DEBT OWED TO MUNICIPALITIES, POOR BILLING AND CRITICAL SUCCESS FACTORS TO BILLING

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1 DEBT OWED TO MUNICIPALITIES, POOR BILLING AND CRITICAL SUCCESS FACTORS TO BILLING

2 EXECUTIVE SUMMARY Local government is a key component of South Africa s three-sphere system of government and is responsible for the delivery of basic services including water, sanitation, electricity and refuse removal. Together with property rates, payment for basic services provides crucial sources of income for municipalities. Whereas indigent households are eligible to receive a certain portion of basic services at no charge, all other end users are required to pay for municipal service delivery. Non-payment for municipal services, also known as municipal consumer debt, presents a dire challenge that affects the very viability of a municipality. As at 2013/14, consumer debt was close to R100 billion this equates to 40% of total local government operational expenditure for that year. In essence, municipalities could have spent 40% more on service delivery if they had been able to recover debt. Municipal consumer debt is a multi-faceted challenge, which has no single solution. The overarching objectives of this research included a characterisation of municipal consumer debt, determining the drivers of such debt and proposing avenues for minimising non-payment. In order to fulfil these objectives, a two-pronged approach was used. Firstly, an in-depth secondary data analysis was undertaken to determine the key trends in municipal debt in the country, including a description of the sources of debt (customer grouping, services), the general factors leading to non-payment of municipal services, relationships between debt and other variables (such as for example, poverty and inequality) and an analysis of the debt situation in individual municipalities. Secondly, a comprehensive case-study approach was adopted and focussed on six municipalities: two metropolitan municipalities, a secondary city, a local municipality, a rural municipality and a district municipality. The case studies assisted with developing a deeper and practical understanding of the issues being faced by the various types of municipalities in managing their revenues. More importantly, it also allowed for the identification of current best practice and systems that improve debt management. The key findings that emanated from the secondary data analysis are: Households are responsible for the largest and fastest growing component of non-payment over the review period, 2004/05 to 2013/14, followed by business. The debt owed by organs of state has the highest real growth rate over the period In terms of the revenue source, non-payment is highest in respect of water. The dominance of water-related non-payment is unsurprising due to it being an essential basic service for which non-payment cannot be penalised through full disconnection, but rather by restrictions Municipal consumer debt is a bigger problem in urban areas, specifically the metropolitan municipalities and secondary cities 2

3 Municipal consumer debt is positively related to unemployment, inequality and the level of disposable income. This suggests that there is a degree of both an inability (due to poverty) and unwillingness of customers to pay for municipal services In terms of the drivers of municipal consumer debt, there are two trends. Between 2004 and 2008, a lack of metering and absence of billing system was the dominant reason. Post-2008, there was an increase in the number of households receiving free basic services, although this factor is unlikely to result in increasing consumer debt levels, as long as indigent households are accounted for. Reasons underpinning non-payment by businesses stem from irregular and incorrect billing Debt outstanding for over one year continues to show real growth over the period reviewed, thus alluding to less than optimal debt management and credit control practices It appears that municipalities have space in their overall operating budgets, be it from the subsidisation from other services or from grants, to fund continued service delivery even in the face of high outstanding debt levels A budget analysis of debt levels in specific sectors indicates that, in general, the water, sanitation and refuse removal sectors are currently being operated at a financial loss. Debt levels are close to or even exceed total spending and revenue in these sectors. The financial shortfalls in the provision of these services are likely resulting in municipalities not covering the costs of providing these services. It also suggests that municipalities are using revenues from the electricity service, which is financially better performing, to finance shortfalls in other services. This is likely resulting in the current issue of municipalities not paying their bulk service providers The key findings that emanated from the case studies are: Municipal revenue management is a complicated process with various key steps that predetermine the success of the next stage of the process Once there is a failure to implement one step in the revenue management process, the following steps are significantly compromised South Africa has a sound legislative framework that is clear and provides a solid foundation for proper debt and credit control in the country The capacity to understand legislation and translate it into sound municipal policies and by-laws remain a challenge. In fact, capacity constraints in general is a key determinant of the success of municipal revenue management o Good credit control and debt management policies do not imply sound implementation and outcomes in terms of revenue management o Quality human resources and strong internal systems are critical in the process of debt management. Tools and systems to assist with automating certain aspects of revenue management such as billing systems are 3

4 secondary. Some municipalities that are performing well have out-dated systems but well trained personnel Poor revenue planning is also a significant problem being faced by municipalities in their revenue management process o Budgets continue to be not credible and sustainable, resulting in poor revenue projections, unrealistic tariffs that are unaffordable and fail to recover costs and a poor provision for debt impairment and management o Municipalities fail to appropriately profile their customers leading to an inability to properly cross-subsidise service delivery, plan for nonpayment and implement free basic services policies Municipalities that implement consolidated accounts are more effective in revenue management Municipalities that adopted the property valuation targeting approach to indigent management were more successful in capturing poor households and collecting debt. However, this practice was premised against an accurate valuation roll The fundamental data used in revenue planning and billing is a key determinant of the success of the revenue management and billing process. Inaccurate and poor data compromises the entire billing and credit management process Proper and accurate metering and measuring of consumption is a key factor in revenue management and one of the primary determinants impacting on the integrity of the entire billing process. Incorrect meter readings are largely due to poorly trained meter readers, poor controls to ensure accurate meter readings, faulty meters and a lack of access to meters. The use of pre-paid and smart metering systems have significant effects on improving the overall meter reading process The sound operations and integrity of municipal billing systems largely depends on the quality and accuracy of the data that informs such systems. It was found that most billing systems supports sound revenue management and the performance of the system depends more on municipal administrative capacity as opposed to technical issues. In certain instances, municipalities did not programme their billing systems to process basic requirements, including exception reports Easy payment options and sound customer care practices support sound revenue management. In terms of the latter, this includes ensuring that queries and complaints are dealt with timeously Municipalities that fail to timeously and effectively implement their credit control policies are more susceptible to high levels of municipal debt o Following and sticking to the requirements of credit control is the minimum requirement in improving revenue collection 4

5 Electricity disconnections and, to a lesser extent, water restrictions are key credit control instruments and cannot be underestimated in the credit control process o Municipalities that create a culture that non-payment will result in disconnections is a key factor driving improved debt levels The inability to disconnect electricity in Eskom supply areas is a major hindrance to proper debt management The cost in rural municipalities to collect debt and implement credit control policies outweighs the actual gains from revenues collected Whereas some municipalities are implementing innovative approaches to improve revenue collection, there are a number of municipalities that have a good handle on the debt issue as a result of implementing basic strategies to incentivise payment and compliance Local government in general have several additional credit control instruments including the imposition of garnishee orders and the attachment of property. The imposition of these instruments can be improved if a solid framework or regulations are developed to guide implementation Addressing the challenges that give rise to municipal consumer debt is complex and requires a multifaceted approach to ensure practical, workable solutions. On the one hand people may be unable to pay due to poverty and various other reasons. On the other hand, there may be factors endogenous to the municipality that drive poor performance (for example not following the prescripts of the municipal credit control policy). The recommendations emanating from the study should not be viewed as all encompassing. In order to improve municipal revenue management, a clearly defined process of intervention is required. This translates, firstly and most importantly, into municipalities improving internal capacity and systems to support sound revenue management. Without this, all other recommendations will not be effective. What follows are a selection of the main recommendations stemming from the research. Back to the Basics: The solutions to the issue of revenue management in local government conforms well to the current back to basics drive by the Department of Cooperative Governance. The primary and key solution to improve revenue collection is for all municipalities to conform to the basic requirements of debt management and credit control. This project proposes a framework of basic minimum requirements or practices that the different types of municipalities should adhere to in order to improve revenue management. In addition, innovative credit control methods are also proposed that municipalities can implement, as long as the basic requirements are in place. Realign capacity building grants: The research found that basic facets of the revenue management process are not in place in various municipalities. This 5

6 includes the sound valuation rolls, basic customer data and meter reading systems. These system issues can be targeted for correction through current capacity building grants. Additional funding could be made available and earmarked through these grants to focus on such aspects of the revenue management process, with clear targets and outcomes. If no additional funding is possible, a portion of current capacity building funds should be redirected to cover such aspects. Proposed legal amendments The research found the current legislative framework for local government credit control and debt management in the country sound and supportive of improved revenue management. However, it is recommended that Section 118(b) of the Municipal Systems Act be amended to remove the two years prescription for payment of outstanding municipal debt in order to issue a municipal clearance certificate to issue property sale. Furthermore, SALGA should explore the possibility of extending the prescripts of Section 10 of Schedule 2 of the Municipal Systems Act to include all government (national and provincial) workers. Implementation of regulations to implement key credit control tools: As per Section 104 of the Municipal Systems Act, SALGA should interact with the Minister of Cooperative Governance and Traditional Affairs to implement policy frameworks or additional regulations to regulate the following key credit control aspects: o User agreements and deposits and bank guarantees for the provision of municipal services o The seizure of property for non-payment of municipal debt o The attachment of rent payable on a property o The extension of liability to a director, a trustee or a member if the debtor is a company, a trust or a close corporation Education campaign: SALGA should promote a national education drive that highlights the need for households, particularly the indigents, to control and conserve water and electricity use. This would assist in ensuring that indigents do not use above their prescribed free basic amounts that would result in payment to the municipality. The campaign should also cover the issue of Free Basic Services and the need to pay for municipal services. Data verification working group: Accurate data is a critical ingredient that affects the soundness of the entire revenue management chain. Accurately identifying a customer enables a municipality to determine the category the customer falls into (household/business), the tariff it will be levied for services, how to contact and communicate with the customer and where bills should be addressed to. If such data is inaccurate and not updated regularly, the entire revenue management chain will be compromised. It is important to ensure that the accuracy of this type of master data can be crosschecked and verified. It is recommended that SALGA establish a national working group or project team 6

7 that will include the Deeds Office and the Department of Home Affairs to drive the development of key municipal customer data. Central database of defaulters: SALGA should develop and host a central database that monitors all municipal defaulters. All municipalities should have access to this database and use its contents to ensure that individuals with outstanding debt in one municipality cannot interact with other municipalities in any capacity. This system can be linked to the issuing of Municipal Clearance Certificates, what would authorise individuals and companies to interact with municipalities countrywide. Common billing system: From interacting with municipalities it emerged that, whilst some have sophisticated billing systems, understanding the capabilities of the system and directing it so as to enhance revenue management and credit control processes are a key requirement. Generally, a billing system used by a municipality should have preventative and detective capabilities that enables it to produce exception, arrears and disconnection reports. It is then up to the municipality to use the reports generated by the system to intervene and minimise non-payment. To support resource constrained municipalities, where it is not cost effective to operate sophisticated billing systems, SALGA should explore the possibility of developing a standardised billing system with the required capabilities that municipalities require to manage their revenue and credit control. The provision of technical training to municipalities to understand and effectively utilise the system will be key. Municipalities and Eskom: Cutting of electricity provides a strong incentive for defaulters to provide payment and is therefore an important lever for municipalities. Many municipalities are however experiencing challenges with effectively using this lever, especially where Eskom is the service provider. In addressing aspects related to electricity non-payment and the potential to utilise electricity disconnection as a tool to incentivise payment, SALGA should develop a standardised and comprehensive service delivery agreement (SDA) governs the relationship between the service delivery authority (municipality) and the service delivery provider (Eskom). This would be signed between the respective municipality and Eskom. The agreement should set out, amongst others: o The roles/responsibility of the service delivery authority relative to the service delivery provider o The process to disconnect electricity to households that default on municipal services o Arrangements to protect the revenues of Eskom in such a process o The ability of municipalities to apply surcharges on tariffs in Eskom controlled areas to enhance municipal revenues Formation of a multijurisdictional municipal service district: The costs of revenue management for certain types of municipalities are high and can counter the benefits from revenues collected. This is most apparent in smaller 7

8 or rural municipalities, where they do not have the electricity and water function to use as a lever to induce payment and subsequent legal steps to recover debt are too expensive. Therefore, SALGA should consider driving the establishment of a multijurisdictional municipal service district (provided for in terms of Section 87 of the Municipal Systems Act). The establishment of such agencies can form the precursor for the consideration of a national collection agency. Such agencies would: o Be based at the district municipality o Be owned by the district and all the local municipalities within the district o Be established through the pooling of resources o Implement billing and credit control on behalf of all the district and local municipalities o Have the ability to instruct the respective service authority (be it the district municipality, local municipality or Eskom) to terminate services for defaulters o Centralise legal costs associated with credit control Free Basic Services: By law, indigent households are allowed certain levels of basic services free of charge. Many municipalities face the challenge of indigent households exceeding the quota of free basic services. Given that the local equitable share allocation to municipalities is aimed at funding the provision of free basic services, it will be worthwhile to conduct further research to explore the adequacy of current levels of free basic services. 8

9 TABLE OF CONTENTS LIST OF FIGURES and TABLES INTRODUCTION Background Problem Statement Research Question and Objectives Outline of the Report OVERVIEW OF MUNICIPAL DEBT IN SOUTH AFRICA Regulatory Provisions General Trend Analysis Customer Analysis Service/Source Analysis Analysis of Historical Debt Municipal Category Analysis Key Points Emerging from Analysis LITERATURE REVIEW Municipal Business Model Theory of Non-Payment What are the Drivers of Non-Payment? Debt Management Meterability of Services Non-payment and the Poor Billing Credit Control and Debt Collection Bad Debts/Debt Impairment Outsourcing Revenue Collection Centralising Collection Activities Other Debt Recovery Methods Key Points Emerging from Analysis METHODOLOGY AND DATA Case Study Approach Descriptive and Quantitative Methods Data ANALYSIS AND RESULTS Factors Impacting on Debt Bivariate Analysis Statistical Analysis Reasons for Non-Payment Households Organs of State Business Financial Impact of Consumer Debt Identification of Best/Worst Performing Municipalities Key Points Emerging from Analysis SUMMARY OF KEY FINDINGS FROM STATUS QUO REPORT Summary of Key Findings

10 7. SUMMARY OF CASE STUDY ANALYSIS CONCLUSIONS AND RECOMMENDATIONS REFERENCES Appendix 1 Debtor Age Analysis by Municipal Category Appendix 2 Municipal Category Analysis by Customer and Sector Appendix 3 Overview and Results of Econometric Analysis Appendix 4 Identification of Best and Poor Performing Municipalities Appendix 5 Sample of Questionnaire Developed for Municipal Visits Appendix 6 Proposed Framework for the Basic Requirement for Sound Revenue Management and Best Practice LIST OF FIGURES and TABLES Figure 1. Total Stock of and Real Growth in Municipal Consumer Debt, Figure 2. Total and Real Growth in Consumer Debt per Municipality, Figure 3. Total and Real Growth in Consumer Debt per Capita Figure 4. Debt Owed by Customer Group, Figure 5. Real Growth in Debt by Customer Group, Figure 6. Share of Debt per Customer Group, 2013/ Figure 7. Debt per Service/Revenue Source, Figure 8. Real Growth Debt per Service/Revenue Source, Figure 9. Share of Debt per Sector, 2013/ Figure 10. Analysis of Age of Debt Owed on Municipal Books, Figure 11. Total Debt by Municipal Category, Figure 12. Real Growth in Consumer Debt per Category of Municipality, Figure 13. Debt per Municipality by Municipal Category Figure 14. Debt per Capita by Municipal Category, Figure 15. Business Model of a Typical Municipality Figure 16. Billing in the Broader Revenue Management Process Figure 17. Elements of an Effective Billing System Figure 18. Relationship between Debt per Capita and Unemployment, 2012/ Figure 19. Relationship between Debt per Capita and Inequality, 2012/ Figure 20. Relationship between Household Debt per Capita and Disposable Income per capita, 2012/ Figure 21. Relationship between Commercial Debt per Capita and GVA per capita, 2012/ Figure 22. Households Paying for Water, Figure 23. Reasons for Non-payment of Water, Figure 24. Reasons for Non-payment of Water, Figure 25. Households Paying for Sanitation, Figure 26. Households Paying for Refuse Removal, Figure 27. Households Paying for Electricity, Figure 28. Total Debt as a Percentage of Total Operating Expenditure, Operating Revenue and Operating Own Revenues, 2004/ / Figure 29. Sector Specific Debt per Total Sector Operating Expenditure, 2004/ / Figure 30. Sector Specific Debt per Total Sector Operating Revenue, 2004/ /

