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When will the roads agency admit that most of its e-tolls debt is unrecoverable?

This article first appeared in Moneyweb.

etoll-gantry-2Organisation Undoing Tax Abuse (Outa) raised some interesting questions about the South African National Road Agency’s (Sanral) 2016 annual report which came out recently, specifically Sanral’s lack of enthusiasm for writing off unpaid e-tolls, which many suspect will never be recovered.

The balance sheet shows trade receivables of R7.66 billion, up from R4.96 billion in 2015 and R1.15 billion in 2014. Is Sanral continuing to count unrecoverable e-tolls as an asset on its balance sheet?

“Had Sanral accounted prudently and honestly as regards these unrecoverable amounts, it would have been forced to report a far greater loss than the R954 milllion reported for the 2016 financial year,” says Outa.

These trade receivables are largely uncollected e-tolls that have been rolled over from one year to the next. Most companies would be forced to recognise unpaid debts as unrecoverable after a year and write this off against the income statement. While this would not have impacted Sanral’s cash position, it would have impacted its income statement and balance sheet. It would also presumably have lowered the quality of its bond debt (it is already paying 144 basis points above the Johannesburg Inter-Bank Rate for its Highway bond series, which have been poorly supported in recent months).

Some of these outstanding e-toll bills are well over two years old, well past the age of write-off in terms of accepted accounting practice. Conventional accounting practice requires that unrecoverable receivables, which are clearly unrecoverable, must be expensed through the income statement.

Sanral is clearly keeping this debt “alive” through the issue of about 6 500 summonses to defaulting motorists.

This, then, becomes something of a legal as well as an accounting issue. The Prescription Act will make it difficult to recover debts of this nature once they are older than three years. One lawyer specialising in prescription law contacted by Moneyweb says e-tolls kicked off in December 2013 – exactly three years ago. Sanral’s prescription problem kicks off in little over a month.

Court challenge

The issue of a summons theoretically interrupts the prescription (though not necessarily) and keeps the debt alive. But what about the millions of people who have not acknowledged their e-tolls debts and have not been summonsed to appear in court by Sanral?

They could, and probably should, argue the debt has prescribed and boot Sanral to touch, says one lawyer. Sanral and Outa have a test case somewhere on the horizon to decide the lawfulness of its attempt to claim unpaid e-tolls from Gauteng motorists. Outa says the implementation of e-tolls was unlawful on the grounds that they were imposed on Gauteng drivers without the necessary public engagement and planning, and are far more costly than other alternatives.

The question is, when will Sanral recognise that large parts of its unpaid e-tolls are unrecoverable? Clearly, it is awaiting the outcome of its court challenge to make a determination about this.

According to figures reported to parliament, 2.9 million Gauteng freeway users have outstanding debts to Sanral, totalling R7.9 billion.

RMB credit analyst, Elena Ilkova, says it’s important to look at Sanral’s revenue recognition. The company recorded revenue of R8.4 billion for 2016, of which R5.6 billion was the Gauteng Freeway Improvement Project (GFIP). Turning to the notes in the annual report, we see that Sanral did not recognise R3.6 billion of this latter amount because it relates to the so-called alternate tariff for non-registered users. Sanral quite prudently assumed they would not get paid this money, which left it with GFIP revenue of R2.8 billion for 2016.

The trade receivables (toll) amount for 2016 was R7.2 billion, of which R730 million is current and outstanding for less than 30 days, while R6.2 billion (2015: 3.5 billion) is outstanding for more than 91 days.

“The R6.2 billion has not been written off or significantly impaired because until now Sanral has never actually made an attempt to collect the debt, in other words enforce its claim.  It would not be prudent to write this amount off until it becomes clear it is not collectible, which is why 6 500 summonses have been issued for roughly R575 million, and those cases are heading to court.”

Ilkova says once the court makes a decision, Sanral will either have to write off large amounts of these trade receivables (at least the R6.2 billion, potentially more), or adjustments will be made to the receivables figure as a pattern of collection is established.

Unrecoverable debt

“Therefore, I expect that both the revenue and trade receivable numbers would be subject to change once the court process yield some answers,” she says.

Sanral’s spokesperson Vusi Mona says Sanral has to record its receivables in the manner it has as it is an agency of government and cannot simply write-off debt. “Every effort is being made to recover what is due to the state. The legal process is slow but will assist in confirming to users that the user pay principle is here to stay.”

Moneyweb asked Sanral’s auditor, the Auditor-General of SA (AGSA), how it could continue to count presumably unrecoverable debts as an asset.

AGSA spokesperson Africa Boso said: “It is worth noting that the auditor’s responsibility is to express an opinion on the fair presentation of financial statements in accordance with the International Financial Reporting Standards. In auditing receivables, the auditor considers the recoverability of the debt by applying the International Standards on Auditing 540 (Auditing Accounting Estimates). This involves testing the reasonability of management assumptions and compliance with the accounting policies, informed by the relevant financial reporting framework.

“Determination of provisions for doubtful debt is largely a result of a number of considerations which are based on the judgment of the auditor after considering management representations. As to the matter about which you enquire, we as auditors were satisfied with the underlying assumptions made by management.”

Outa believes Sanral is “deluding itself and its shareholders” into thinking legal prosecutions against non-paying motorists will improve its e-tolls collections, and appears to have convinced the Auditor-General (AG) of this unlikely outcome. This in turn raises questions as to the independence and probity of the AG in issuing a statement to this effect, and on which its “going concern” assurance is heavily weighted.

Another point raised by Outa concerning the annual report is the cost of building roads in SA. Some R7.6 billion was spent on strengthening and improving 531kms of road, or R14.3 million per kilometre, which is well above local and international benchmarks.

Then there is the Sanral debt level, which has gone from R6 billion a decade ago to R47 billion in 2016. This massive increase in debt has been accompanied by a rather modest increase of about 500kms in the tolled portion of its network (1.8832kms). Sanral receives government grants for the non-tolled portion of its network, and relies on tolls for the rest.

The annual report raises more questions than it answers about the financial future of this organisation: what will happen if it loses the court case? Why are road construction costs so high? How are the concessionaries (who run the toll roads) spending the money they raise from road users? When the concession periods are over in 12 years or so and the roads are returned to Sanral, will the tolls drop to cover just basic maintenance? If not, what was the point of all this?

These are all valid questions that need better answers. Perhaps the bigger problem Sanral faces is a PR one: do you know anyone personally who actually wants Sanral to succeed in its court challenge? Case closed.