayment Programme Whereas the progressive debt write-off programme lends support to customers in deemed consumption areas i.e. Soweto, Orange Farm, Ivory Park and Alexander, other socioeconomically oppressed areas, which have conventional metered services, are excluded from the project and derive no benefits whatsoever outside of the prevailing Indigency Policy, which restricts benefits to a distinct category of debtors who are predominantly dependent upon social welfare benefits and grants, due to either their pensionable age or disability as determined. There are however, many thousands of families, in conventionally metered townships, who are substantially in arrears for various reasons but primarily due to perpetuating poverty as a result of unemployment, crime, AIDS and political disparities of the past. These families may have income streams, even if insufficient to pay accumulated arrears on municipal accounts as well as pay for the supply of current services. These are poor people who don t qualify for Special Cases benefits due to their ability to earn marginal wages or not qualifying for State pensions, yet they have accumulated arrears as a result of their inability to service their accounts over the years. Single parents, grand parents or an extended family member often head these households. Some of these families own small ex Community Development houses or similarly acquired homes whereas many rent homes. There is a strong presence of such poverty in the south, southeast, central and southwest of Johannesburg. Many of these customers have made repayment arrangements with the City only to default and fall deeper into the debt trap. Council s current repayment tenure is limited to sixty months (60). The methodology applied is to move the entire debt into the current account so as to avoid further interest accumulating and then apply the relevant instalment to the current bill for monthly repayment. Upon default, the repayment arrangement ceases, the accumulated debt regresses back to arrears, thus attracting interest and the account becomes overdue in totality, which attracts credit control action including termination of service and legal action in recovery, often to no avail. It is therefore proposed to put in place an Incentivised Repayment Programme whose purpose would be to be to establish a habit of full and timeous payment of municipal 2

3 accounts among lower-income consumers that are currently in arrears. The programme would consist of the following: a) The current tenure for repayment arrangements is extended to a maximum of 100 months (one hundred months) (this will make it more affordable to service the arrear debt). The remaining conditions for the repayment programme remains intact i.e. the interest is suspended for a long as the proportionate instalment of the arrears together with the current portion on the account are being serviced regularly and without default; b) Where the customer has serviced the arrears and the current obligations of the account, without interruption, for the agreed upon tenure of the arrangement and for 50% of the debt, the remaining 50% of the debt will be written off (this provides a substantial incentive to keep to the arrangement, and to build a habit of paying Council in full and on time). c) To accommodate the implementation of this methodology, the customer would be required to enter into an arrangement, which will be based upon the standard business rules i.e. affordability will determine the tenure, whilst the account will be flagged to be exempt from interest on total arrears for as long as the arrangement remains in place (this permits customising the arrangement to the customer s individual circumstances). d) Default in paying the proportionate share of the arrears plus current will result in the arrangement falling away whilst the arrears will once again attract interest and the debtor will be subject to standard credit control measures. e) Upon concluding the arrangement coupled with the required signing of an acknowledgement of debt, all reconnection and disconnection charges on the account up until the end of June 2004 will immediately be reversed (an additional incentive to enter into the arrangement). It is proposed that the programme be restricted to households with the following characteristics: The main breadwinner may not earn more than R6 500 (six thousand five thousand rand per month); The account must be in the name of the main breadwinner. To qualify for acceptance under the programme, the applicant would have to produce the following: South African identity book; Original tax invoice for the previous month s billing from the City of Joburg; Original bank statement or bank transaction record not older than 3 months; Proof of income which demonstrates that his/her income threshold does not exceed R6500 per month and accordingly provide original or certified copies of: o The most recent payslip, or o An affidavit duly attested as being true and correct. The following conditions are recommended for acceptance onto the programme: The customer must have a pre-paid electricity meter installed within the first 12 months of entering into the arrangement. The customer will carry the cost of the pre-paid meter whereas the installation costs will be carried by the respective UAC. Once Johannesburg Water is positioned to roll out pre-paid water meters in these areas, the customer must make application for a prepaid meter in terms of the prevailing conditions applied by Johannesburg Water. 3