11 Table 1. Case-Studies of Countries where Improved Billing Led to Revenue Enhancements Table 2. Evolution of Collection Processes Table 3. Criteria for Assessing Municipal Debt Management Performance Table 4. Synthesis of Findings Based on Desktop Analysis and Interaction with Municipalities 69 LIST OF ACRONYMS FBS FFC GHS GVA MFMA MPRA REX SALGA LGES Free Basic Services Financial and Fiscal Commission General Household Survey Gross Value Add Municipal Finance Management Act Municipal Property Rates Act Regional Explorer South African Local Government Association Local Government Equitable Share 11

12 1. INTRODUCTION 1.1. Background Local government is a key component of South Africa s three-sphere system of government. Municipalities are constitutionally mandated to provide basic services to local communities. Basic services include electricity, refuse removal, water and sanitation. Such services are pivotal in sustaining and developing local communities and regional economies. In order to fund such key basic services, municipalities are constitutionally assigned a range of own revenue instruments. This includes the imposition of a range of taxes (property tax, surcharges and other local taxes), the ability to apply user charges to services rendered by municipalities and a range of other local licenses and fees. Although local government in South Africa also receives intergovernmental transfers from national and, to a lesser extent, provincial government, municipalities in the country generally fund their expenditures predominantly with local revenue instruments. The design of South Africa s local government fiscal system therefore places an emphasis on revenues generated locally to fund the bulk of municipalities service delivery obligations. Therefore, it is important that revenues are enhanced to ensure a sustained delivery of municipal basic services. The non-payment by a municipality s residential and non-residential customers for municipal services and taxes is known as municipal consumer debt and is defined as, the non-payment of property rates, fees/charges for services provided by municipalities and various other financial obligations to municipalities (FFC, 2011:45). Municipal consumer debt poses a potential challenge that threatens the fiscal and financial position of municipalities and can ultimately impact on the sustainable delivery of services Problem Statement Overall debt owed to local government has increased substantially in recent years. This compromises a municipality s fiscal position and thus increases the risk of financial distress. Figure 1 illustrates the issue of perennially increasing debt owed to local government. 12

13 Figure 1. Total Stock of and Real Growth in Municipal Consumer Debt, / / / / / / / / / /14 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Total Municipal Debt Real Growth Source: National Treasury: MFMA Section 71 Reports Deflator Base Year: 2002 Figure 1 illustrates a constant annual increase in the total debt owed by consumers of municipal services to municipalities. In 2004, reporting on debt owed to municipalities was very poor, with only 28 municipalities disclosing such information. Therefore, the initial increases in the total debt levels were likely due to an increase in the number of municipalities reporting on consumer debt. However, with the same number of municipalities (55) reporting in 2005/06 and 2006/07, the debt levels increased significantly by 26% in real terms. Although the real growth rate of municipal debt in the country appears to be slowing in recent years, total debt stock owed to municipalities continues to increase and was close to R100 billion in 2013/14. This is a significant amount of lost municipal revenues, considering that it equates to around 40% of total operating expenditure for that year. Essentially, municipalities could have spent 40% more on services to communities had it recovered its outstanding debt Research Question and Objectives From the discussions above, it is clear that the issue of increasing consumer debt is of growing concern to local government and to the South African intergovernmental fiscal system in general. However, the nature of municipal consumer debt is dynamic and complex. There are various reasons that lead to increasing debt owed to municipalities. These can range from fundamental social and political reasons, such as an inability to pay due to high levels of poverty or unwillingness to pay due to social discontent, to a lack of municipal capacity and other operation issues. In terms of the latter, poor billing practices and improper debtor management are some of the operational challenges being faced by municipalities. 13

14 It is to this end that the South African Local Government Association (SALGA), as the organised representative of local government in the country, has undertaken the initiative to critically investigate the complex issue of municipal consumer debt. The commissioned study entitled Debt owed to municipalities, poor billing and critical success factors (hereafter referred to as the research project or the study) aims to: (a) Holistically understand the factors that are resulting in increasing debt levels and, (b) Identify new and innovative methods to curb this concerning trend, (c) Critically analyse the current billing practices of South African municipalities in order to identify the key challenges and potential remedial measures, the latter of which will be garnered primarily from national and international best practices in billing using a case study approach. In order to address the issue of municipal billing practices and the general subject of municipal consumer debt, the study will achieve the following objectives: i. An understanding of the historical and current trends in consumer debt in the country ii. iii. iv. An analysis of the nature of municipal consumer debt a. Source of the debt in terms of services rendered and by customer group b. Debtor age analysis c. Analysis of debt across the different categories of municipalities An in-depth literature review a. Understand the theoretical reasons for high consumer debt and its drivers b. Review previous empirical research on municipal consumer debt both internationally and in South Africa c. An analysis and identification of international examples of successful and innovative debt management models and best practice in billing, their effectiveness and critical analysis of their potential for implementation in South Africa An analysis and identification of best performing and poorly performing South African municipalities a. Understand the factors contributing to high levels of debt owed to municipalities b. Understanding the challenges being faced with regards to billing practices c. The identification of successful and innovative systems of debt management and best practice with regards to billing systems v. A full set of recommendations to improve debt management in South African municipalities. These would include how current best practice/innovative 14

15 models, identified locally and/or internationally, can be re-configured to practically implement in other South African municipalities Outline of the Report The report is structured as follows: Section 2 provides a comprehensive overview of the historical development and current status of municipal consumer debt in the country. Such a trend analysis will assist in understanding the current nature of consumer debt and where such debt emanates from. Section 3 provides a comprehensive literature review on the subject of municipal consumer debt and will allow one to understand the key theoretical reasons for nonpayment, a review of previous empirical analysis undertaken for South Africa, understand the issue of billing and key requirements for a successful billing system, assess the issue of debt and billing internationally and to identify new and innovative methods used by South Africa s international counterparts to address the issue. Section 4 describes the methodological approach of this study, namely case study analysis complemented by statistical analysis. Section 5 provides the secondary analysis and results Section 6 provides the summary of the status quo report Section 7 provides the summary of the Case Study analysis Section 8 concludes the paper with a comprehensive set of recommendations and proposed models for implementation in South African specific municipal context. 15

16 2. OVERVIEW OF MUNICIPAL DEBT IN SOUTH AFRICA This section characterises municipal consumer debt in South Africa by providing the legislative overview of municipal revenue management and key trends in the current nature of the debt owed to municipalities. The focus is on a high level summary of the municipal consumer debt challenge. Additional statistical and graphical information is contained in the annexures to this report Regulatory Provisions Regulatory and legislative provisions acknowledge the challenge posed by nonpayment. The Municipal Finance Management Act (MFMA) and the Municipal Systems Act aim to guide municipalities with respect to revenue and debt management. Section 64 of the MFMA relates to revenue management. It allocates responsibility for revenue management to the accounting officer. It requires a municipality to ensure that: Effective revenue collection systems are in place Revenue due to a municipality be calculated monthly Management, accounting and information systems are established and maintained to adequately account for debtors Adequate internal controls are established with respect to debtors The Municipal Systems Act dedicates a chapter (chapter 9) to the issues of credit control and debt collection. According to this legislation, municipalities need to devise a credit control and debt collection policies Section 9 provides detailed guidance on aspects that need to be included in this policy. This section further allows municipalities to effect garnishee orders in cases of non-payment. Section 80 of the Municipal Systems Act makes provision for the delivery of municipal services by an external provider, hence allowing for municipalities to outsource functions. Importantly section 104 makes provision for the Minister responsible for local government to devise norms and standards with respect to credit control and debt collection. As will become apparent in the following section, norms and standards to guide municipalities in the application of effective revenue and debt management are lacking. Guidelines on when to write debt off as irrecoverable, the amount of interest to charge on outstanding amounts is all left to municipal discretion. Some municipalities have good systems in place and manage their debtors well. However there is a need for some basic guidelines to assist municipalities to better manage the challenge of non-payment. Norms and standards should be applied on a differentiated basis and could exclude those municipalities that show evidence of sound debt management.

17 2.2. General Trend Analysis As indicated in Figure 1 above, almost R100 billion is owed to municipalities in South Africa in the form of municipal consumer debt. Although analysing the total quantum of municipal consumer debt provides a general picture of the problem, such analysis hides the real impact that high levels of consumer debt can have on a municipality. In addition, the inconsistent reporting specifically between 2004 and 2008 makes it difficult to compare year-on-year increases in total consumer debt, as it is unknown whether the actual quantum of debt is increasing or whether there are additional municipalities reporting on debt. Figure 2. Total and Real Growth in Consumer Debt per Municipality, / / / / / / / / / /14 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% -70% Debt per Municipality Real Growth per Municipality Source: National Treasury: MFMA Section 71 Reports Deflator Base Year: 2002 Figure 2 provides the average debt per municipality and its real growth rate from 2004/05 to 2013/2014. Debt per municipality attempts to account for reporting differences. As seen in Figure 2, consumer debt levels per municipality were initially higher in earlier years but decreased as more municipalities reported. In fact, there were real decreases in debt per municipality from 2007/08 onwards. However, real increases in debt per municipality recurred from the 2009/10 financial year onwards. This was likely due to the impact of the global financial crisis making it difficult for consumers to pay for local taxes and services. In 2013/14, the average debt owed to a municipality was around R400 million. 17

18 Figure 3. Total and Real Growth in Consumer Debt per Capita / / / / / / / / /13 15% 10% 5% 0% -5% -10% -15% -20% -25% Debt per Capita Real Growth per Capita Source: National Treasury: MFMA Section 71 Reports, IHS Global Insight: REX Deflator Base Year: 2002 Population numbers apply to only municipalities that reported on debt Figure 3 extends the analysis by looking at consumer debt per capita and its real growth from 2004/05 to 2013/14. In 2004/05, consumer debt stood at around R1 400 per person. This has increased considerably such that, as at 2013/14, current debt per capita is over R1 600 per person. In both Figure 2 and Figure 3, there was a sharp real increase in 2006/07. Similar to the trend in Figure 2, debt per capita initially decreased up until the 2009/10 financial and subsequently increased thereafter. The impact of the recessionary environment at the time and its after-effects are apparent Customer Analysis Municipal customers are generally classified into one of four categories: commercial (businesses), domestic (households), public (organs of state) and other customers 1. Figure 4 illustrates the trend of non-payment by category of consumer from 2004/05 up until 2013/14. By far the largest and fastest growing levels of non-payment are with respect to households. In 2013/14, households owed municipalities close to R60 billion in unpaid debt. Such a trend suggests that issues of inability or possibly unwillingness to pay for local services on the part of households are likely. This is because households are more likely to be impacted by high levels of poverty and prone to social unrest. 1 What constitutes the category Other varies from municipality to municipality. An example of what might be listed in this category includes debt emanating from insolvent estates (FFC, 2011:45). 18

19 Figure 4. Debt Owed by Customer Group, / / / / / / / / / /14 Source: National Treasury: MFMA Section 71 Reports Deflator Base Year: 2002 Commercial Households Organs of State Other Customers Over the period reviewed, there was also a sharp increase in debt owed by businesses. This occurred after the financial crisis in 2009/10, highlighting this sector s vulnerability to economic cycles. Debt owed by organs of state has also increased over this period. As of the 2013/14 financial year, other organs of state (national and provincial governments) owed municipalities over R1 billion. The extent of non-payment by this category is particularly concerning as it is indicative of a possible breakdown in the system of cooperative government that underpins South Africa s intergovernmental system. Measures have been put in place to improve payment by other spheres of government for municipal services. These include: Provincial Debt Management Steering Committees in a number of provinces to resolve disputed accounts The inclusion of a property rate grant to provinces for payment of property rates; and Other intergovernmental platforms established to deal with the intergovernmental debt issues Despite the aforementioned interventions, the problem of non-payment from other organs of state persists. Section 64(3) of the Municipal Finance Management Act (MFMA) states that: The accounting officer (of a municipality) must immediately inform the National Treasury of any payments due by an organ of state to the municipality in respect to municipal taxes or for municipal services, if such payments are in arrears for periods of more than 30 days 19

20 The persistence of non-payment by organs of state, despite a legislative provision and various interventions to curb this type of non-payment, suggests one (or a combination) of three possible challenges: Municipalities are not accurately reporting non-payment by organs of state to the National Treasury, National Treasury is not responding in a manner that obligates organs of state to pay outstanding amounts, or The provision in the MFMA, whilst making provision for reporting of the debt by municipalities to the National Treasury, it does not propose any remedial measures to be taken by the National Treasury on the issue. Whereas the Constitution provides for the stopping of a transfer (Section 216) this may not be a long-term, practical solution as it will ultimately affect service delivery beneficiaries/the poor. Figure 5 illustrates the real annual growth in non-payment, by customer grouping between 2004/05 and 2013/14. Initially, debt owed by government and other customers grew at a relatively faster pace. In 2010/11, household and business debt levels increased substantially in real terms. The increase in debt owed by organs of state continues to grow considerably, illustrating a real growth rate of over 20% as at 2012/13. Figure 5. Real Growth in Debt by Customer Group, % 100% 80% 60% 40% 20% 0% -20% 2004/ / / / / / / / / /14-40% -60% -80% Source: National Treasury: MFMA Section 71 Reports Deflator Base Year: 2002 Commercial Households Organs of State Other Customers Figure 6 confirms the current share of debt owed by the different customers to local government in 2013/14. Households currently account for 62% of total municipal consumer debt, while commercial customers account for a further fifth of the total debt levels. 20

21 Figure 6. Share of Debt per Customer Group, 2013/14 5% 12% 21% 62% Commercial Households Organs of State Other Customers Source: National Treasury: MFMA Section 71 Reports Deflator Base Year: Service/Source Analysis Municipalities are constitutionally authorised to levy taxes and charge for the services that they provide. This allows the municipality to cover its costs in providing such services and also allow for the cross-subsidisation of service delivery to poor households. Figure 7 provides a breakdown of the services and tax instruments that are most susceptible to levels of non-payment. The three largest categories are that of water, property rates and electricity. Access to water is a basic right in the Constitution of South Africa. Therefore, it is difficult for a municipality to take punitive measures, such as fully cutting water supply, to recover outstanding debt in this sector. This could be a key-contributing factor in the large level of non-payment for this particular service. Currently, R25 billion is owed on outstanding water debts. 21

22 Figure 7. Debt per Service/Revenue Source, / / / / / / / / / /14 Electricity Water Property Rentals Waste Management Waste Water Management Property Rates Other Services Source: National Treasury: MFMA Section 71 Reports Deflator Base Year: 2002 The non-payment of property rates is also another significant area where debt levels are high. Unlike water and electricity where a service is rendered and a consumer charged for using the services, property rates is a general tax instrument and thus not linked to a specific service. This could be one of the reasons contributing to the high levels of non-payment of property rates, as citizens cannot see the value for money that arises with paying property rates. Current outstanding property rates stands at over R20 billion. In addition, the implementation of the regulations of the Municipal Property Rates Act (MPRA), one of which requires the imposition of new valuation rolls based on the market value of properties, has experienced some delays and disputes and could have contributed to an increase of non-payment of property rates. The non-payment for electricity has become apparent in recent years, probably due to the above inflation increases in the electricity tariff afforded to Eskom for its investment requirements. This is likely resulting in a situation where households can no longer afford to pay for electricity. Electricity is also the service most likely to get disconnected for non-payment. The fact that electricity debt continues to rise despite this practice suggests that non-payment is becoming a serious issue. Figure 8 shows the real growth of debt emanating from each service or revenue source from 2004/05 up until 2013/14. Most services have experienced positive and constant real growth over the period. There was initially a large real increase in water-related debt in 2006/07. A similar upward trend was evident in the case of sanitation from 2007/08 onwards, peaking in 2010/11 with a real increase of 60%, but subsequently stabilising. Similar to the analysis of real growth per customer group in Figure 5, it is 22

