The City of Cape Town wants to take out a loan to upgrade its wastewater infrastructure.
Cape Town - Despite the country’s economic stagnation and the recession, the City of Cape Town is planning a €80 million (more than R1.4 billion) international loan to upgrade its wastewater plants, but economists warn ratepayers will ultimately have to foot the bill.

Mike Schussler, chief economist at Economist.co.za, said with the culture of non-payment of rates and taxes, the city’s ability to service the loan will come under strain, leading to greater reliance on those who pay.

Mayoral committee member for finance Johan van der Merwe confirmed that the city council has been approached for an unsecured loan with semi-annual repayments over 15 years. The loan, issued by German-government owned KfW Development Bank, amounts to €80m.

The final payment is on November 15, 2033 and comes with an indicative interest rate of 8.25 to 8.75% (determined at August 15, 2018).

Asked why the city council needed a loan and why it could not use its own capital funding for the upgrades, Van der Merwe said: “The city approved its budget during May 2018 after a comprehensive public participation process in which the city’s funding strategy to fund its capital programme was also approved.

“The taking up of debt is necessary to spread the related costs over the lifetime of the projects financed to not unduly burden the current ratepayer. All cost implications have been considered in terms of affordability in advance.”

Johan van der Merwe. Picture: Willem Law

Schussler said although infrastructure upgrades are needed, the current recession means Cape Town needs to fork out more to repay the loan.

“The rand is weakening, which means they will get more money in euros, but paying back the loan will become difficult, given the weaker rand and recession. At the end of the day, ratepayers are the main income for the city and already many municipalities are in debt.

“Around the country we have about 28 municipalities that owe Eskom about R30bn. We have towns with 85% unemployment, so how do you function like that?” he asked.

According to the city council’s financial reports, Capetonians already owe the municipality R8.8bn, with arrears debt at R5.5bn. Schussler said a recession could lead to job losses and weaker economic activity.

“There is to a great extent a problem with payment from many consumers. Despite a so-called culture of non-payment, many consumers cannot afford their payments to councils.

“And if there is little or no payment to municipalities, they will have difficulty paying loans and other agreements,” he said.

Mayco member for informal settlements, water and waste services and energy Xanthea Limberg said the city council pre-empts upgrades to critical infrastructure.

City of Cape Town mayoral committee member for water services Xanthea Limberg. Picture: David Ritchie/African News Agency (ANA)

“To ensure it is able to meet growing demand that comes with an increasing population, the city will always opt for earlier project initiation rather than deferring it,” she said.

Ratings agency Moody’s has Cape Town on a Baa3 rating, which is the lowest investment grade.

Economist Dawie Roodt said the interest rate is high, especially for a euro loan.

“This loan sounds expensive. Euro loans normally have low interests rates of between 4% and 5%.”

ANC Cape metro leader Xolani Sotashe said the city council had money in the bank to do upgrades of this nature.

“This is going to add further pressure on the residents of Cape Town.

“At the end of the day, the ratepayers pay for the city,” he said.

The public has until September 28 to comment on the plan. Comments can be sent to [email protected]

The city’s full council will consider the loan at its meeting on October 25.

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Cape Argus