Debt owed to water boards: input from COGTA, SALGA, National Treasury & DWS

Meeting report

Opening remarks
Ms M Semenya (ANC), Chairperson of Portfolio Committee on Human Settlements, Water and Sanitation noted apologies from the two Ministries and said that if time does not permit a full discussion, the Committee will reconvene again. There is a challenge about water debt in the country. If this matter is not attended to, South Africa will end up with an ‘Eskom crisis’ in the water sector. It is important to find a way for all stakeholders to unlock the problem and resolve it. The most important objective is for the people of South Africa to get better services.

Department of Cooperative Governance and Traditional Affairs (COGTA) briefing
Dr Mmaphaka Tau, COGTA Deputy Director-General: National Disaster Management Centre, introduced the team that was supporting him. The presentation would cover the role that COGTA has played to assist municipalities to pay the debt owed to water boards, the challenges encountered, and recommendations for improved performance. The thrust of the presentation will highlight the support provided through the Back to Basics programme, the District Development Model and also, from a municipal support point of view, the Section 139 interventions that the department continues to implement, and the IMTT that has been providing strategic leadership in this matter.

Role played by COGTA
Mr Plaatjie Mahlobogoane, COGTA Senior Manager: Equitable Share, unpacked the role played by COGTA in assisting municipalities to pay debt owed to Water Boards. Section 154 of the Constitution requires COGTA to support and strengthen the capacity of municipalities to manage their own affairs, to exercise their powers and to perform their functions. In line with section 154, COGTA developed programmes to support municipalities. For example, the Back to Basics (B2B) Programme has made coordinated attempts to support municipalities to discharge their basic responsibilities. Through the District Development Model, COGTA will be involved in a number of activities including the development of financial recovery plans and credible budgets, in collaboration with National Treasury. The Municipal Infrastructure Support Agent (MISA) provides technical support to enhance the management of municipal infrastructure support programmes. MISA developed 87 municipal diagnosis reports and technical support plans where basic service delivery gaps were identified. In addressing the inability to render services, MISA has deployed resources to municipalities to enhance municipal capacity; improve municipal infrastructure planning, operation and maintenance, in the selected 87 municipalities. MISA programmes are addressing the inability of the municipalities to render service delivery.

Challenges experienced by COGTA
Mr Mahlobogoane elaborated that it has been determined that, among others, most municipalities have entered into payment agreements in the past and these are renewed each time municipalities fail to adhere and there is a threat to disrupt services; municipalities’ municipal managers and chief financial officers have agreed to unaffordable and unrealistic agreements to avoid service disruptions; high vacancy rate on position that are critical on the municipalities such as the artisans and engineers; and ageing municipal infrastructure has resulted in high water losses and illegal connections resulting in revenue losses.

Recommendations by the IMTT Advisory Panel
The IMTT Advisory Panel recommendations on the simplified revenue plan project, the constitutional challenge, and systemic and structural challenges were unpacked (see document).

Conclusion
Mr Mahlobogoane said that a comprehensive package of support is required to tackle the massive debt that municipalities owe to all their creditors.The support package will include improving leadership, governance processes and systems, technical capacity and partnerships with Eskom, DWS, Water Boards and the provinces. COGTA will continue working closely with Eskom, DWS and Water Boards through the IMTT technical processes to ensure that joint long-term and sustainable solutions are reached.

National Treasury legislative and regulatory perspective
Mr Sadesh Ramjathan, from the Local Government Budget Analysis Unit, explained the relevant provisions of the Municipal Finance Management Act (MFMA) and the Municipal Systems Act.

As at 30 June 2019, municipal consumer debt is R165.5 billion (compared to R143.2bn the previous year). The largest component of outstanding debtors is households at R118.6bn (71.7%) and government owes R10.3bn (6.2%).