23 concerning that real growth in consumer debt continues to follow a year on year positive trend. Figure 8. Real Growth Debt per Service/Revenue Source, % 60% 40% 20% 0% 2005/ / / / / / / / /14-20% -40% -60% Electricity Water Property Rentals Waste Management Waste Water Management Property Rates Other Services Source: National Treasury: MFMA Section 71 Reports Deflator Base Year: 2002 Figure 9 confirms the current portion of outstanding consumer debt emanating from services/revenue sources. Water constitutes around 30% of outstanding municipal debt, followed by property rates (24%) and electricity (18%). Figure 9. Share of Debt per Sector, 2013/14 7% 18% 24% 11% 29% 9% 2% Electricity Water Property Rentals Waste Management Waste Water Management Property Rates Other Services Source: National Treasury: MFMA Section 71 Reports Deflator Base Year: Analysis of Historical Debt Consumer debt owed to municipalities is usually categorised in terms of the number of days that the debt has been outstanding from the due date for payment stated in a municipal bill. These usually range in multiples of 30 days from the due date for 23

24 payment in the municipal bill. Once the debt becomes outstanding, municipalities should ideally begin processes to collect the outstanding debt. If the debt still remains uncollected for a certain period following the full implementation of credit control processes, municipalities should consider the debt irrecoverable and write it off their books. This period when a debt gets classified as irrecoverable and is written off, is governed by the municipality s debt management or debt write-off policy as per Section 96 of the Municipal Systems Act. However, there needs to be a balance between ensuring that municipalities make concerted and reasonable efforts to collect the outstanding debt and not simply write off debt arbitrarily. Many municipalities also have the tendency of not writing off debt as per their debt management or debt write-off policy or have simply not implemented their full credit control policy. As a result, such debt continues to reflect on their books and artificially inflates the level of debt owed. In fact, the current stock of consumer debt would not be as exorbitant if debt was appropriately collected or subsequently written off if assumed irrecoverable. Figure 10 supports some of the arguments above by illustrating the levels and growth of debt according to the period for which it is outstanding. From 2004/05, debt that is older than 1 year progressively increases: growth in debt outstanding for more than a year increased by an annual average growth rate of 16% between 2008/09 and 2013/14 financial years. This offers a clear indication that municipalities are failing to recover outstanding debt and are not writing these irrecoverable debts off. However, the accounting process of writing off historical debt usually needs to be reflected and balanced of the revenue side of a municipal budget, impacting on the overall financial position of the municipality. On the other hand, assuming that municipalities should ideally have recovered their debts within 120 days, debt levels would not be as high as reported. Figure 10 shows that municipal consumer debt levels would have been 66% less in 2013/14 had these debts being considered irrecoverable following the sound implementation of the credit control policies. In other words, total municipal consumer debt would have been R32 billion, as opposed to R95 billion in 2013/14, had debt older than 120 days been collected. The share of debt older than 120 days of total debt increased from 44% of total debt in 2004/05 to 66% of total debt in 2013/14, a further indication that debt is simply accumulating in municipal books. 24

25 Figure 10. Analysis of Age of Debt Owed on Municipal Books, / / / / / / / / / /14 0 to 30 Days 31 to 60 Days 61 to 90 Days 91 to 120 Days 121 to 150 Days 151 to 180 Days 181 Days to 1 Year Over 1 Year Real Growth in Debt Over 120 Days Nominal Share of Debt Over 120 Days 80% 60% 40% 20% 0% -20% -40% Source: National Treasury: MFMA Section 71 Reports Deflator Base Year: 2002 Appendix 1 offers a similar analysis to Figure 10 but disaggregates the status of outstanding debt by municipal category, service/revenue source and customer grouping. Such analysis allows one to assess specifically where debt is being recovered and/or written off and where debt persists. Firstly in terms of the different categories of municipalities, secondary cities and larger towns have the lowest levels of outstanding debt older than 120 days as a share of total debt (around 48% in 2013/14) compared to metros (73%), smaller towns (64%), rural municipalities (81%) and district municipalities (83%). In fact, the analysis on secondary cities suggests that once the debt has reached 120 days, they are either recovered or written off. This is indicated by the days outstanding debt category constituting the largest share of debt within these municipalities. Notwithstanding the aforementioned facts, outstanding debt older than a year continues to grow in real terms across all types of municipalities. Outstanding debt levels older than 120 days also constitute the largest share of overall debt per customer grouping. However, it should be noted that in the case of households, debt older than one year is decreasing in real terms. In terms of the age of outstanding debt per service/revenue source, interestingly, debt older than 120 days as a percentage of total debt is lowest for water and electricity services. Furthermore, real growth in outstanding debt over one year is relatively lower in real terms compared to other services and revenue sources. In terms of the water service, it is likely that municipalities consider this type of debt irrecoverable and are likely writing such debt off. In terms of electricity, outstanding debt between 0 to 30 days old constitutes the highest share of overall debt in the provision of this service. This is interesting as it suggests that there is likely greater debt recovery in electricity, possibly due to the practice of disconnecting the electricity service to non-payers. 25

26 2.6. Municipal Category Analysis The analysis thus far assessed the aggregate debt levels of local government in general. However, it is important to note that municipalities in the country are vastly different and can range from densely populated urban hubs to sparsely populated rural areas. Consequently, demand for services and budget sizes are likely to differ considerably. Figure 11 disaggregates the debt levels by municipal type. It is clear that most of the debt, in absolute terms, is experienced by metros and secondary cities. This is due to their larger budgets and greater number of customers thus increasing the frequency of non-payment for services. As at 2013/14, close to 75% of the total municipal consumer debt is located in metros and secondary cities. It is thus clear that the absolute extent of debt is a problem in the urban centres of the country, although this is not to suggest that the level of debt does not impact negatively on the financial position of smaller municipalities. Figure 11. Total Debt by Municipal Category, / / / / / / / / / /14 Metros Secondary Ci es Large Towns Smaller Towns Rural Municipali es Districts not Providing Water Districts Providing Water Source: National Treasury: MFMA Section 71 Reports Deflator Base Year: 2002 Municipal categories based on the Department of Cooperative Governance s Classification (See LGTAS) Figure 12 shows the real growth in debt per category of municipality from 2009/10 to 2013/14. The reason for analysing the shorter time frame is due to the unrealistically high increases in debt levels from 2004/05 to 2008/09 as a result of differences in the number of municipalities reporting. An analysis from 2009/10 provides a greater sense of the growth in debt levels due to the number of municipalities reporting being more stable. After initially high real growth in 2009/10, debt levels increased more or less at the same rate across municipalities, apart from a large 50% real increase in rural municipalities in 2012/13. 26

27 Figure 12. Real Growth in Consumer Debt per Category of Municipality, Source: National Treasury: MFMA Section 71 Reports Deflator Base Year: 2002 Municipal categories based on the Department of Cooperative Governance s Classification (See LGTAS) As pointed out above, absolute debt is highest in the urban municipalities. This is in all likelihood due to the fact that these municipalities have bigger populations and households with access to basic services. Figure 13 controls for the number of municipalities reporting by looking at debt per municipality. Debt per municipality is highest in metros. Although there are a smaller number of metros, graph 13 confirms that debt remains a relatively high problem in metropolitan areas. In 2012/13, the average level of outstanding debt owed to a metropolitan municipality was R8 billion, illustrating the context of the problem experienced in these municipalities. Figure 13. Debt per Municipality by Municipal Category / / / / / / / / /13 Metros Secondary Ci es Large Towns Smaller Towns Rural Municipali es Districts not Providing Water Districts Providing Water Average Source: National Treasury: MFMA Section 71 Reports Deflator Base Year: 2002 Municipal categories based on the Department of Cooperative Governance s Classification (See LGTAS) Figure 14 illustrates debt levels per capita by the different categories of municipalities, controlling for reporting. Once again, debt per capita is highest in metropolitan municipalities. Metros are the only municipal type that is above the national average of debt per capita. However, in 2013/14, debt per capita in secondary cities increased above the national average. The analysis confirms that generally, once controlling for 27

28 municipalities reporting and population, municipal consumer debt is most prominent in the urban areas of the country. Figure 14. Debt per Capita by Municipal Category, / / / / / / / / /13 Metros Secondary Ci es Large Towns Smaller Towns Rural Municipali es Districts not Providing Water Districts Providing Water Average Source: National Treasury: MFMA Section 71 Reports Deflator Base Year: 2002 Municipal categories based on the Department of Cooperative Governance s Classification (See LGTAS) Appendix 2 further extends the analysis above by looking at debt emanating from services/revenue sources and customers across the categories of municipalities. Firstly, in terms of customers, municipal consumer debt owed by households is the highest across all municipal categories. Commercial debt is relatively higher in metros due to these municipalities having a higher level of economic activity and consequently a larger number of business customers. Debt owed by organs of state is relatively higher in rural municipalities. This is possibly due to the lack of capacity in these areas to establish and engage in intergovernmental forums to recover debt from provincial and national government. Non-payment in the provision of the water service is highest across most of the categories of municipalities. Interestingly, larger local municipalities and rural municipalities have a relatively higher level of non-payment for property rates. In terms of rural municipalities, the issue of communal/traditional land, where the imposition and collection of property rates proves difficult, could explain this Key Points Emerging from Analysis i. The growing levels of household consumer debt per year suggest that poverty and affordability is likely progressively putting pressure on these customers. ii. Commercial customers are most susceptible to economic downturns, suggesting that municipalities are likely to experience higher consumer debt levels when the local or national economy is in recession. Municipalities should be aware of this and government should consider contingency plans in such situations. 28

29 iii. iv. Although debt levels are higher for certain revenue sources/sectors than others (e.g. water), the fact that debt levels continue to grow across revenue sources indicates a general issue with paying for municipal services and taxes. Debt emanating from the provision of the water service continues to be high and is increasing year-on-year. This will continue to be an issue as local government balances its need for cost recovery and the social and human rights of its citizens v. The above inflation increases to the electricity price is likely increasing the debt levels emanating from the provision of electricity. This needs to be tested empirically. vi. vii. viii. Municipalities are failing to recover outstanding debt and are also failing to write-off such debts. This is resulting in debt accumulating in municipal books, thus artificially inflating consumer debt levels. Exceptions to this rule are evident in that municipalities appear to be writing off historical debt arising in the water and electricity sectors. In the case of water services it is probably due to the difficulty in recovering such debt, whilst the ability to disconnect electricity is the likely reason why municipalities are better able to recover debt. Secondary cities appear to be doing well in recovering outstanding debt and/or writing off such debt when it is deemed irrecoverable. This is confirmed by the relatively low amounts of historical debt within these municipalities. In absolute terms, municipal consumer debt is most apparent in the urban areas of the country, due to the greater demand for services and higher numbers of customers served in these areas. Across the different categories of municipalities, the non-payment by households for municipal services is most prominent. In addition, non-payment for water services is most common across municipal types. The non-payment of property rates is relatively higher in larger local municipalities and rural municipalities, while rural municipalities have relatively higher debt levels owed by organs of state. 29

30 3. LITERATURE REVIEW 3.1. Municipal Business Model In a fiscally decentralised system of governance, subnational spheres of government are assigned expenditure and revenue responsibilities. The assignment will detail what a subnational sphere of government (such as a province or municipality) is legislatively required to spend its resources on, as well as the various tools through which revenue can be derived (Bahl, 1999). The revenue and expenditure mandates of local government differ across countries. Irrespective of the precise services that municipalities are responsible for, the model underpinning the functioning of a municipality is standard and is outlined in Figure 15 below. Municipalities provide constitutionally mandated services to municipalities and charge them for delivery of these services. In addition to intergovernmental transfers, the revenue earned from service delivery activities is a vital component of total revenue for municipalities. A key problem arises when payment for service delivery is not made. This affects the financial viability of a municipality and the on-going sustainability of service delivery. Non-payment is also known as municipal consumer debt and is defined as, the non-payment of property rates, fees/charges for services provided by municipalities and various other financial obligations to municipalities (FFC, 2011). Figure 15. Business Model of a Typical Municipality Financial Institutional Payment CUSTOMERS Communication MUNICIPALITY Service delivery and billing Socioeconomic Technical Capacitybuilding and Training Source: adapted from USAID, Theory of Non-Payment 30

31 The reasons underpinning the non-payment of public services can be divided into two broad categories, namely inability to pay and unwillingness to pay. The first reason is related to poverty and unaffordability of tariffs charged for public services. Unwillingness to pay implies that a consumer can afford to pay for a service, but chooses not to. The reason for choosing not to pay can stem from a number of reasons, but generally unhappiness with the quality and/or efficiency of the service being provided is often the driver. According to Cullis and Lewis (1997), willingness to pay or compliance, depends in part on the fiscal policies and tax enforcement regimes in place as well as the tax attitudes or fiscal consciousness of taxpayers. General literature on tax evasion is helpful in conceptualising the problem of nonpayment. For example, according to the deterrence model of tax evasion, first formulated in 1972, the extent to which evasion takes place is influenced by possible legal influences and the risk appetite of the individual concerned (Slemrod, 2007). According to behavioural models of tax evasion, the political economic context or environment is important. For example, the decision to evade taxes is based on the extent to which the taxation system is considered to be fair. In such cases, the existence of penalties may not be enough of a deterrent in stemming evasion. This is particularly relevant in the South African case where, during the apartheid era, rates boycotts were a means of protest against an unjust system What are the Drivers of Non-Payment? Inability to pay for services, as a result of poverty, has been comprehensively assessed in South Africa. Studies by Booysen (2001) and Botes and Pelser (2001) find that nonpayment is largely driven by an inability to pay. Unemployment, low-income levels and unaffordable rates are particularly emphasised. Booysen s (2001) analysis highlights that both higher-income and low-income households paid for services, thus indicating that there is a significant degree of compliance and ability to pay amongst households residing in poor areas. In fact, significant variations in payment and non-payment exist across both poor and non-poor areas. Both studies disaggregate their findings according to a rural/urban divide. This distinction is useful in that it highlights unique characteristics of the non-payment phenomenon in different types of areas. Botes and Pelser s (2001) assessment of nonpayment found that, in South Africa, literacy rates, which are indicative of people s ability to comprehend municipal accounts, can increase unwillingness to pay. Botes and Pelser (2001) note that people s perception of the quality of a municipality s billing system can also inhibit payment of services. If people believe that billing is incorrect, they are more unlikely to be willing to pay. This latter aspect is determined by the efficiency and effectiveness of municipalities. 31

32 In addition to the aspect of poverty, other issues, most notably unhappiness with service delivery or government in general, can also affect willingness to pay. Glaser and Hildreth (1999) propose that perceptions of government and willingness to pay are directly linked. In a survey of mid-western United States cities with a population of approximately each, they found that half of the respondents were willing to pay more for improved local government performance (Glaser and Hildreth, 1999). Fjeldstad (2004) applied the issue of perception and whether or not governments are acting in accordance with people s interests to South Africa. According to Fjeldstad (2004), three dimensions of trust affect the extent to which people are willing to pay. First, trust in local government to act in their citizens interest, which refers to whether people believe that government will spend money on the required services and whether the services provided are of an acceptable quality. The second dimension relates to whether citizens believe that authorities will establish fair procedures for revenue collection and distribution of services. Effective enforcement to ensure payment is critical, as citizens should believe that non-payment carries a penalty, such as the disconnection of services. However, whereas one would expect compliance to be positively related to the severity of sanction applied for non-payment, the opposite is true for South Africa (Fjeldstad, 2004). The reason for this inverse relationship could lie with the principle of reciprocity: giving back what you get. In this case, treatment perceived to be unfair or extreme is met with a strong refusal to pay. Finally, the third dimension concerns trust in other citizens to pay their share. What comes into play here is belief about the honesty of others, which is related to the role of social influences (Fjeldstad, 2004). Here the work of Fjeldstad echoes Cullis and Lewis (1997) who note that, behaviour is not a function purely of individual choice: individuals look to others in order to decide what is acceptable, reasonable, expected within the social context in which the action is set. There are social norms to behaviours and beliefs (Cullis and Lewis, 1997:311). Alozie and McNamara (2010) bring a gender dimension to the willingness to pay debate. Using multivariate analysis to estimate the effect of gender on urban residents willingness to pay of 702 households in Phoenix in the United States, they found that certain services trigger gender differences in willingness to pay. More specifically women were more willing to pay for services associated with compassion (housing for the poor), economic security (job training and placement services) and public safety (treatment of drinking water) (Alozie and McNamara, 2010). As there are many femaleheaded households in South Africa, it would be interesting to test whether such genderspecific behaviours are apparent in the South African context. Adenike and Titus (2009) focus on the determinants of willingness to pay for improved water supply in Nigeria, and find that two determinants, namely household income and 32

