3. Budgets
Questions regarding the capital and operating budgets were included in questionnaire 16. Collectively, the core group of municipalities have approved operating budgets of R37,36 billion.

The budgets can be analysed in the following categories:

Collectively, the operating budgets indicate a positive ability to stabilise the financial deterioration. During the period June 1997 to June 1998, debtors increased by R2 billion (from R7,3 billion to R9,3 billion). If the same trend continues in the 1998/99 financial year, it will require a funding source of the same magnitude to avoid a negative cash-flow. The combined budgets indicate that approximately R2,2 billion was provided as contributions to various funds. This could counter the effect of a further deterioration.

A closer analysis, however, reveals that contributions were made for the following purposes:

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

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

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

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

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

Approximately R5,4 billion is earmarked from internal financing sources (internal advances, special funds and other funds). This seems very unlikely, as loan repayments only amount to R2 billion (from the operating budget). Approximately R3,4 billion must therefore be advanced from cash reserves. The total cash holdings of municipalities only amount to R6,9 billion, of which the Durban Corporation holds R3,5 billion. Very few municipalities will be able to access the capital market, due to lack of creditworthiness. It therefore appears that the capital development programmes of municipalities are over-ambitious, unless debt collection improves dramatically. The only logical conclusion is that municipalities will continue to experience further cash-flow difficulties, due to their ambitious capital budgets.

The inability of municipalities to attract external capital finance and produce achievable capital budgets indicates that they do not meet the following criteria:

• Impact of society.
• Customer satisfaction.
• Business results.
• Capital spending patterns.
• Debt management.