The debt owed to municipalities by organs of state and its escalation between 2014 and 2019 was explained by means of a graph and a debtors age analysis for organs of state was provided.  Mr Ramjathan delved into the initiatives to address the problem. There have been a few hurdles in resolving the debt owed to municipalities and government property ownership has been the largest contributor of the debt spiralling out of control. In 2004/05 about R600 million was provided by the fiscus for clearing outstanding debts to municipalities. Unfortunately, only about R200 million was actually claimed by municipalities. At the national level an Intergovernmental Debt forum consisting of DPW, CoGTA, Treasury, the Department of Rural Development and Land Reform, and SALGA has been established to resolve the organs of state debt matter. DPW undertook a verification process to authenticate the debt owed to municipalities, but this process was not completed as the land ownership issues were not resolved.

Mr Ramjathan spoke to the initiatives by IMTT to restructure debt owed by municipalities, the process to deal with defaulting municipalities, and the need for stronger monitoring and oversight.

Mr Ramjathan recommended that the Committee note the legislative framework that regulates payment of creditors within 30 days; the challenges that government is confronted with and is trying to solve through exploring sustainable options; the work done on government debt to municipalities and the progress made by the Department of Public Works in addressing the ownership control issue that will assist with correct billing to governments agencies in future.

South African Local Government Association (SALGA) on resolving water debt of municipalities
Mr Bhekumzi Stofile, SALGA working group chairperson for councillor welfare, governance and international relations, introduced the SALGA representatives, highlighting that SALGA has interacted with the department on numerous occasions. It would have been ideal if this meeting and the debate was about debt owed to municipalities. As National Treasury highlighted, R165bn is owed to municipalities. If those billions were paid to municipalities, we could have had a different conversation today. Unfortunately, we are dealing with the matter of water debt.

A few days ago at the Standing Committee on Public Accounts (SCOPA), SALGA indicated that it is unfortunate that Parliament’s approach is issue-based. The biggest challenge in the country is the lack of servicing debt by national, provincial and local government, including business. SALGA would like to hear from National Treasury as to what efforts are being made to pay what is due to municipalities. Moreover, it is prudent that Parliament reappraises the 1998 White Paper on Local Government and its assumptions. The 1998 White Paper on Local Government assumes that Local Municipalities, despite their size, will be able to collect and generate 80% of revenue. That Paper failed to recognise future developments such as the sluggish economic performance in the world and South Africa. The poor economy impacted payments by individuals and households in municipalities.

Additionally, there an inability to understand that the infrastructure that municipalities operate is ageing infrastructure. In light of, among others, water leakages, there should be some investment, including for electricity. Parliament needs to re-examine the White Paper and its assumptions. These assumptions need to trust the developmental state of local government, teasing out what this means for the resources that should be allocated to the local sphere in order to render services.

Further, South Africa has a history where there is a notion that it is wrong to pay for services. Households are refusing to pay for services. The departments of the state are not paying municipalities for municipal services. Echoing what the Finance Minister has said recently, it is important for government to go into communities explaining why it is important to pay for services. So far, it has not been explained in this meeting what must be done about those who are not paying for municipal services. Currently, for indigents, water is bought for R10 and the equitable share funds that water at R8. Who is going to pay the R2? Where will it come from?

At the kernel of these matters he had raised, as enshrined in the Constitution, is the expectation that Provincial and National government work cooperatively with Local government in delivering its mandate. In that process, there is a weakness in the cooperative work in confronting and dealing with these challenges.

In the interaction that SALGA had with the Department of Water and Sanitation, the question was posed: How can one be both referee and player? DWS determines and declares water tariffs and there is no one who adjudicates whether these tariffs are wrong. Treasury should have quoted the MFMA provision that the department when it declares tariffs, it needs to consult. The department is heading towards a cul de sac situation. In the case of electricity, the National Energy Regulator (NERSA) brings objectivity to tariff determinations. There are a number of service mandates that have landed in the municipal space and the municipality, at the end of the day, is expected to render these services. For whatever is bought, there needs to be a mark-up and collection. In an environment where there is culture of non-payment, how will this be achieved?