33 connection charges drive willingness to pay. In addition, a positive relationship between the level of education and willingness to pay existed. Central to the issue of ability to pay is the aspect of affordability. McPhail (1993) suggests incorporating affordability and willingness to pay assessments at the planning stage of a public good such as water and electricity. This is particularly important if the intention is to recover costs, as the information that an affordability assessment yields can provide insight into potential service utilisation patterns and therefore the tariff to be charged in order to maximise cost recovery. McPhail (1993) notes that despite the obvious importance of having an indication of willingness to pay, policymakers continue to make general assumptions with respect to the population to be served, per capita consumption rates, etc. The end result is that tariff-setting is based on covering operating, maintenance and capital costs, without consideration of what people are willing to spend, which could even be higher than the rate set (McPhail, 1993) Debt Management There are various innovative methodologies being adopted by governments, nationally and internationally, in a bid to better manage the challenge of non-payment. In this section three critical aspects of debt management are discussed, namely: the meterability of services provided, how to manage the provision of free basic services (FBS) to the poor and the billing of paying households Meterability of Services A meter records the consumption of a service. The use of meters heightens transparency between government and end users as the volume of consumption is known and can be regulated by the end user. The installation and use of meters can reduce non-payment. Danilyuk (2009) and Kessides et al (2009) advise that prior to meter installation, an analysis of the costs and benefits of metering be explored, as there are infrastructure, installation and promotional costs involved in using them. Achieving and maintaining accurate and efficient billing and collection processes depends on a number of factors, including regular metering of service consumption, adequate staff capacity and convenient facilities for customer payments (World Bank, 2008). With respect to reasons driving household non-payment, poor/irregular metering systems were particularly emphasised (StatsSA, 2005, 2006, 2007, 2008 see analysis in Section 5). Meter management is essential in ensuring improved billing one of the key focus areas of meter management should be on illegal connections and faulty meters Non-payment and the Poor In South Africa specified levels of basic services such as water, electricity, sanitation and refuse removal are provided free of charge to indigent households. Municipalities can determine the guidelines around which households can be declared indigent. The problem arises when indigent households are incorrectly billed for utilisation of a free 33

34 basic service. There are two parts to this issue. The first relates to the upkeep of a municipal indigent register. Where this is lacking, a municipality cannot know which households are eligible to receive FBS and which households should be paying for services. Where indigent households are wrongfully classified as not paying, this artificially inflates the level of non-payment. The second issue relates to cases where indigent households consume more than the specified amount of a basic service deemed to be free. For example, in the case of electricity, the national guideline is that indigent households are allowed 50-kilowatt hours per month free of charge. When this level is exceeded, payment is required. However, it is unlikely that such households have the financial capacity to pay for the use of the service beyond the free portion. In such instances, municipalities need to either control/monitor the use of free basic services of their identified indigents or not charge these households knowing that payment is unlikely. In addition, the consistent exceeding of the FBS amount by poor households does raise the issue of the sufficiency of the nationally defined norms for FBS. However, the discretion on the definition of indigent and the portion for FBS within municipal jurisdictions lies with the corresponding local government in question but funding is only afforded by national government as per the national definition of indigents (households earning less than R2300 per month) and FBS levels (50 kilowatt per hour for electricity and 6 kilolitres per month for water). Support beyond these levels is funded by municipal own revenue sources Billing Accurate billing processes are an integral component of any effective revenue enhancement strategy. Figure 16 below illustrates how billing fits into the broader revenue management value chain. Revenue losses arising from poor billing is attributed as a key reason for municipalities becoming progressively more dependent on intergovernmental transfers. 34

35 Figure 16. Billing in the Broader Revenue Management Process Revenue Planning Managing Revenue Targets Developing Tariffs Invoicing and Collections Administration relating to customer base Measuring usage Billing Credit control Collecting revenues Loss Management Financial and technical losses Source: Sooful, The importance of accurate billing should not be under-estimated as numerous casestudies report revenue improvements as a result of more effective billing processes. Table 1 below summarises some of these success stories. Table 1. Case-Studies of Countries where Improved Billing Led to Revenue Enhancements Country Billing Reform Burkina Faso Computerisation of billing and administrative systems and replacement of old meters improved cost recovery to 96% of costs Kenya (Nyeri and Mavoko) Use of integrated financial management systems to identify tax defaulters and manage bad debts was critical in improving local tax revenues Brazil (Sao Paulo) Specific focus was placed on improving the metering and billing of the prime 2% of customers (who comprise 34% of revenues). Through this and other complementary approaches such as the installation of new meters, revenue was significantly increased Thailand Meter readers were appointed to check meters monthly using handheld readers that confirm consumption levels with the utility s 35

36 Uganda Source: Rao, servers before printing instant bills. This led to an improvement in financial performance, with revenue significantly exceeding costs A city council in Kampala undertook a series of reforms aimed at improving property tax collection this included: a bill delivery drive, media campaigns, better reminders, more payment points, pressure on individual defaulters and the use of private bailiffs. Figure 17 depicts the minimum elements required to ensure a well-functioning billing system. There are two primary ingredients: accurate data and technology or a system capable of facilitating an efficient and effective billing process. The key aspects from Figure 17 can be summarised as follows: The billing process is initiated once a customer is connected or purchases a service delivered by a municipality The first layer with respect to ensuring accurate data and an efficient system relates to ensuring appropriate administrative and technology controls: o Ensuring accuracy of master data: This data relates to the basic information regarding the consumer of the service and ultimately the person responsible for payment. Master data must encompass accurate property information (address/location/ meter number), accurate customer information (name of the consumer, consumer category referring to whether the consumer is a business, household or government department). Basically master data refers to all the information required to understand the consumer and to get the bill to the correct place once consumption has taken place. o Ensuring a high level of information technology (IT) security as well as preventative and detective controls: IT security is required to ensure that all customer information is kept confidential. This aspect is important in securing the billing system and making it as tamper proof as possible. Preventative controls prevent errors from occurring prior to a bill being sent out. Types of preventative controls include: password protection, assigning specific authority levels to certain processes (for example those with authority to close accounts or alter the status of an account). Detective controls identify potential errors. This type of control entails analysing a bill before it s finalised with the aim of identifying potential errors. Detective controls should ideally be able to identify accounts that have not been billed, accounts displaying out of the ordinary consumption, or accounts that display out of the ordinary billing amounts 36

37 The second layer concerns appropriate administrative and technology processes. On the administrative side, it is about correctly capturing the meter readings, billing data and all receipts and utilising this information to devise reports that can assist in evaluating performance, to anticipate the potential extent of non-payment and inform strategies to be employed to enhance revenue - this can range from writing off certain debt to employing professional debt collectors Figure 17. Elements of an Effective Billing System HIGH PERFORMING BILLING SYSTEM Accuracy of Inputs/Data Technology/Appropriate Software ADMINISTRATIVE AND TECHNOLOGY CONTROLS Master data IT Security Preventative/Detective Controls ADMINISTRATIVE AND TECHNOLOGY PROCESSES Capture all meter readings, billing data and receipts Pre-billing/Variance reports, Backups, Bill, Bill Print, Roll-overs Billing Period Source: Adapted from USAID, 2005 and Mazibuko, Billing Formula London and Farmer (2013), provide an overview of the three key steps that have been undertaken in all proven initiatives for improving government debt collection. Step 1: Conducting an operational review, which refers to an in-depth review of current operations to assess and prioritise opportunities for improvement. Step 2: Systems modernisation is required to align management systems with the precise needs of government. London and Farmer support the use of case management systems that are underpinned by predictive modelling. Predictive modelling allows for better risk management by determining the likelihood of a debtor paying voluntarily within a given amount of time. This information can then be used to determine the least costly action to obtain payment. According to London and Farmer (2013), statistical models have proven effective in increasing collections through allowing government to determine which cases/households are likely to self-pay relative to those that will require further action to induce payment. 37

38 Step 3: Business process improvements are needed to leverage the potential benefits of modern technology. When business process is at odds with technology, any potential improvements are constrained. In terms of business process, London and Farmer (2013) emphasise two types of collection process improvements. One is administrative and the other is legislative. Administrative revisions can be relatively easily implemented whereas legislative revisions require more formal regulatory/statutory changes. Whilst legislative revisions are more complex, they are able to give government new collections options and tools. Rao (2012) concurs with the need to harness technology when it comes to billing as errors can further be eliminated through limiting human handling of data and utilising commercial software instead. The manner in which core collection processes are evolving emphasises the need for automated technologies to aid the communication and collection process. See Table 2. Table 2. Evolution of Collection Processes Collection Historical Current Next Generation Process Presenting the bill to the debtor Responding questions the bill to about Interacting with the debtor and establishing payment Processing debtor payments Securing involuntary payment an Posting the paper bill/account to the debtor Mail paper correspondence Walk-in offices Inbound call centre Mail paper Inbound/outbound call centre Walk-in office Manual paper check processing Pursuing a judgement via the court system and manually producing garnishment documentation Mailing the bill via post Online Inbound call centre Web portal for Frequently Asked Questions (FAQs) Inbound/outboun d call centre Electronic financial transfer Credit/debit card processing Automated legal documentation processing to secure highvolume judgements Data acquisition to obtain banking information Paperless/online Sending bill using mobile communication Interactive online chat Smart phone applications Social media Smart phone applications for payments Third party internet applications Non-traditional payment processes (PayPal) Money transfer options (Western Union) Electronic garnishments submitted to employers 38

39 Organisational structure Source: London, Field offices with manual collection efforts Collection policies and practices developed/administered locally enabling automated garnishment activities Agency call centres to handle debtor correspondence Standardised collection practices within agencies Field offices handling more complex cases Centralised collection units servicing multiple agencies and debt types Data sharing, leveraging tools and analytics across multiple agencies Decision analytics driving collection activities for all agencies The efficiency and accuracy with which households are billed needs to be coupled with strengthened collection processes in order to positively affect revenue. In this regard, outsourcing billing and/or collection to private agents has become an increasingly attractive option Credit Control and Debt Collection Once a service has been provided and the household billed, the municipality needs to have a process for dealing with non-payment in place. This is where credit control and debt collection measures come into focus. The section below highlights key considerations for an effective credit control and debt collection process Bad Debts/Debt Impairment There are cases where a municipality may not be able to recover amounts owing to them. These types of debts are referred to as irrecoverable or bad debts. Sound accounting procedure requires that when an entity (in this case municipality), realises that it is unlikely to recover amounts owing in respect of water/electricity/property rates, it should write off the bad debt from its books. Currently in South Africa, municipalities determine when a debt is considered bad. Part of the challenge is that at times municipalities do not write off these irrecoverable amounts, thereby artificially inflating the extent of non-payment (FFC, 2011). One of the reasons bad debt cannot simply be written off is due to municipalities not undertaking the full credit control processes required to cover such debt Whereas one would want to enforce correct accounting procedure and write off irrecoverable debts, there are also moral hazard considerations that need to be factored 39

40 in when writing off debts to soon. In this sense, the aspects that need to be considered when writing off of irrecoverable amounts too quickly, are akin to what policy makers need to consider when undertaking amnesty programmes. The provision of amnesty is a strategy employed by governments where, for a limited period, a predetermined group of taxpayers pay a defined amount in exchange for forgiveness for non-payment. Extending this offer to taxpayers offers the state the ability to bring a short-term infusion of revenue into state coffers. There are however disadvantages to utilising this strategy, namely: It can undermine tax morale as honest taxpayers may feel upset It can signal a weak government that is unable to enforce payment Anticipation of further write-offs can affect future compliance Costs associated with behaving dishonestly decrease and guilt is removed, thus making non-payment ok (Torgler, et al, 2003) Outsourcing Revenue Collection Fjelstad, Katera and Ngalewa (2009) evaluate the Tanzanian experience of outsourcing local government revenue collection. The study focused on the experiences of seven local government authorities, namely: Dar es Salaam city council, Mwanza city council, Ilala municipal council, Kinondoni municipal council and the three rural district councils of Kilosa, Kisarawe and Moshi. One of the most instructive findings, which are particularly relevant for South Africa, is the need to carry out comprehensive assessments of the revenue potential of the tax bases being outsourced prior to actual outsourcing. This enables government to judge the performance of the agency outsourced to. In the case of Tanzania, the absence of knowledge regarding the fiscal capacity of a local government made conditions rife for corruption. In Tanzania, the amount of revenue paid by the agency to the government annually, monthly or weekly, is specified as part of the contract. According to Fjeldstad et al (2009), this facilitated greater predictability and hence improved planning and budgeting processes on the part of the councils/local governments concerned. An additional benefit based on the Tanzanian experience was the freeing up of staff time to focus on other issues. Prior to commissioning the agency, the time of council/local government staff was significantly biased in respect of revenue collection activities. According to transaction cost theory, billing/revenue collection, due to its ease of measurement 2 and low asset specificity 3, is an ideal function to be outsourced to a third 2 Measurability of a function is defined as the extent to which service delivery can be monitored/measured (Brown and Potoski, 2001). 3 Asset specificity is defined as the extent to which specialised investment is needed to carry out a function (Brown and Potoski, 2001). 40

41 party (Brown and Potoski, 2001) 4. The Tanzanian experience also raises the advantage of the cost effectiveness of outsourcing collection. Whereas government staff is employed full time, agencies are not bound by the same rules and constraints around labour. In the case of the Tanzanian agencies, hiring of staff was linked to the nature of the revenue source being collected. For example, certain taxes on agricultural goods were seasonal and as a result, the agency had the flexibility to hire more staff during the collection season and reduce numbers thereafter. In terms of disadvantages related to the outsourcing of revenue collection to an agency, the Tanzanian case highlights the need for effective monitoring by the sphere of government outsourcing the function. Whereas outsourcing may free up significant time of government employees, this does not negate the need to strictly monitor agency activities and to ensure that whilst revenues are being collected, this is being done in accordance with the values of the government of the day. The issue of political interference needs to be factored in. The Tanzanian experience with outsourcing highlighted the extent of political interference with councillors advising people not to pay outstanding monies to agencies (Fjeldstad et al, 2009). Outsourcing debt collection has proven useful in developed countries as well. In Chicago in the United State of America for example, the city had a $635 million deficit in Through a combination of selling its historical parking ticket debt portfolio to third party debt collectors and reporting nonpayers to credit agencies, the city was able to generate $33 million in 2013, which is way above the average collection rate of between $16 million to $18 million (Governing Institute, 2014). Key to the Chicago success was the existence of a sophisticated agency management approach aimed at fostering a competitive environment and incentivising collection agencies so as to optimise collection. Regular oversight of agency activities need to be conducted to ensure that collection is as efficient and effective as it could be Centralising Collection Activities Historically national, provincial and local governments were responsible for their own collection functions. According to London (2014), this made sense due to challenges around access to data and limits in terms of automated collection applications. However as time has progressed and these challenges have nearly disappeared, a centralised debt collection agency can be a game-changer when it comes to revenue generation. Benefits include the creation of economies of scale, the advantage of concentrating skills particularly in cases where human capital is limited and elimination of duplication (London, 2014). 4 If measurability is high and asset specificity is low, then a case can be made for outsourcing (Brown and Potoski, 2001). 41