4 Any deviation from the repayment programme to be considered on merit with the necessary consideration of prevailing circumstances, affordability and mitigating evidence. A customer who has defaulted must be not automatically excluded from rehabilitation upon deviation from the original terms of the repayment programme concluded, provided the transgression is adequately addressed through restructuring of the programme upon application and which application must be motivated and mitigated. 4 FINANCIAL IMPLICATIONS Progressive debt write-off programme The financial quantum in dovetailing all historical debt under this model would amount to progressively writing off an indicative amount of approximately R1.6 billion (June 2004 figues), as opposed to the R880m originally anticipated in respect of water arrears only. However, there is some overlap between this estimate and the Special Cases arrears write-offs, so that the total write-off should in practise be lower than this. Incentivised Repayment Programme Whereas the value of money diminishing substantially over an extended repayment period, coupled with non recovery of interest and writing off a portion of the debt as a reward for performance, may not be the best financial recommendation in terms of recovery of arrears, the importance of rehabilitating a significant section of the community will, in the longer term, prove to be enormously beneficial to the City, particularly as the new generation follow the lead of their role models. The subsequent paradigm shift will engender a more mature sense of ownership and accountability towards the City of Joburg in terms of promoting the obligations of our residents. As these residents graduate towards accepting their responsibility of paying for services received, so too will they begin to appreciate the reinvestment by the City of Joburg into their respective communities as funds become available for development of infrastructure, social services and community support functions. The mutual long-term benefits include rehabilitation of the customer plus empowerment of the household and community, in terms of the customer taking direct responsibility in managing their expenditure against disposable income. The City benefit insofar as a captive market is created for pre-paid meters whilst financial risk is mitigated through restricted access to supply of service at the behest of the customer. A stronger buy-in towards meeting rates and refuse obligations is attainable through the support of the City in incrementally eroding the historical debt against current performance. Communities have matured to an extent where they are beginning to endorse their civic duties but battle to service old and current debt simultaneously; hence by the City demonstrating empathy in graduating the communities through rewarding performance, an alliance and partnership will develop and foster stronger co-operation between parties. 4

5 5 LEGAL IMPLICATIONS The Council s Credit Control and Debt Collection Policy and By-Laws need to be amended to accommodate the extension of the tenure for arrangements from the maximum of 60 to 100 months. The writing off of capital on the basis of uneconomical recovery for purposes of this project exclusively is supported. 6 POLICY IMPLICATIONS Progressive debt write-off programme o Extend the prevailing Council Resolution, wherein the debt relief model is applied exclusively to the water debt, to include the composite debt for all other charges in totality. o Recognise the need to separate the identity of the Gcin amanzi project from phase II by naming phase II appropriately Incentivised Repayment Programme o Amend, by addendum, the current credit policy to reflect the extension of repayment terms to 100 months plus the specific Council resolution sought to give effect to the performance based incentive as articulated above and limit the validity of the addendum to 6 months from date of Council resolution. 7 COMMUNICATION IMPLICATIONS Substantive internal and external communication would be required to ensure consistency in the message relayed. The Communications Director would be required to develop a comprehensive communication and media plan in support of promoting the successful implementation of the progressive write off strategy. 8 OTHER BODIES / DEPARTMENTS CONSULTED City Power Communications Revenue Directorate Stakeholder Committee Legal Corporate Pikitup Rates Directorate Johannesburg Water 5

6 IT IS RECOMMENDED 1. That for the reasons set out in the report, the Progressive Writing Off of Debt and the Incentivised Repayment Programme as discussed in the body of the report be approved. 2. That the Credit Control and Debt Collection Policy and By-Laws be amended to extend the tenure for repayment arrangements from a maximum of 60 months to a maximum of 100 months. 3. That, in terms of Section 7 (1) of the Rationalisation of Local Government Affairs Act, 1998 the Council declare its intention to amend its Credit Control and Debt Collection By-Laws on the basis of the draft as set out in Annexure B. 4. That the Executive Director: Corporate Services publish the notice set out in Annexure A in the Provincial Gazette, Sowetan, Beeld, The Star and The Citizen to the effect that the Council announce its intention in terms of paragraph 3 above and with a view of allowing the public to comment on such amendment by not later than (date to be advised). 5. That the Acting Director: Legal Services in consultation with the Acting Executive Director: Finance and all interested parties report on the comments received in terms of paragraph 4 above with recommendations on the final amendment of the By-Laws. (REVENUE) Desiré Borain M MOITSE a/executive DIRECTOR: FINANCE FINANCE AND ECONOMIC DEVELOPMENT) COUNCILLOR P. TAU MMC: FINANCE, STRATEGY AND ECONOMIC DEVELOPMENT 6