Institutional Delivery Mechanisms, Pricing & Debt
Mr William Moraka, SALGA Director: Water and Sanitation, set the context for delivery mechanisms, pricing and debt. The escalating debt in the water sector may be attributed to the absence of an economic regulatory regime for infrastructure investments, costing and pricing; generally there is a culture of non payment of services ; water losses of over 38%; and unauthorised connections. Mr Moraka spoke to the top municipal debt, service delivery versus payment levels, cost of service versus equitable share, and non-revenue water.

Interventions
Mr Moraka outlined the interventions at strategic and operational levels. At a strategic level, SALGA is part of the technical team that supports the IMTT tasked with finding sustainable solutions to the debt problem for both electricity and water. The technical team has facilitated payment arrangements for water in Limpopo, Gauteng and North West provinces. At an operational level, there have been technical, social, financial, institutional, and legal interventions. Other interventions included the National Task Team workshop in Bloemfontein to deliberate the issues raised by the Portfolio Committee and to lobby for revision of payment arrangements based on proper due diligence.

Way Forward
Mr Moraka gave a breakdown of the way forward at a policy and operational level. SALGA suggested the following policy principles be agreed to as the way forward:
- targeting infrastructure grants and equitable share to service historical debt is not a sustainable solution;
- multi-year tariff determinations will promote stability and predictability of tariffs (electricity approach);
- common tariff methodologies to determine water costing and pricing.

At an operational level, SALGA recommended
- IMTT proposals be taken forward through relevant inter-governmental relations (IGR) process - particularly the campaign on payment of services and installation of meters
- The Non Revenue Water Proposal to National Treasury is an important ingredient in arresting money lost through leaks - SALGA will work with its partners to ensure the programme is established;
- In the absence of a regulator, introduce an economic panel of experts to assess water costing and pricing.

Department of Water and Sanitation response to SALGA inputs
Mr Frans Moatshe, Acting CFO: Department of Water and Sanitation, presented an overview of the debt owed to entities supporting the work of the Department. The Department appoints implementing agents for projects funded through the Regional Bulk Infrastructure Grant and Water Services Infrastructure Grant. In addition to the normal infrastructure projects there are also intervention projects where municipalities are experiencing challenges. Some of the interventions led to budget pressures on the Department’s allocation. This is being attended to through budget reprioritisations. There is ongoing engagement between the Department, COGTA and the municipalities. The debt owed to the Water Trading Entity (WTE) as at 18 October 2019 was given.

On the debt owed to water boards by municipalities, Mr Moatshe explained how the WTE and DWS have been battling the escalating water-use debts by municipalities over the years. He spoke to the DWS billing and revenue hierarchy, the consequences of non payment, the Trans-Caledon Tunnel Authority (TCTA) dependency on WTE payments. After a breakdown of the details of municipal debt to the Water Trading Entity, he gave details on debt owed to Water Boards as at 30 September 2019, especially Amatola, Bloem, Lepelle Northern, Magalies, Mhlathuze, Overberg, Rand, Sedibeng, and Umgeni Water Boards. A debt age analysis was given as well as debt owed to the WTE by Water Boards.

Challenges
The challenges faced include a culture of non-payment within municipalities; current laws do not make provision for channelling the equitable share for the purpose of debt reduction; current laws do not make provision for top slicing grants for the purpose of debt reduction; and resistance to legal steps against delinquent municipalities.

Proposed solution
By way of remedial action, Mr Moatshe proposed continuous stakeholder engagement, top-slicing of municipal grants, continuous participation in the IMTT, continuous participation in the provincial joint tactical committee, and handing-over of delinquent municipalities as per legislation and Minister of Finance directive.

Closing remarks
Both Chairpersons agreed that the two Committees reconvene with the stakeholders, especially SALGA, to discuss the presentations and assist the Department in resolving this. The country cannot have the water sector experiencing an ‘Eskom’ crisis. A key part that has not been presented today is how the waste water treatment plants are in disrepair which effects the end-user.