42 Barrand et al (2004), provide an interesting review of the experiences of Central and East European countries that have moved from separate tax and pension collection systems to unified or integrated collection systems. Generally, the decision to unify collection systems has been based on the desire to improve revenue collection. According to Barrand et al (2004), the collection function can be arranged in two ways: One is to run parallel systems such as in France and Germany and the other, Is to have an integrated collection system, as is the case in Sweden and the United State. In some countries, parallel systems have converted to an integrated collection system to achieve greater efficiency, for example, in Ireland, Italy, Sweden, and the United Kingdom. Recently, some transition countries, including Estonia, Hungary, Latvia, and Slovenia, have taken steps to move from parallel systems to integrated systems. In contrast, there appear to be no cases of a well-run integrated collection system converting to a dual collection system (Barrand et al, 2004). Lower administration costs as highlighted by London (2014) are a key feature of integrated systems. Barrand et al (2004) reiterate these advantages citing the following as key considerations that weigh in favour of centralisation: Fewer staff and economies of scale in human resource management and training, fewer numbers of managers, and common processes for filing and payment, enforcement, and data entry data and verification. Lower infrastructure costs in office accommodation, telecommunications networks, and related functions. Elimination of duplicated IT development costs and less risk in system development and maintenance Other Debt Recovery Methods Monetizing stale 5 debt: Once a debt collection has been attempted through in-house government collection processes and outside third-party collectors, it often remains on the books of a municipality and accumulates year on year until eventually it is written off as a bad debt. Monetizing stale debt entails evaluating historical debt for its potential to create immediate revenue through its sale. This practice is commonly referred to as selling of debtor books. Critical to ensuring the success of this strategy is evaluating the true value of a debt portfolio on the open market (Governing Institute, 2014). So whereas a municipality may not be able to fully recover R2 million in unpaid electricity bills, it could, through the sale of it debtor book, make R Whilst having to forego collection of the total outstanding amount, the sale of debtor books provides an option to at least recover a portion of an outstanding amount that would, otherwise have to be written off as 5 Stale debt refers to historical debt that has a low probability of being recovered. 42

43 irrecoverable. The caution here is to find a balance as this practice could negatively affect paying consumers. If selling of debtor books becomes the norm, the implication is that non-payers may well be pursued but will only end up paying a fraction of their full outstanding amount. This may prove a negative incentive to paying customers who may rethink conscientiously paying full amounts upfront and rather opt for non-payment in the present and paying a smaller amount when pressed to do so. Garnishee orders: A garnishee is a court order served by a sheriff of the court to an employer ordering the employer to make deductions from an employee s salary to enable settlement of a debt. In the South African scenario municipalities are legally allowed to make a court application in respect of a garnishee order to recover unpaid monies. Due to the cost of this process, this is not a common avenue pursued by municipalities (National Treasury, 2011). In addition care must be taken to ensure that when garnishee order (or emolument attachment orders) are granted, that the nonpayer is indeed not indigent and that the extent of non-payment is severe and historical. Holistic view of nonpayers: This approach entails a better understanding of the relationship between a constituent and the municipality and establishing what is referred to as a 360-degree view of constituent debt. For example the common reaction to non-payment is to disconnect or restrict the service. Sometimes this works, but often it does not. A 360-degree view of this debt would be to link non-payment for a service to other aspects of interaction that the nonpayer has with the municipality (Governing Institute, 2014). So for example if an electricity nonpayer requires a permit/approval to modify his/her existing property, then such approval can be withheld contingent on payment of other outstanding amounts. This approach can work but a municipality needs to be certain that billing systems are accurate and that well-paying customers are not unknowingly affected. It is also an approach that requires significant data on users. Power of direct communication: In a recent study by Szabo and Ujhelyi (2014), the positive effects of a public information campaign were tested on 900 households located in Pretoria, South Africa. The study was in response to non-payment in the water sector. The findings show that households exposed to the campaign were more likely to pay the results show a 30% increase in payment for water by the sampled households over a three-month period. The focus of the campaign was with reference to understanding utility bills, daily consumption levels and metering. They found that the challenge was not around lack of availability of information but rather the level of understanding so for example residents knew where their meters were located but did not understand what the numbers on the meter imply/mean. The change in behaviour induced by the public information campaign is attributed to psychological effects that serve to remind, nudge or compel the consumer to pay an outstanding debt or reduce consumption. 43

44 Recipients of the programme indicated an appreciation for the effort to communicate or reach out to users Key Points Emerging from Analysis i. Regarding drivers of non-payment: a. Determine whether non-payment is as a result of inability or unwillingness to pay. Solutions should be tailored to the reason for nonpayment. If non-payment is due to inability to pay, then the quality of the billing system, for example will not eradicate non-payment. b. Previous empirical studies on non-payment in South Africa confirm that non-payment is generally related to inability to pay. Poverty, unemployment are key drivers in this regard. c. The literacy level of households is an important factor that should be considered. According to the literature low literacy levels could be impeding understanding of municipal accounts, thus leading to unwillingness to pay d. Affordability and willingness to pay assessments should be conducted during the planning stages of service delivery processes ii. iii. Regarding broader debt management: a. A comprehensive assessment of fiscal capacity of the tax/revenue stream must be conducted prior to outsourcing revenue collection. This will limit scope for corruption b. Despite high initial costs, the installation and use of meters have been shown to assist in the reduction of non-payment c. Policies around indigent households and eligibility for free services are a central concern in ensuring that households are correctly billed and that municipal consumer debt is not artificially inflated due to incorrect billing of a household that should not be paying for a service d. Billing is a central component of the broader revenue management function. Revenue losses due to poor billing is directly related to municipalities becoming progressively more dependent on intergovernmental transfers e. There are two basic ingredients to establishing a high performing billing system - accurate data and technology or a system capable of facilitating an efficient and effective billing process. Lack of any one of these ingredients can jeopardise the integrity of the billing system and therefore the extent of revenue collected Regarding credit control and debt collection a. The efficiency and accuracy with which households are billed need to be coupled with strengthened collection processes if revenue is to be 44

45 enhanced. In this regard, outsourcing billing/collection to private agents has become an increasingly attractive option b. Transaction cost theory shows that billing/revenue collection, due to its ease of measurement and low asset specificity, can be an ideal function outsourcing to a third party. Outsourcing to third parties has resulted in increased revenue in both developing country and developed country contexts c. Centralising collection activities has also proven beneficial across a range of countries especially in terms of reducing duplication and concentrating expertise 45

46 4. METHODOLOGY AND DATA 4.1. Case Study Approach The proposed primary methodology for the research project will follow a comprehensive case study approach. The rationale for such an approach was due to the nature of the research project and its aim to identify best practice and innovative models to improve billing practices, consumer debt management and general revenue enhancement. In order to achieve this aim, a thorough analysis of local and international best practice and innovative debt management models need to be undertaken. The analysis from the status quo report will form the basis in identifying the best and worst performing South African municipalities, ideally across the different categories of municipalities. Once this is identified, in-depth primary and secondary data analysis will be undertaken. In terms of the former, this is likely going to be in the form of visits to these municipalities. Including an analysis of poorly performing municipalities is important in order to garner and understand the current constraints that result in poor debt management. A comprehensive questionnaire will be developed to inform the municipal visits. This questionnaire will form the basis of the interaction with these stakeholders and allow for a collective analysis of the issues and best practice emanating from the visits. A sample of this questionnaire is attached as Appendix Descriptive and Quantitative Methods The status quo report and other secondary data analysis will be in the form of descriptive statistics. This will include trend analysis, cross sectional analysis and identifying relationships between debt and other variables (such as poverty, inequality etc.). In terms of the latter, the factors that impact on municipal debt levels will be isolated and quantified in terms of their overall impacts. This analysis is important in diagnosing the problem of municipal consumer debt in South Africa and will allow us to remedy each challenge in a holistic manner Data The case study approach would entail the collection of primary data from a sample of best and worst South African municipalities, as determined by the secondary data analysis, as well as international local government counterparts. Such information will be gathered via a questionnaire and supplemented by electronic and face-to-face interactions with the chosen or identified municipalities and international partners.

47 The secondary data analysis is based on financial and non-financial data sourced from various sources. Data on municipal consumer debt and other financial variables were sourced from the National Treasury s local government financial database. This data base an essential collation of financial data reported by all municipalities as per the provisions in Section 71 of the MFMA. Municipal reporting on consumer debt was initially very poor, as discussed above, but gradually improved in later years. However, municipal reporting is susceptible to reporting errors, including discrepancies between total reported debt levels from consumers relative to services that should be the same. Nonetheless, such information is approved by the Municipal Manager prior to submission to Treasury and should reflect the current consumer debt position of the municipality. Other financial data used from the 2004/05 to the 2009/10 financial years have been audited while the subsequent years are sourced from the Section 71 reporting requirements. Financial data used in this paper ranges from the 2004/05 to the 2013/14 financial years. Non-financial data was sourced from IHS Global Insights Regional Explorer (REX) database and Statistics South Africa s Non-Financial Census of Municipalities. Socioeconomic data such as community education levels, gross value added (GVA), inequality, poverty and unemployment were sourced from the REX database. Municipal institutional variables such as indigent registers, FBS information, vacancy rates and municipal councillor data were sourced from the Non-Financial Census. Audits of municipal financial statements were collated from the Auditor General of South Africa. In general, non-financial data was available from 2004/05 to 2012/13, while others were available for shorter time periods. Statistics South Africa s annual General Households Survey (GHS) provides valuable data on the reasons households do not pay for municipal services, particularly the water service. This sample survey traces households payment compliance for the four basic services while requesting specific reasons for non-payment for the water service. This dataset was used to assess reasons for non-payment. 47

48 5. ANALYSIS AND RESULTS This section undertakes statistical analysis using secondary data to delve deeper into the issue of municipal consumer debt in South Africa. Issues focussed on include: the key factors driving consumer debt in the country, some of the reasons for non-payment and an analysis of the best and worst performing municipalities in terms of collecting outstanding debt. It should be kept in mind that statistical analyses are useful in the sense that they provide insight into the general relationships between variables (like non-payment and poverty for example), however these relationships are not applicable to all municipalities. Given the unique characteristics of municipalities in South Africa, it is very possible for certain general trends to have opposite effects in certain municipalities. Results and therefore solutions cannot be generalised as we are dealing with a heterogeneous group of municipalities Factors Impacting on Debt Bivariate Analysis The literature review assessed previous theoretical and empirical analysis on the key drivers of municipal consumer debt. Such drivers ranged from exogenous factors (beyond the control of the municipality) such as poverty to endogenous factors i.e. factors within the control of the municipality such as administrative inefficiencies, poor billing and poor service delivery. This section examines some correlations between debt levels in municipalities and certain structural variables, such as poverty, economic activity and unemployment. However, bivariate correlations are not sound in depicting confident statistical relationships, as they do not control for other variables that may have an impact on the variable of interest, municipal consumer debt in this case. In order to account for this, a statistical model is estimated in Section 5.1.2, where more exact relationships between variables and municipal debt can be determined. Figure 18 assesses the relationship between debt per capita and levels of official unemployment across municipalities for the 2012/13 financial year. It is assumed that high levels of unemployment decrease the disposable incomes of customers, particularly households, and thus makes it difficult for them to meet their payment obligations to municipalities. As depicted in Figure 18, it does appear that there is a positive relationship between higher debt levels and higher unemployment levels. Employment levels are a cyclical process i.e. they increase with upturns in economic activity. Given that high unemployment is inversely correlated with municipal consumer debt, it is very likely that municipalities face tighter revenue situations when the economy is in a downturn or recession. Therefore, municipal revenues are susceptible to the local state of the economy.

49 Figure 18. Relationship between Debt per Capita and Unemployment, 2012/13 25% 20% 15% 10% 5% 0% Source: National Treasury: MFMA Section 71 Reports, IHS Global Insight: REX The inability to pay for services due to high levels of poverty and unemployment is a key factor that drives municipal consumer debt in the country. Figure 18 supports previous empirical analysis that suggests that households in the country do find it difficult to pay for municipal services and taxes due to such external factors. However, many studies also found that there is a degree of unwillingness to pay for services. Such a situation arises when customers are discontent with municipal service delivery and performance in general or they are discontent with their economic and social environment and government in general. Customers can thus be unwilling to pay for such services as a form of protest against government. Figure 19 uses inequality as a proxy for difficult social circumstances and social unrest and examines the level of inequality to municipal consumer debt levels. There appears to be a relationship between high levels of inequality in municipal consumers and high consumer debt levels within such municipalities. Figure 19. Relationship between Debt per Capita and Inequality, 2012/ Source: National Treasury: MFMA Section 71 Reports, IHS Global Insight: REX 49

50 Figure 20 looks further at the issue of poverty and inability of households to pay for municipal services, by showing the relationship between debt owed by households per capita and disposable income per capita. However, there appears to be a positive relationship between disposable income and debt owed by households, suggesting that communities with higher income levels are associated with higher municipal consumer debt levels. Such a correlation contradicts theoretical and practical knowledge. The reason for such a relationship is likely due to the inability to control for other variables in bivariate correlations. For example, metropolitan municipalities are likely to have a higher level of debt due to the greater number of services they provide but are also likely to have more affluent communities due to the greater economic activity in such areas. Alternatively, it could also indicate a degree of unwillingness to pay such that the more a household earns, the more predisposed the household may be in taking the risk of non-payment. This can likely explain the relationship found in Figure 20. Figure 20. Relationship between Household Debt per Capita and Disposable Income per capita, 2012/ Source: National Treasury: MFMA Section 71 Reports, IHS Global Insight: REX Figure 21 assesses the relationship between debt owed by businesses per capita and the gross value added within municipalities per capita. A greater level of economic activity can generally indicate a more affluent local populace and thus lower consumer debt levels. On the other hand, it can also indicate a greater concentration of business thus increasing the likelihood of businesses not paying for services and high commercial debt levels. Looking at Figure 21, the latter relationship is likely, as there appears to be a positive correlation between commercial debt per capita and economic activity per municipality. 50

51 Figure 21. Relationship between Commercial Debt per Capita and GVA per capita, 2012/ Source: National Treasury: MFMA Section 71 Reports, IHS Global Insight: REX Statistical Analysis The bivariate correlations explained above focused mainly on external or exogenous factors and its potential impact on debt. It did not look at the relationship between municipal consumer debt and endogenous or municipal performance factors. In addition, bivariate analysis can be misleading, as it cannot control for other important variables. A statistical model was estimated that looked deeper into municipal performance and its impact on consumer debt and to improve on the bivariate analysis above. More importantly, this study s primary aim is to assess the billing practices of municipalities and whether such practices are resulting in high debt levels. Although one cannot control for billing practices in this statistical analysis (as such data is currently not available), one can assess general performance issues. The models were estimated for total debt per capita, electricity debt per capita and water debt per capita. The full methodology and results are provided in Appendix 3. The results are summarised below: Factors impacting total debt per capita o External Factors impacting on total debt per capita Disposable income had a positive impact on total debt per capita. This confirms the analysis in Figure 18. Since the model controlled for unemployment and municipal performance factors, it is likely that this result confirms a degree of unwillingness to pay for services. This finding also supports the trend in Figure 19, where unwillingness to pay for municipal services was inferred. Unemployment has a positive effect on total debt per capita indicating that there is a degree of inability of certain consumers to pay, particularly those with no or minimal income sources. High levels of inequality increases debt per capita, suggesting that there is a degree of social issues impacting on the unwillingness to pay for municipal services. 51

52 o Municipal Performance Factors impacting on total debt per capita Municipalities that identified their own indigents for the delivery of FBS had lower levels of debt. This is an important finding as it suggests that municipalities had lower debt levels if they do not charge households that are unlikely to pay for such debt due to an inability to pay. Accurately identified poor households are thus very important in curbing high consumer debt levels. Municipalities with an unqualified audit opinion had lower levels of consumer debt. This is also a very important finding as it suggests that municipal capacity to handle their internal financial affairs, which includes accurate billing practices, lowers municipal debt levels. This result confirms the concern over poor billing and financial practices and high debt levels. Factors impacting electricity and water debt per capita o The same factors described above on total debt per capita had a similar impact on electricity and water debt per capita o Variables were used to test whether outsourcing the water and electricity services and applying a specific method to provide FBS (prepaid meters for example) would impact on consumer debt levels. However, none of these variables had a statistically significant impact on consumer debt levels. This finding suggests that extensively mooted solutions for municipal consumer debt may not be universally applicable. However, recall that these are general trends and all this analysis confirms is that, in general, whether a municipality outsources or privatises its service or not does not increase or decrease the level of consumer debt for that municipality Reasons for Non-Payment The analysis thus far highlighted and confirmed statistical relationships between several external and internal factors and municipal consumer debt, confirming that debt in the country is influenced by a combination of inability to pay, unwillingness to pay and poor municipal practices. This section further scrutinises such factors by examining specifically why households, businesses and organs of state do not pay for municipal services and taxes. The following analysis should be interpreted in the context of a year specific sampled household survey. Although a trend is provided, samples are likely to change between years Households Statistics South Africa s GHS assesses the reasons that households do not pay for municipal services, including particularly an in-depth assessment of the water sector. Figure 22 poses the question to households on whether they currently pay for the water service. This trend was assessed from the 2004 to the 2013 GHS. In 2004, around 6 million households (over 50%) were paying for water, while 3 million were not paying. 52

