May 4, 2005
By Thomas Thale
ECONOMISTS have cautiously welcomed the announcement by the City of Johannesburg that it is to write off R1,5-billion in bad debt owed by indigent households.
Viewing it as a prudent move to correct the City's financial status, economists agree that the decision will enable Johannesburg to have a clearer picture of its finances. But they also warn that it could have the unintended consequence of encouraging defaulters not to pay their accounts.
Executive Mayor Councillor Amos Masondo announced the write-off on Wednesday, 4 May, when he launched a programme for poor people to register to get free services. He also warned that the City would continue to take credit control measures against delinquent accounts.
The City has accumulated more than R7-billion in its debtor's book.
Tony Twine, the senior economist at Econometrix, endorsed the write-off, saying it would correct the City's financial status, which has been distorted by irrecoverable debt.
"Having a large debt overhang that is probably unlikely to be recovered, creates a false impression when looking at the financial status of a municipality. It creates an impression of assets that the municipality in reality does not have. As a result, you end up with an economic view of a municipality that might distort the apparent environment within which it delivers and charges for services," Twine said.
By writing off irredeemable debt, he added, the City would make its financial picture more accurate and better decisions could then be taken by all the players, policy makers, executive officers and the broad public.
Mark Schussler, the chief economist at T-Sec, agreed that it was probably a good idea for Johannesburg to help people who were genuinely poor. "It would be a waste of time to try to recover from them."
Twine said the write-off removed the necessity for the municipality to attempt to recover money that was irrecoverable. "It means that the people whose debt is written off can begin to function properly in a free-delivery environment. It leads to a more effective system of delivery that does not trip over old hurdles."
But Schussler cautioned that the City would have to make sure that people who were not poor did not abuse the system. "People who should be paying, must still pay for the services they consume. We cannot afford to fall back."
While agreeing that the write-off "could be seen to be worthwhile", Elize Kruger, an economist at Kagiso Securities, warned that the move could create a bad precedent. "It is not a sound principle financially. Over time, it might have negative consequences, with people not paying because they know their accumulated debt will be written off."
Lumkile Mondi, the chief economist at the Industrial Development Corporation, echoed her warning, saying the City might be sending a wrong message to ratepayers. "In an environment of a low interest rate, when people's income has improved drastically, some people are just unwilling to pay."
But Mondi agreed that the City should subsidise people who were truly indigent, like the elderly, adding that it highlighted the dependence of large sections of the population on the public provision of essential services.
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