THE National Treasury has published a financial recovery plan for the poorly-run Lekwa Local Municipality in Mpumalanga, giving it three years to get its finances in order.
Lekwa Municipality was thrust into the spotlight when Astral Foods, one of South Africa’s largest poultry producers with a processing plant in Standerton, took legal action against it due to severe supply disruptions caused by disintegrating infrastructure.
The North Gauteng High Court issued an order earlier this year requiring the national government and the National Treasury to intervene and prepare a financial recovery plan for the troubled municipality.
Lekwa is faced with severe liquidity challenges.
It is technically insolvent as its liabilities exceeds its assets by R741 million, mainly due to arrears Eskom and Rand Water debt.
Eskom was owed in excess of R1.3 billion as at March 31.
The municipality had unpaid creditors amounting to R1.7bn at the end of the 2019/20 financial year and the figure was growing progressively.
The provincial treasury assessment of the Lekwa medium-term revenue expenditure framework budget predicts a cash shortfall of R2.2bn for the 2021/22 financial year.
In its report, the Treasury said among the audit issues raised with respect to the municipality’s financial management inefficiencies were weak internal controls; weaknesses and non-compliance with policies and procedures; and fruitless and wasteful, unauthorised and irregular expenditure.
It said the cash flow challenges in Lekwa can be directly attributed to the municipality adopting unfunded budgets over the last three years.
Unrealistic budgeted revenue collection levels had also not been realised while operating costs remained high with no effort made to contain expenditure particularly on non-priority spending.
“The current organisational structure needs to be reviewed in such a way that it considers the current financial state of the municipality and streamlines the overall organisational structure within the available budget,” the Treasury stated in the report.
In May, the municipal council was dissolved by the Cabinet and Johann Mettler was appointed as the administrator for this intervention.
Treasury’s financial recovery plan covers the four municipal sustainability pillars of governance, human resources, financial management and service delivery.
The indicators for the rescue phase include a funded budget, monitoring of the daily cash and cash balances, cost containment measures, focusing on improving the debtor’s collection rate, the ring-fencing of conditional grants and ensuring that creditors are paid timeously and that negotiations are entered into to settle any outstanding debt.
Treasury developed a financial forecasting model to set financial targets for the Lekwa which could see the municipality progressively move towards a position of improved financial sustainability over the 3-year period.
It projected that cash shortfall of R2.2bn at the end of the 2020/21 financial year will reduce to a cash shortfall of R1.6bn at the end of the 2022/23 financial year, improving to a cash shortfall of R1.1bn at the end of the 2023/24 financial year.
Treasury said the net increase in cash hold could improve with R20m in 2022/23 and R260m in 2023/24.
“If these positive trends could be achieved and sustained, it could realistically be expected that it will take the municipality a period of 5-6 years to move to a fully cash-backed funding position.”
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