53 The number of households paying for the water service reached a peak in 2008, but then subsequently declined thereafter. In 2009, close to 5.5 million households paid for water, whereas 5.6 million households did not pay. Households not paying for water gradually increased to over 7 million households in Households paying for water declined from 50% in 2004 to 40% in Figure 22. Households Paying for Water, Yes No Not Applicable Unspecified Percentage of Compliance 60% 50% 40% 30% 20% 10% 0% Source: Statistics South Africa: General Household Survey The trends illustrated in Figure 22 are concerning and can be explained by a number of reasons. Firstly, non-payment increased in 2009, possibly suggesting that households were impacted by the global financial crisis and subsequent recession that hit the country. Water, being a basic need, was likely consumed over this period but became unaffordable for many households. Secondly, it could be that many newly formed households were likely poor and could not afford to pay for municipal water services. Thirdly, poverty levels could be progressively increasing in South Africa, making it difficult for household to afford services. The number of households not paying for water services would not necessarily result in higher consumer debt levels. It is likely that such households are receiving FBS and are thus not required to pay for services. In order to explain the trends above, the GHS ideally further scrutinises the issue of nonpayment for water services by requiring households to provide reasons such behaviour. Unfortunately, the nature of the reasons posed to households changed in 2009, resulting in a different set of factors prior to and after Figure 23 provides the reasons provided for household non-payment for water services from 2004 to Note that this period coincides with the period of relatively greater levels of household payment in Figure 22. From 2004 to 2008, the biggest driver of non-payment of water was a lack of a metering system. More importantly in the context of this study, the second most apparent reason for nonpayment is the absence of a billing system. In fact, municipal inefficiencies and poor practices accounted for 40% to 50% of the reasons for non-payment (irregular metering system, no metering system, irregular billing system, no billing system and meter is broken). Inability to pay for services accounted for around 13% to 15% of the 53

54 reasons provided while the use of FBS was around 5% on average over the period. In relation to the latter point, approximately 13% of households did not pay, as they believed government should supply water for free. Figure 23. Reasons for Non-payment of Water, Irregular Metering System No Metering System in Place Irregular Billing System No Billing System Meter is Broken Cannot Afford to Pay Unhappy With Service Government Must Supply Free Water Others do not pay Using Free Basic Amount Other Source: Statistics South Africa: General Household Survey Unfortunately, due to the change in the question posed to households, the above trend could not be further analysed after More unfortunate is that the nature of the question changed moved away from issues of municipal performance around billing and metering to general issues, although such questions are still posed. Figure 24 tracks the reasons for household non-payment for water under the revised reasons provided. The most common reason given by households for the non-payment of water was that such households were receiving free basic water. This applied to around a quarter of all households. As mentioned, the increase in households receiving FBS would not necessarily result in increasing consumer debt levels, if indigent households are well accounted for. Around 10% to 12% of households over the period stated that they received permission from the municipality not to pay for services. It is unknown whether such a decision is linked to the provision of FBS or due to other factors. It is important to note that the analysis over this period corresponds to the period of increasing non-paying households evident in Figure 22. Analysing these two trends in tandem suggests that the bulk of the increasing non-payment for water was due to the provision of FBS. Such an increase in the provision of free water was likely due to an increasing number of households qualifying for such services due to increasing general poverty, the after-effects of the global financial crisis or municipalities increasing the threshold for qualifying households. The analysis in Figure 24 highlight municipal inefficiencies. The reasons do not have a water meter, water meter not working and do not receive a bill, accounted for, on average, 21% of the reasons provided by households for non-payment. This is a large 54

55 drop from the previous trend and could possibly due to the change in questions posed. Alternatively, there could just be a larger number of households receiving FBS. Figure 24. Reasons for Non-payment of Water, Using Own Source of Water Use Free Water Payment included in Rent Payment included in Levy Permission from Municipality Not to Pay Do Not Have Water Meter Water Meter not Working/Broken Do not Receive Water Bill Community Decision not to Pay Cannot Afford to Pay Water Supply Irregular Water Supply has been Stopped Other Source: Statistics South Africa: General Household Survey The analysis in the GHS of the water service is the most comprehensive in the dataset. However, households were also asked whether they paid for other municipal services. Figure 25 illustrates the trend in the payment for sanitation from 2009 to In 2009, around 5 million or 39% of households paid for sanitation. This decreased slightly in the following year, with just over 34% of households paying for the service. However, payment levels subsequently increased suggesting that the recession could have also impacted on payment for this service. Overall, payment for sanitation has been relatively stable, with a larger number of households paying for the services as opposed to not paying. Figure 25. Households Paying for Sanitation, Yes No Do not know Not Applicable Unspecified Percentage of Compliance 40% 39% 38% 37% 36% 35% 34% 33% 32% 31% Source: Statistics South Africa: General Household Survey 55

56 Figure 26 assesses household payment for refuse removal over the same period. Similar to the trends in Figure 25, the payments for refuse removal have being relatively stable, with more households paying than not paying. Although there was a slight decline in payment levels in 2010, this gradually increased subsequently. Figure 26. Households Paying for Refuse Removal, Yes No Do not know Not Applicable Unspecified Percentage of Compliance 41% 40% 39% 38% 37% 36% 35% 34% Source: Statistics South Africa: General Household Survey Figure 27 shows the percentage of households paying for the electricity services in Compared to the other three municipal services described above, electricity has the highest levels of payment amongst households at 76%. This relatively high payment level supports the notion that debt recovery is higher in electricity due to the greater ability to disconnect this service. Only 4% of households in the country do not pay for electricity provision. Figure 27. Households Paying for Electricity, % 0% 15% 5% 76% Yes No Do not know Not Applicable Unspecified Source: Statistics South Africa: General Household Survey There are around 6 million households paying for the water, sanitation and refuse removal services, with the water service having the highest number of non-paying households (over 7 million in 2014 compared to just over 4 million for refuse removal and around 3 million households for sanitation). Such trends correspond well to the 56

57 analysis on the share of consumer debt per sector/revenue source, with consumer debt being highest in the water sector Organs of State As at 2013/14, non-payment by provincial and national government stood at just over R4.5 billion. Generally there are three departments responsible for the bulk of nonpayment, namely the public works, education and health departments. In the case of public works, non-payment is linked to the devolution of payment for property rates from the national to the provincial departments. In essence, this shift has created bottlenecks in payment of property rates to municipalities. Within education, the problem of non-payment is located within Section 21 schools these are schools that have been afforded responsibility to manage their own financial affairs. The existence of non-payment thus brings into question the extent to which they are responsibly managing their resources. In the case of health-related non-payment, often clinics are failing to meet their obligations towards municipalities. The delegation of the authority over clinics to municipalities exacerbates the issue. Where non-payment exists, there is often one of two challenges: either municipalities are not spending funds in accordance with the agreement they have with provinces or, secondly, no agreement exists to guide what the municipality is responsible for and what the province is responsible. The aforementioned reasons highlight the need for improved intergovernmental planning processes to ensure that the revenue of municipalities as the service delivery engines of government are protected, especially when it comes to non-payment by organs of state Business The analysis carried out in Section 2 suggests that commercial customers are particularly vulnerable to economic cycles. This is evident in the sharp increase in nonpayment by businesses after The link between business non-payment and business cycles is confirmed by a 2011 study carried out by the Financial and Fiscal Commission on the extent of the non-payment challenge. In addition to the impact of the broader economic environment, businesses cite irregular billing and incorrect billing as the top drivers of non-payment (FFC, 2011). This brings in to sharp focus the role that effective billing can play in enhancing municipal revenue. In contrast to the challenge with household non-payment, which hinges on inability to pay, non-payment by businesses speaks directly to poor municipal performance and inefficiencies. Revenue from businesses is a critical source of revenue, especially when considering that business activity is a key promoter of greater economic growth. As a result, more should be done to enhance the performance of municipalities to ensure that this source of revenue is ably and efficiently collected from a customer grouping that is capable and willing to pay for services. 57

58 5.3. Financial Impact of Consumer Debt Section 2 provided a comprehensive review and analysis of the nature of municipal consumer debt in South Africa in terms of its trends over the last ten years, debt per customer group, debt per sector/revenue source, debt per municipal category and the trends in the age of debt over the last 10 years. The literature review, amongst other highlights, outlined the factors that theoretically lead to non-payment of outstanding municipal debt by customers. Section 5 empirically tested some of these factors to ascertain whether such factors are statistically significant in explaining consumer debt in South African local government while also highlighting some of the reasons households, businesses and organs of state provide for not paying for municipal services. Ultimately though, high municipal debt levels threatens the financial and fiscal sustainability and viability of municipalities. This section assesses how the current debt levels impact on the fiscal position of municipalities. Figure 28 provides a trend of total consumer debt as a percentage of total operating expenditure; total operating revenue and total operating own revenues (corrected for grants). Such analysis examines how much of foregone services could have been delivered had the outstanding debt been collected and also how much of the debt can a municipality absorb using existing revenues to ensure services continue to be delivered. Recall that, particularly for services, a large part of the tariff charged by municipalities is used for cost recovery. If customers don t pay for such services, municipalities are required to fund the cost of these services from other revenues. Therefore, high levels of non-payment can make it difficult for municipalities to meet its input costs and can result in financial unviable local governments. Therefore, a high percentage of debt per operating budget threatens the financial viability of the municipality and the sustainable delivery of services. Total municipal debt was around 50% of operating expenditure in 2004/05. This position gradually improved and reached a through in 2009/10. Currently, total debt is around 40% of the operating expenditure. This suggests that municipalities could have used such foregone/uncollected funds on service delivery. In the face of foregone/uncollected revenues, municipalities with need to have space in the operating budget to pay for and maintain the delivery of services. Looking at total debt as a percentage of operating revenue and operating own revenue allows one to see whether there is such space to accommodate lost revenues. In 2013/14, total debt is around 40% of total operating revenue. This level has improved from a peak of 50%. Taking out grants from the analysis, debt was around 50% of operating own revenue in 2008/09, which declined thereafter. Although high debt levels result in foregone income and expenditure and ultimate service delivery, it 58

59 appears that there is still space within municipal budgets to absorb such uncollected revenues. The trends indicate that, prior to 2012/13, municipalities were recovering relatively more of their revenues relative to service rendered (by broadly identifying operating expenditures with the delivery of services). Figure 28. Total Debt as a Percentage of Total Operating Expenditure, Operating Revenue and Operating Own Revenues, 2004/ /14 Source: National Treasury Section 71 Reports Figure 29 extends the analysis above to look at sector specific debt and expenditure within these sectors respectively while Figure 30 assesses sector specific debt and total revenues collected from the rendering of the service. Whereas the aggregate analysis suggested that there was space within municipal budgets to absorb the foregone revenues from unpaid debts owed to municipalities, the sector specific analysis suggests that certain services are currently making financial losses and are unsustainable. Firstly on the expenditure side in Figure 29, from 2010/11, debt in the sanitation service far exceeded expenditures in the sector. Essentially, the rendering of the sanitation service in local government was financially unviable, as it is likely that municipalities were not able to recover their costs from providing these services. It is likely that revenues from services running at a surplus are being used to subsidise other services where municipalities are running at a financial loss (due to non-payment for services amongst other factors). Debt levels in water and refuse was around 80% of operating expenditure in this sector in 2013/14, suggesting that there is also pressure being placed on the rendering of these services. Debt emanating from electricity relative to total operating expenditure in the electricity sector is much lower when compared to other services. This low ratio corresponds well with previous analysis that shows greater ability to collect debt from the electricity service. However, given that municipalities are facing financial pressures from rendering other services, it is possible that the better revenue recovery in electricity, and more likely from grants, are used to subsidise the delivery of the other services. When considering this hypothesis with the current issue of municipalities owing Eskom funds for the purchasing of bulk electricity, it is likely that the poor financial 59

60 performance in other municipal services is also impacting on the rendering of the electricity service. Figure 29. Sector Specific Debt per Total Sector Operating Expenditure, 2004/ /14 Source: National Treasury Section 71 Reports The trends described above are similar on the revenue side, as depicted in Figure 30. From 2011/12, total debt emanating from the non-payment for sanitation services equated to almost 100% of the total revenues collected from this service. This clearly indicates that the provision of sanitation is financial unviable, if revenues collected from sanitation were used to offset the outstanding debts. The ratio of outstanding debts in water and refuse removal has also being increasing over the period. The electricity debt to revenue ratio is once again the lowest. This figure also shows debt in unpaid property rates relative to total revenues from this tax source. On average, this ratio ranged from 50% to 60% over the period. Figure 30. Sector Specific Debt per Total Sector Operating Revenue, 2004/ /14 Source: National Treasury Section 71 Reports 60

61 5.4. Identification of Best/Worst Performing Municipalities This section identifies the best and worst performing municipalities in South Africa in terms of their overall revenue and debt management. This process will form the basis by which a sample of municipalities will be chosen as case studies to further analyse the key drivers and potential solutions to municipal consumer debt in South Africa. The following criteria was used to assess municipal performance in managing their debt: Table 3. Criteria for Assessing Municipal Debt Management Performance i Analysis of Total Municipal Consumer Debt a. Debt per capita b. Debt as a percentage of operating expenditure c. Debt as a percentage of operating revenue ii Analysis of sector specific debt a. Sector specific debt per capita b. Sector specific debt as a percentage of sector specific operating expenditure c. Sector specific debt as a percentage of sector specific operating revenue iii Analysis of customer specific debt a. Customer specific debt per capita b. Household debt as a percentage of total households c. Commercial debt as a percentage of GVA (minus government) d. Government debt as a percentage of government GVA iv Trends in historical debts and ability to manage (recover/write off irrecoverable) outstanding debt The criteria above were applied to the different categories of municipalities whereby the best performers and worst performers per category were identified. As mentioned above under data sources, there is likely to be a degree of incorrect reporting when analysing Section 71 reports. This was evident when analysing municipal specific trends, where unrealistically extreme values were calculated for specific municipalities. It is unlikely that these extreme values are outliers but rather incorrect reporting. In such instances, these municipalities were reported but should be considered with caution. The criteria used to group municipalities stems from the categorisation explained in Annexure B of the Local Government Turnaround Strategy, namely category A (metros) B1 (secondary cities), B2 (Large local municipalities) B3 (smaller local municipalities) 61

62 B4 (rural local municipalities), C1 (district municipalities that are not water service providers) and C2 (district municipalities that are water service providers). This categorisation is widely used for analysing municipalities for illustration but is not the most accurate or an officially endorsed categorisation. Given this, municipalities within each category can be diverse, making comparisons difficult. For example, a secondary city such as Msunduzi has a population of approximately and an operating budget of R3 billion in 2012/13 compared to Steve Tshwete, which is also a secondary city, with a population of approximately and an operating budget of around R1 billion in the same period. Even in metros, which is a constitutional status conferred to municipalities, such diversity is apparent. For example, the City of Johannesburg has an operating budget that is almost 10 times that of Buffalo City. However, in the absence of a more accurate methodology and given that this method is widely used, the above categorisation will form the basis of the comparison under the proviso that such comparisons should be considered in the context of the above. The comprehensive results of the analysis are provided in Appendix 4. What follows is a brief summary of the key trends and conclusions. Analysis of Total Municipal Consumer Debt In terms of total municipal debt per capita, amongst metros the City of Johannesburg frequently has the highest per capita debt over a the five year period. On the other hand, Buffalo City has the lowest levels of debt per capita. However, as mentioned above, Buffalo city is a smaller municipality with a smaller budget relative to the other metros, which likely results in this municipality having lower per capita consumer debt. In secondary cities, Steve Tshwete municipality in Mpumalanga has the lowest per capita debt amongst the secondary cities in every year of the period under review. Emfuleni municipality has the highest per capita consumer debt in three of the four years reviewed for secondary cities. There are no clear trends in high and low debt per capita for the other categories of municipalities. However, Albert Luthuli and Uthukela district municipality occur more than once in terms of highest per capita consumer debt as a rural and district municipality respectively over the period. When assessing total municipal consumer debt against operating expenditure and operating revenues, Ekurhuleni, the City of Johannesburg and Mangaung are the metros with the highest ratios of debt to operating budgets over the period. Buffalo City, Nelson Mandela Bay, ethekwini and the City of Cape Town are the better performers. Given that Buffalo City has a lower debt per capita amongst metros as well as a lower debt ratio relative to its budget confirms that this municipality does manage its debt relatively better. 62

