THE finances of Drakenstein Municipality are stable, but concern has been expressed that the Municipality’s debt is growing.
The Municipality recently decided to write off millions of rands of old debt, on a Rand for Rand basis, in an effort to get debtors to cough up before 31 May.
Moody’s Investor Service recently gave Drakenstein a rating of A3 (stable) in its Credit Opinion, but pointed out that Drakenstein’s debt as a percentage of operating revenue had increased to 29% compared to 13% in 2007, up from 24,6% last year.
Drakenstein’s cash financing surplus of total revenue is currently at an all time low of -6,2% compared to a positive 17,4% in 2006. The Gross Operating Balance has decreased from 10,6% in 2006, to only 1,1% last year.
Drakenstein is the second largest municipality in the Western Cape with total revenue of R825 million in 2009. It is rated in the mid-range of 17 local municipalities whose ratings range from A1 to Baa2.
In the past few years, Drakenstein consistently maintained comfortable operating surpluses, averaging 9%. In spite of the growing revenue base driven by service charges and property rates, the financial statements for 2010 show a material decrease in the gross operating margin to a modest 1%, reflecting an increase in bad debt provision and bulk purchases.
The growth in debt is mainly due to the economic recession which has hit local residents hard. Another cause is the electricity bulk purchases that have increased by almost 25%, while sales have increased by only 20%, with Drakenstein absorbing the rest of the cost increases, says finance head Cavin Petersen. Other costs are the financing of unfunded mandates such as primary healthcare and activities such as public safety, sports and recreating and economic development that put tremendous pressure on the budget.
The report states: “Drakenstein’s relative position reflects debt and debt service levels that are higher than the median of rated municipalities, although gross operating margins have generally remained in line with the sector’s average.
“Credit challenges include a narrow economic base concentrated in agriculture and therefore dominated by seasonal economic activities, and a growing debt trajectory.”
“The A3 rating could come under pressure in the event of the deterioration of fiscal discipline, above-budget increases in borrowing levels and a decline of the revenue collection rate that could negatively affect cash flow and liquidity.
“Bad debt provision has increased from R140 million in 2009 to R159 million in 2010, although revenue collection improved from 91% in 2009 to 96% in 2010.”
The Council has recently changed its traditionally conservative borrowing strategy to take on more liabilities to finance capital expenditure on infrastructure developments.
Long term liabilities have increased from R46 million in 2007 to R225 million in 2010, resulting in an increase in debt to operating revenue ratio from 13,2% to 29%.
