National Treasury has, with effect from 20 March, withheld the transfer of equitable shares to 60 municipalities that failed to pay Eskom and other creditors on time, it announced on Tuesday.

“Section 216 (2) of the Constitution permits National Treasury to stop the transfer of funds to any organ of state that commits persistent and material breach of their financial obligations,” Treasury said.

It said the persistent failure by some municipalities to pay creditors within 30 days amounts to financial mismanagement, with Treasury deeming it important to take steps to ensure that municipalities meet their financial commitments.

As at 31 December 2014, municipalities owed Eskom R9-billion, of which R4.5-billion is current and the balance relates to arrears, which is a persistent breach of the payment terms applicable to creditors.

In the same reporting period, municipalities owed Water Boards R3.6-billion, of which R1.3-billion is current and R2.3-billion relates to arrears.

Treasury said businesses owe municipalities R22-billion in total, while national and provincial departments owe R4-billion.

Early in March, Treasury informed municipalities with persistent arrears in respect of Eskom and Water Boards of its intention to invoke Section 216 (2) of the Constitution, subject to municipalities entering into repayment arrangements with these creditors and preparing a financial recovery plan where relevant.

Municipalities were advised to obtain a council resolution to confirm the municipality’s commitment to the process and to ensure that the current account due to Eskom is paid by 13 March 2015.

“The persistent arrears and failure of municipalities to settle their Eskom payments within 30 days, as is legally required, negatively impacts Eskom’s cash flow, thereby compromising the utility’s operations and financial position.

“Although the decision to invoke Section 216 (2) will affect the municipalities’ ability to meet some of their financial obligations, financial mismanagement cannot be condoned under any circumstances,” said Treasury.

Transfers will only be released once all requirements are met.

“National Treasury is of the view that there cannot be improvement in overall service delivery in an environment where the principles of efficient public finance management are regularly disregarded.”

Treasury said it would like to support struggling municipalities by helping them to prepare a recovery plan that will mitigate the budgeting and revenue management risks and to ensure proper municipal billing and collection is implemented as required by the adopted credit control policy.