63 For secondary cities, Matjhabeng and Emfuleni are both impacted financially by high debt levels when analysing the debt to operating budgets, as these municipalities have the highest ratios of debt to total operating budgets. Steve Tshwete is once again the best performing secondary city. Once again, there are no clear trends for other types of municipalities. Overstrand local municipality in the Western Cape appears to manage its debt better relative to its budget, as it is has a low debt per operating budget in a couple of years over the period. The higher per capita debt levels experienced by Albert Luthuli and Uthukela district municipality also impacts on their budgets Key Points Emerging from Analysis The following pertinent points arise from the analysis undertaken in Section 5: i. Municipal consumer debt in South Africa is driven by external (exogenous) and internal (endogenous) factors. Whereas municipal performance issues characterise the latter and is largely within the control of municipalities, the former describes the greater socio-economic circumstances of the country. A concerted effort from all spheres of government is required to deal with exogenous issues. ii. iii. iv. The degree of unwillingness of customers to pay for municipal services is also apparent. Although this trend can be due to greater social discontent or municipal inefficiencies, ultimately, it is the municipality that suffers the consequences of non-payment. Community engagement and education plays an important role in improving willingness to pay. FBS are a nationally driven policy that is implemented by municipalities. However, the municipality has full discretion as to who qualifies for this social support and how such support will be provided. There is a delicate link between the provision of FBS and consumer debt levels. The analysis found that municipalities experienced lower debt levels if they accurately accounted for their indigent population. This ensured that poor people who cannot pay for services were not billed unnecessarily, thus increasing debt levels. Outsourcing of service delivery (and consequently the billing component) was not associated with either higher or lower levels of consumer debt. In addition, the method used to provide FBS (pre-paid meters for example) also did not impact on municipal debt performance. This is contrary to findings from the literature review, which showed that countries in various contexts (developed and developing) have increased collection rates as a result of outsourcing. Thus the result of the statistical analysis requires further exploration in subsequent analysis. 63

64 v. The number of households not paying for water services has steadily increased over the last couple of years. Whereas initially much of the non-payment was due to municipal inefficiencies, recently the non-payment is driven by an increased number of households receiving free basic water. Such an increase in the provision of free water was likely due to an increasing number of households qualifying for such services due to increasing general poverty, the after-effects of the global financial crisis or municipalities increasing the threshold for qualifying households. This trend results in higher debts emanating from the provision of water. Payment levels are relatively higher in the other services, although there are still a large number of non-paying households for sanitation and refuse services. vi. vii. viii. The non-payment of debt owed to municipalities by other organs of state reflects a failure in the cooperative system of governance promoted in the country. Such issues can easily be remedied through interactions and negotiations between municipalities and other organs of state as well as National Treasury instituting appropriate and practical measures to incentivise payment. Debt owed by businesses is largely attributed to poor municipal billing performance. In order to improve recovery of outstanding debts amongst this customer group, municipal performance would need to improve. Nonetheless, businesses that owe debts to municipalities should understand that they are financially obligated to local government for services rendered, regardless of municipal inefficiencies. In general, it appears that municipalities are meeting the costs in delivering services, even in the face of large levels of municipal consumer debt. There also appears to generally be space in municipal budgets to fund service delivery. However, at a sector level, it appears that the provision of the sanitation and, to a lesser extent, the water and refuse removal service is currently under extreme financial stress. The analysis also suggests that revenues from electricity and probably grants are used to subsidise financial losses in the provision of other services. These trends are likely resulting in the current inability of municipalities to pay their bulk service providers. 64

65 6. SUMMARY OF KEY FINDINGS FROM STATUS QUO REPORT As at 2013/14, consumer debt was close to R100 billion this equates to 40% of total local government operational expenditure for that year. In essence, municipalities could have spent 40% more on service delivery if they had been able to recover debt. Municipal consumer debt is a multi-faceted challenge, which has no single solution. What follows is a description of the key findings and potential remedial measures to consider in addressing the current challenges resulting in rising municipal consumer debt levels Summary of Key Findings i. Households are responsible for the largest and fastest growing component of non-payment over the entire period reviewed 2004/05 to 2013/14. ii. iii. iv. Non-payment by organs of state is the fastest growing category after households. Key government departments responsible for non-payment are public works, education and health. Despite the implementation of various measures aimed at reducing this kind of debt, it remains a challenge, particularly for rural municipalities. In terms of the revenue source for which non-payment is highest: water, followed by property rates and electricity is where the bulk of non-payment is located. The dominance of water-related non-payment is unsurprising due to it being an essential basic service non-payment cannot be penalised through disconnection. Across the different categories of municipalities, the non-payment by households for municipal services is most prominent. In addition, non-payment for water services is most common across municipal types. The non-payment of property rates is relatively higher in larger local municipalities and rural municipalities, while rural municipalities have relatively higher debt levels owed by organs of state. v. Debt outstanding for over one year continues to show real growth over the period reviewed. Debt older than 120 days as a percentage of total debt is lowest for water and electricity. Also real growth in debt outstanding for over 1 year is lowest for water and electricity. In the case of water, it is likely that municipalities are considering unpaid amounts as irrecoverable and writing them off. This is probably due to the fact that water services cannot be totally disconnected and hence non-payment for this service is likely to be higher. In the 65

66 case of electricity the lower historical debt is likely due to the threat of disconnection serving to incentivise payment. vi. vii. viii. ix. The point at which debt is categorised as irrecoverable and written off is determined by municipal debt management or debt write-off policies. As a result such practices varies across municipalities. It is important for municipalities to apply all credit control processes before considering debt as being irrecoverable. The challenge for municipalities is finding the balance between not writing off amounts as irrecoverable to soon so as to create a moral hazard amongst paying customers but also to employ sound financial management practices and not hold off too long before writing off an amount as irrecoverable. Municipal consumer debt is a bigger problem in urban areas metropolitan municipalities and secondary cities. Secondary cities show highest debt located at the days category, indicating that they are effectively collecting debt Most important reason driving non-payment from 2004 to 2008 was a lack of metering and absence of a billing system. Post-2008, non-payment is driven by provision of FBS. Reasons underpinning non-payment by businesses stem from irregular and incorrect billing Municipal consumer debt is positively related to unemployment, inequality and the level of disposable income. This suggests that there is a degree of both an inability and unwillingness of customers to pay for municipal services. It also indicates that municipal consumer debt levels are anti-cyclical and highly sensitive to the local economic environment. x. According to behavioural models of tax evasion, the decision to evade taxes is based on the extent to which the taxation system is considered to be fair. In such cases, the existence of penalties may not be enough to deter evasion. This is particularly relevant in the South African case where, during the apartheid era, rates boycotts were a means of protest against an unjust system. 66

67 7. SUMMARY OF CASE STUDY ANALYSIS SALGA commissioned this study to identify the key drivers of municipal consumer debt in South Africa and possible remedial measures to address such challenges. Such remedial measures were to be identified from national and international best practice, including new and innovative ways used by certain municipalities to recover and minimise their consumer debt levels. Specifically, the current poor practices in municipal billing were to be assessed and remedied through this study. The paper thus far undertook a comprehensive review of the current state of municipal consumer debt, a literature review and analysis on the key drivers of debt, the reasons for non-payment of debt and the best and worst performing municipalities in their revenue management. The next step of the research is to undertake further analysis using a total of six municipalities as case studies. The case study methodology will enrich the current desktop analysis undertaken and result in a deeper and practical understanding of the issues being faced my municipalities in managing their revenues. More importantly, it will also allow for the identification of current best practice and systems that improve debt management. The six municipalities chosen as case studies were based on analysing the trends in the debt management and are as follows: i. The City of Johannesburg A metropolitan municipality with high levels of debt as indicated in the analysis ii. iii. iv. ethekwini Municipality A metropolitan municipality that has performed relatively better in managing their debt levels Steve Tshwete Local Municipality A secondary city that has performed relatively better in managing their debt levels, as derived from the analysis Overstrand Local Municipality A local municipality that has performed relatively better in managing their debt levels v. Albert Luthuli Local Municipality A rural municipality that is facing difficulties in its debt management vi. Uthukela District Municipality A water service authority that is facing difficulties in its debt management Based on initial analysis of credit control and debt management policies as well as interactions with six specific municipalities the following points come out clearly: 67

68 Municipal revenue management is a complicated process with various key steps that predetermine the success of the next stage of the process Once there is a failure to implement one step in the revenue management process, the following steps are significantly compromised South Africa has a sound legislative framework that is clear and provides a solid foundation for proper debt and credit control in the country The capacity to understand legislation and translate it into sound municipal policies and by-laws remain a challenge. In fact, capacity constraints in general is a key determinant of the success of municipal revenue management o Good credit control and debt management policies do not imply sound implementation and outcomes in terms of revenue management o Quality human resources and strong internal systems are critical in the process of debt management. Tools and systems to assist with automating certain aspects of revenue management such as billing systems are secondary. Some municipalities that are performing well have out-dated systems but well trained personnel Poor revenue planning is also a significant problem being faced by municipalities in their revenue management process o Budgets continue to be not credible and sustainable, resulting in poor revenue projections, unrealistic tariffs that are unaffordable and fail to recover costs and a poor provision for debt impairment and management o Municipalities fail to appropriately profile their customers leading to an inability to properly cross-subsidise service delivery, plan for nonpayment and implement free basic services policies Municipalities that implement consolidated accounts are more effective in revenue management Municipalities that adopted the property valuation targeting approach to indigent management were more successful in capturing poor households and collecting debt. However, this practice was premised against an accurate valuation roll The fundamental data used in revenue planning and billing is a key determinant of the success of the revenue management and billing process. Inaccurate and poor data compromises the entire billing and credit management process Proper and accurate metering and measuring of consumption is a key factor in revenue management and one of the primary determinants impacting on the integrity of the entire billing process. Incorrect meter readings are largely due to poorly trained meter readers, poor controls to ensure accurate meter readings, faulty meters and a lack of access to meters. The use of pre-paid and smart metering systems have significant effects on improving the overall meter reading process The sound operations and integrity of municipal billing systems largely depends on the quality and accuracy of the data that informs such systems. It was found 68

69 that most billing systems supports sound revenue management and the performance of the system depends more on municipal administrative capacity as opposed to technical issues. In certain instances, municipalities did not programme their billing systems to process basic requirements, including exception reports Easy payment options and sound customer care practices support sound revenue management. In terms of the latter, this includes ensuring that queries and complaints are dealt with timeously Municipalities that fail to timeously and effectively implement their credit control policies are more susceptible to high levels of municipal debt o Following and sticking to the requirements of credit control is the minimum requirement in improving revenue collection Electricity disconnections and, to a lesser extent, water restrictions are key credit control instruments and cannot be underestimated in the credit control process o Municipalities that create a culture that non-payment will result in disconnections is a key factor driving improved debt levels The inability to disconnect electricity in Eskom supply areas is a major hindrance to proper debt management The cost in rural municipalities to collect debt and implement credit control policies outweighs the actual gains from revenues collected Whereas some municipalities are implementing innovative approaches to improve revenue collection, there are a number of municipalities that have a good handle on the debt issue as a result of implementing basic strategies to incentivise payment and compliance Local government in general have several additional credit control instruments including the imposition of garnishee orders and the attachment of property. The imposition of these instruments can be improved if a solid framework or regulations are developed to guide implementation The table below tries to synthesize findings based on desktop assessment of policies and face-to-face interactions with municipal officials. There is a wide array of issues the table itemises issues according to where in the revenue management chain it would fit. Table 4. Synthesis of Findings Based on Desktop Analysis and Interaction with Municipalities Municipality Issue City of Joburg Metropolitan Municipality ethekwini Metropolitan Municipality 1. LEGISLATION (national/municipal) Steve Tshwete Local Municipality Albert Luthuli Local Municipality Overstrand Local Municipality UThukela District Municipality When was credit control/debt Date of policy assessed: 2009 Says policy will Date of policy stipulated as: CREDIT Contains section a on 2014 States that policy will be Called Credit Control and Indigent 69

70 management policy drafted and how often updated? Aspects of good governance evident? be reviewed but not how often CONTROL AND DEBT COLLECTION POLICY 2014/2015 Other National Credit Understanding legislative Act only makes the law/knowing issues reference to the rules is a key residential ingredient. Staff customers, thus need to be making it capacitated in difficult to apply this regard to business and organs of state customers that consume municipal services Evidence of Separate *Distinguishes Differentiatio sections applying between bulk n at policy to hijacked and customers and level abandoned others building but not *Distinguishes explicit between differentiation residential/busin between ess and customer types government and services property owners *Separate section on water and sewerage non-payment and for electricity MUNICIPAL CAPABILITY (human capital issues/leadership) Capacity to Staff to be well Very few adequately acquainted with people that manage rules/bylaws work in the revenue and they must section four management enforce it this clerks in credit function is rule number 1 control team Leadership Councillor helped with debt collection as opposed to making performance Evaluation whereby measures for performance are set out e.g.: Income Collection Targets, Customer Service Targets, Administrative Performance Targets No bylaws in place - financial constraints Shortage of staff no capacity to collects debts A small degree of councillor interference in revenue management reviewed annually and provides dates when previous reviews were conducted Also emphasised the importance of capacitated staff that understand the legislation and municipal policies Well trained staff is critical have 58 staff members that are capacitated to carry out the job No political interference. Councillors must understand Policy document undated Short staffed as unit still in establishmen t phase. Difficult to attract proper skills Political interference not a issue councillors good 70

71 problems leadership is important strong political and administrative leadership process processes/poli cies. Councillor education is important listeners 2. CUSTOMER INFORMATION (type of customer/maintenance of customer information) Indigents Indigents have to The policy All RDP Contains detailed Indigence apply and be contains an households are section on linked to registered in annexure on considered indigents: property value terms of the assistance to the indigents. Definition of (R and Expanded Social poor. This indigent is a below Package in order section is household with considered to qualify for any disaggregated by no income indigent) social relief service and/or a total Indigents related to the electricity (FBE income equal to given three provision and based on less the social state months to pay charge of than average of pension grant Municipality municipal 150 kwhs per qualifies as an fixes all water services within month), free Indigent leaks on the the City basic water (first household. And property of There are 280 9kl of water free indigent suburbs that do on property with Once not collect any value of registered as money from R or indigent, all Maintenance of Customer Details policies lacking in how to deal with indigents Indigent policies/register s have failed. Utilities do not have information on indigents this is critical given that CoJ uses a number of utilities to deliver services Obligation is on account holders to ensure that contact details on the City s system are correct and updated less), refuse removal (no charge for property less than R ) and rates Customers are required to update their information details. Failure to respond to Municipality s request for updated for a council subsidy, if an indigent customer s consumption of a service is in excess of the subsidised service, the indigent shall be obliged to pay for such excess consumption at the applicable rate. Everyone gets FBS but when service usage is above FBS level, then payment required. If household is indigent, then half the amount is payable Contains details on the type of info required when accounts are held with the municipality. It is the customer s responsibility to ensure timeous debt written off. Consumption used as an indicator of indigence e.g. if you use over 18kl of water, then not an indigent Indigent refers to a resident in charge of a household and who is responsible for payment of municipal charges and whose combined household income is equal to or less than the amount as determined by the Council to qualify for indigent status and has applied to Council and is accepted to be classified as an indigent The consumer shall, in writing, notify the Council of any change of address, including an 71

72 information may payment in the result in withholding event of accounts of not received services, Data an issue due disconnection of to allocation of services or land by chiefs prosecution 3. SETTING TARIFFS/SERVICE DELIVERY MECHANISMS/MEASURING USAGE Basis for tariff Tariffs and Different tariffs billing Starts was only for with the one year all property must tariffs are be correctly harmonised zones and valued the property is the fundamental indicator for the tariffs property valuations are NOT correct in COJ hence all subsequent tariffs are incorrect 80% of bills are incorrect in COJ due to incorrect zoning and evaluation new valuation rolls have huge problems with market values. Tariffs not based on model, increased by inflation Meters Traditional Traditional Prepaid meters Households for meters are used meters are used installed as indigent support but the but the part of attempt may be required municipality has municipality is in to build culture to convert to difficulties the process of of payment pre-- payment accessing meters upgrading to electricity in households smart meters. meters, the cost The City may Pre-paid meters of which can be install pre-paid are used in met either by: (a) meters for all several areas of LES fund, (b) registered the municipality surcharge on the indigents and electricity occupiers of coupon cost; or hijacked and (c) cash payment abandoned by the household buildings Prepaid meters need to be implemented, but the CoJ does All tariffs are cost reflective and deemed affordable by the municipality Indigents get free prepaid meters and flow limiter water meters Pre-paid meters used to enforce satisfactory arrangements with customers in arrears by blocking access to prepayment electricity purchases. If indigents refuse prepaid address, and contact details. Issues with district taking over the function and harmonising tariffs. Tariffs affordable, linked to inflation Traditional meters are used 72

73 Meter Reading not have the funds Estimate consumption as city cannot read all meters at the same time (can only estimate after three months). Some meters in house need to access property By laws via jmpd to request access to residents no manpower Intervention move meters outside - Longterm solution smart meters 4. BILLING (System/ Billing system Billing systems used are general and can be applied COJ uses SAP/Venus SAP is wrongly implemented account holders should not be the basis for the system but rather the property itself System does not distinguish households that are poor/rich SAP cannot support workflow and specific scenario processing Comprehensive audit process for meter readers Uses its own billing system. The billing system is deemed old and not user friendly. Meter controllers to go check what meter readers read on a monthly basis meter reading function is outsourced looking at technology nonaccessibility of meters - move meters from inside houses to outside estimate for 6-7 months Uses own billing system Challenges related to meters very prevalent. Old meters Sebata billing system. No major issues with system. installation, then they are off the indigent register MOTLA system: File sent to Cell phone. System won t accept exceptional readings no estimations. Replace all meters older than 10 years. Onus on customers to check meters. DB4 (SAMRAS) no major issues with the system Metering of services and specifically incorrect meter reading is a big challenge this then affects accuracy of billing. Issues around meters include: Faulty meter readings, meters inaccessible (inside the house), old meters and poor maintenance of meters Moonsoft billing system used. No major issues with system Accuracy bills of Issues due to incorrect valuation rolls that form the basis of tariffs There are some problems but these are mitigated with the use of Meters are read well and bills are correct Issues with bills in rural areas Data auditing process to ensure data is correct. Ensure data is Poor accuracy levels due to challenges with meter 73

74 and bills Pay points Easy Pay and other retailers, post office, internet banking Reason for non-payment (view of municipality) People don t pay due to the fact that they were not required to pay previously historical culture of non-payment. There is also the political aspect whereby nonpayment is a means of protest exception reports that ensure bills are properly assessed prior to issue Conventional methods Conventional methods emphasised that there must be numerous pay points Culture of nonpayment must be mitigated by proper service delivery and strong punitive action for nonpayment CREDIT CONTROL AND DEBT MANAGEMENT Consequences Municipality is Water: of nonpayment hesitant to Flow impose strong restrictors/flow credit control limiters installed measures due to in water issues with the connections of billing system. customers who Looks at have not paid property seizure total charges for water services for 60 days or more, and who owe Municipality more than an amount determined by CFO from time to time, for water used and sewage discharged and who have not responded to written notification from Municipality Electricity: The customer of a private residential property may Following the issuing of a letter of demand, nonpayment electricity is cut. Residents are not allowed to purchase electricity until arrears are paid. Conventional methods Following the issuing of a letter of demand, nonpayment electricity is cut. updated Conventional methods Disconnection of services to be implemented when the municipal account is 1day overdue, the municipality shall issue a final notice to the consumer which payment shall be payable within 7 days. Uses electricity as a credit control mechanism. Does have problems in Eskom supply areas to cut electricity for non-payment. Water restrictions are not as readings Bills can be paid at variety of places checkers, pick n pay, post office, FNB Acknowledge d that nonpayment was due to poor service delivery and that this needs to be improved. In the event that full payment of the consolidated account, including any accumulated arrears, is not received on or before the due date, the water supply shall be restricted, unless a formal acknowledg ment of debt has been signed by the customer and the necessary arrangement for an extension of payment has been approved by the Chief 74

75 After how many days of non-payment do you start taking measures to collect Methods recover unpaid amounts to Arrangements to pay arrears Cut off electricity and water. Spoliation order A debtor may enter into a written agreement with the COJ to repay overdue amounts. *Outstanding balance/costs or interest to be paid in monthly instalments *Current apply for a prepayment meter and qualify for the 80/20 prepayment debt recovery facility - conditions are that value of property should not exceed a value set by CFO and amount of arrears must not exceed an amount set by the municipality Automatically after 30 days but challenge is lack of capacity to collect debt Demand notice, request to come forward and make a plan to pay if none of above, disconnect effective electricity cutting. as Start collections as soon as possible. Due date is 20 th of each month. Letter sent out on 26 th to postal/physica l address. Then 14 days to pay. Then cut/restrict electricity, restrict water Serve summons to get outstanding amounts. Judgements, and make arrangements for payment. Usually 12 months, but can make arrangements Financial Officer CFO enters into agreement with defaulter and grants extensions of time for settlement. If defaulter is a business, a minimum of 50% of the 75

76 Interest on outstanding amounts Writing off of debt monthly amount must be paid in full on/before due date Interest charged at prevailing prime interest rate and comes in effect on due date of accounts. Where an agreement to pay outstanding amounts is concluded, no further interest is added Policy provides for when a debt will be written off - does not seem like an automatic writeoff exists for when a debt reaches a certain age debt write- The legal rate of interest raised on arrears is equivalent to the rate of interest as determined in terms of the Municipal Property Rates Regulations or any other legislation or as determined by Council Cites cases where debt is written off as irrecoverable - does not include when a debt reaches a certain age Must not create a culture of writing off debt as that can give rise to a culture of nonpayment writing off only in certain instances Interest and penalties to be raised as a charge on all accounts not paid by the due date in accordance with applicable legislation Don t adhere to debt write off policy. Debt from 2001 still in books Interest charged is 4% higher than prime - specific relative to others Instances provided where debt will be written off - does not include when debt reaches a certain age Go in to all processes total overdue amount, as an initial payment, to be paid, and balance of account to be paid in equal instalments over a maximum period of twelve months. For domestic consumers, 10% of total overdue balance required as initial payment, and the balance in equal instalments over a maximum period equal to number of months that outstanding amount has accumulated Interest at prime +1%, may be charged from the date upon which the amount of the account was due for payment 76

77 off Outstanding amounts based from taxes can only be written off after 30 years. Need to follow all procedures before debt can be written off. Debt written off by prescription (3 years) before deciding write off to Debt collection procedures/l egal Action OTHER ISSUES Doing business within the municipality Innovative measures to incentivise Separate set of procedures in the case of (a) water and electricity, and (b) refuse/sewerage, unmetered properties Before resorting to legal action, CoJ uses The norm on the debt collection period is set at 60 days and the collection rate is set at 95 % A company submitting a tender must provide documentation showing that no amounts to municipality is outstanding by every director/partner /trustee Section on water debt relief programme - To promote a culture of payment the Municipal Manager shall, when a Debtor is above 120 days in arrears, Commence legal Process against Process could involve summonses, Court trials, judgements, emolument attachment orders and, as a measure of last resort, sales in execution of property Contractors may submit tenders or quotations subject to the tenderer obtaining from the municipality a certificate stating that all relevant municipal accounts of the tenderer have been paid in full Good payer status, e.g. may be awarded to Should monthly accounts remain unsettled after the due date, notice will be given to the owner/custom er that the amount owed must be settled within fourteen (14) days, failure of which will lead to restriction/dis connection of services, including legal proceedings Contains provisions around contractors wanting to tender for services in the municipality and for Makes mention of implementing Where no credit arrangement for the settlement of any outstanding debt has been entered into, and whether the services to the property have been disconnected / restricted or not, the Council may implement debt collection measures for recovery of debt 77

78 payment incentive of interest reversal as tool to motivate settlement of debt Selling of debtor books Additional costs that consumer is liable for Non-payment by municipal staff Books not in order, so cant sell Any action taken to request payment from the debtor/ remind the debtor, by means of telephone/fax/ /letter that his/her payments are due, an administrative fee may be levied against the account of the debtor outstanding amounts written off if current amounts paid consistently over 20 month period Consumer liable for all disconnection and reconnection fees A staff member/councill or may not be in arrears to the Municipality for rates and service charges for a period longer than 3 months where after outstanding amounts can be deducted municipality assists indigent households with water leakages customers with specific benefits attached such as special queues for faster service Court and auction All costs of legal processes, charges, service discontinuation costs as associated with credit control and debt collection shall be for the account of the customer incentive measure to ensure payment but no details provided Staff arrears will be dealt with in accordance with Schedule 2(10) of Local Government: Municipal Systems Act 32 of 2000 and in terms of any procedures, method or actions referred to in this Policy. Members of staff of the Council may not be in arrears with the Council for rates and/or service charges for a period longer than 3 months, and the Council may deduct any outstanding amounts from the salary of such member of staff after this period 78

79 8. CONCLUSIONS AND RECOMMENDATIONS Addressing the challenges that give rise to municipal consumer debt is complex and requires a multifaceted approach to ensure practical, workable solutions. On the one hand people may be unable to pay due to poverty and various other reasons. On the other hand, there may be factors endogenous to the municipality that drive poor performance (for example not following the prescripts of the municipal credit control policy). The recommendations emanating from the study should not be viewed as all encompassing. In order to improve municipal revenue management, a clearly defined process of intervention is required. This translates, firstly and most importantly, into municipalities improving internal capacity and systems to support sound revenue management. Without this, all other recommendations will not be effective. What follows are a selection of the main recommendations stemming from the research. Back to the Basics: The solutions to the issue of revenue management in local government conforms well to the current back to basics drive by the Department of Cooperative Governance. The primary and key solution to improve revenue collection is for all municipalities to conform to the basic requirements of debt management and credit control. This project proposes a framework of basic minimum requirements or practices that the different types of municipalities should adhere to in order to improve revenue management. In addition, innovative credit control methods are also proposed that municipalities can implement, as long as the basic requirements are in place. The details of this intervention are provided in Appendix 6. Realign capacity building grants: The research found that basic facets of the revenue management process are not in place in various municipalities. This includes the sound valuation rolls, basic customer data and meter reading systems. These system issues can be targeted for correction through current capacity building grants. Additional funding could be made available and earmarked through these grants to focus on such aspects of the revenue management process, with clear targets and outcomes. If no additional funding is possible, a portion of current capacity building funds should be redirected to cover such aspects. Proposed legal amendments The research found the current legislative framework for local government credit control and debt management in the country sound and supportive of improved revenue management. However, it is recommended that Section 118(b) of the Municipal Systems Act be amended to remove the two years prescription for payment of outstanding municipal debt in order to issue a municipal clearance certificate to issue property sale. Furthermore, SALGA should explore the possibility of extending the prescripts of Section 10 of Schedule 2 of the Municipal Systems Act to include all government (national and provincial) workers. 79

80 Implementation of key regulations to implement key credit control tools: As per Section 104 of the Municipal Systems Act, SALGA should interact with the Minister of Cooperative Governance and Traditional Affairs to implement policy frameworks or additional regulations to regulate the following key credit control aspects: o User agreements and deposits and bank guarantees for the provision of municipal services o The seizure of property for non-payment of municipal debt o The attachment of rent payable on a property o The extension of liability to a director, a trustee or a member if the debtor is a company, a trust or a close corporation Education campaign: SALGA should promote a national education drive that highlights the need for households, particularly the indigents, to control and conserve water and electricity use. This would assist in ensuring that indigents do not use above their prescribed free basic amounts that would result in payment to the municipality. The campaign should also cover the issue of Free Basic Services and the need to pay for municipal services. Data verification working group: Accurate data is a critical ingredient that affects the soundness of the entire revenue management chain. Accurately identifying a customer enables a municipality to determine the category the customer falls into (household/business), the tariff it will be levied for services, how to contact and communicate with the customer and where bills should be addressed to. If such data is inaccurate and not updated regularly, the entire revenue management chain will be compromised. It is important to ensure that the accuracy of this type of master data can be crosschecked and verified. It is recommended that SALGA establish a national working group or project team that will include the Deeds Office and the Department of Home Affairs to drive the development of key municipal customer data. Central database of defaulters: SALGA should develop and host a central database that monitors all municipal defaulters. All municipalities should have access to this database and use its contents to ensure that individuals with outstanding debt in one municipality cannot interact with other municipalities in any capacity. This system can be linked to the issuing of Municipal Clearance Certificates, what would authorise individuals and companies to interact with municipalities countrywide. Common billing system: From interacting with municipalities it emerged that, whilst some have sophisticated billing systems, understanding the capabilities of the system and directing it so as to enhance revenue management and credit control processes are a key requirement. Generally, a billing system used by a municipality should have preventative and detective capabilities that enables it to produce exception, arrears and disconnection reports. It is then up to the municipality to use the reports generated by the system to intervene and 80

81 minimise non-payment. To support resource constrained municipalities, where it is not cost effective to operate sophisticated billing systems, SALGA should explore the possibility of developing a standardised billing system with the required capabilities that municipalities require to manage their revenue and credit control. The provision of technical training to municipalities to understand and effectively utilise the system will be key. Municipalities and Eskom: Cutting of electricity provides a strong incentive for defaulters to provide payment and is therefore an important lever for municipalities. Many municipalities are however experiencing challenges with effectively using this lever, especially where Eskom is the service provider. In addressing aspects related to electricity non-payment and the potential to utilise electricity disconnection as a tool to incentivise payment, SALGA should develop a standardised and comprehensive service delivery agreement (SDA) governs the relationship between the service delivery authority (municipality) and the service delivery provider (Eskom). This would be signed between the respective municipality and Eskom. The agreement should set out, amongst others: o The roles/responsibility of the service delivery authority relative to the service delivery provider o The process to disconnect electricity to households that default on municipal services o Arrangements to protect the revenues of Eskom in such a process o The ability of municipalities to apply surcharges on tariffs in Eskom controlled areas to enhance municipal revenues Formation of a multijurisdictional municipal service district: The costs of revenue management for certain types of municipalities are high and can counter the benefits from revenues collected. This is most apparent in smaller or rural municipalities, where they do not have the electricity and water function to use as a lever to induce payment and subsequent legal steps to recover debt are too expensive. Therefore, SALGA should consider driving the establishment of a multijurisdictional municipal service district (provided for in terms of Section 87 of the Municipal Systems Act). The establishment of such agencies can form the precursor for the consideration of a national collection agency. Such agencies would: o Be based at the district municipality o Be owned by the district and all the local municipalities within the district o Be established through the pooling of resources o Implement billing and credit control on behalf of all the district and local municipalities o Have the ability to instruct the respective service authority (be it the district municipality, local municipality or Eskom) to terminate services for defaulters 81

82 o Centralise legal costs associated with credit control Free Basic Services: By law, indigent households are allowed certain levels of basic services free of charge. Many municipalities face the challenge of indigent households exceeding the quota of free basic services. Given that the local equitable share allocation to municipalities is aimed at funding the provision of free basic services, it will be worthwhile to conduct further research to explore the adequacy of current levels of free basic services. 82

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85 Appendix 1 Debtor Age Analysis by Municipal Category Attached separately Appendix 2 Municipal Category Analysis by Customer and Sector Attached separately Appendix 3 Overview and Results of Econometric Analysis Attached separately Appendix 4 Identification of Best and Poor Performing Municipalities Attached separately Appendix 5 Sample of Questionnaire Developed for Municipal Visits Attached separately Appendix 6 Proposed Framework for the Basic Requirement for Sound Revenue Management and Best Practice Attached separately