Withholding equitable share from municipalities: input by Department of Cooperative Governance; National Treasury & SALGA

Meeting report

Mr K Mileham (DA) said he had written a letter asking that the Ministers of Finance and Cooperative Governance be present at the meeting. He noted their absence and said that no responsibility was being taken by them.

Department of Cooperative Governance & Traditional Affairs (COGTA) briefing
Mr Vusi Madonsela, COGTA Director General, said that the decision to withhold the equitable share funds was a Treasury decision. COGTA had drawn from presentations on the matter by the Departments of Public Works and Public Enterprises as well as Treasury. The presentation included what efforts were being made to resolve the issue and an update on getting government departments to pay their debts which he believed was intertwined with municipalities not paying their debts.

Mr Muthotho Sigidi, COGTA Deputy Director General for Intergovernmental Relations, said that the Minister of Finance had raised concerns about the municipal debt escalation to Eskom and the Water Boards. COGTA had been engaging with various ministers on the issue. Treasury said it would withhold the transfer of equitable share to 60 municipalities for failing to honour their financial commitments in general and for failing to pay Eskom and other creditors. The objectives of this process by Treasury was to understand why municipalities were unable to pay creditors on time and within the 30 day MFMA (Municipal Finance Management Act) requirement and to address the culture of non-payment by municipalities. Non-payment affected investor confidence and in Eskom’s case, impacted on its balance sheet and ultimately on the credit rating of the institution. In addition, non-payment of creditors by municipalities affected the economy and in particular the viability of SMMEs. It was intended that this action of withholding the equitable share be instituted across all spheres of government.

The current debt owed to Eskom by municipalities as at December 2014 was R4.55 billion, arrear debt stood at R4.48b making a total debt of R9b. The current debt owed to the Water Boards was R1.33b, arrear debt stood at R2.33b making a total debt of R3.66b. Current debt owed by national departments to municipalities was R200m, arrear debt stood at R1.3b making a total of R1.5b. Current debt owed by provincial departments to municipalities was R160m, arrear debt stood at R1.85b making a total of R2b.

Mr Sigidi said Treasury has been engaging with municipalities on the non-payment of creditors over several years through various forums. Municipalities had repeatedly agreed to pay amounts they owe, but in many cases this commitment has not been honoured. On 6 March Treasury issued correspondence to municipalities encouraging them to settle their current accounts with Eskom and Water Boards, to confirm repayment arrangements with Eskom and Water Boards and request assistance with a financial recovery plan.

He said poor leadership and weak financial management led to the mismanagement of finances which in turn allowed the debt to escalate. Municipalities set tariffs that were not fully cost reflective. Poor revenue management meant payments due to creditors far exceeded revenue collected. Previous repayment arrangements were not affordable or realistic and in many cases were signed merely for compliance sake. There were no service level agreements (SLA) between municipalities and their bulk services providers (Eskom and the Water Boards). Many municipalities did not have proper SLAs in place or there were weak institutional arrangements between district municipalities and local municipalities. High levels of water and electricity losses had reduced municipality revenues dramatically. Municipalities had high operating costs, in particular, high staff costs. There were negative consequences in revenue collection for municipalities that did not hold municipal licences in their service areas. Municipalities were found to overstate the debtor figures and understate their creditor figures. The creditor amounts far exceeded the equitable share tranche due to municipalities.

COGTA and Treasury were concerned about some of the practices Eskom uses in its billing of municipalities and these would be discussed with Eskom. These include Eskom’s requirement for a 15 day payment period which contradicted the 30 day payment rule of the MFMA; the escalating interest charged on arrear debt as a result of Eskom’s policy to impose an interest rate of prime plus five per cent on defaulting customers; and the penalties charged as a result of municipalities exceeding their notified maximum demand.

He said it would have been better if Treasury and COGTA had met and briefed the political principals, because the two departments did not discuss the matter before the withholding of equitable share, Treasury withheld funds to municipalities that were not supposed to be affected because they did not have the powers and functions to reticulate water and electricity. The equitable share to these municipalities had nothing to do with water and electricity since the equitable share for water and sanitation went to the district. Treasury indicated that the intention to withhold equitable share was aimed at addressing a number of financial management contraventions over and above municipalities’ inability to pay creditors. The second challenge was where the equitable share for a municipality was withheld, while the challenges at these municipalities needed national and provincial government’s attention. These were situations where municipal debt arose due to the problem of a confusion over powers and functions.

Urgent matters, needing national and provincial government attention, as part of the Back to Basics approach were:
- The tariffs being charged by municipalities were not the same yet Eskom charged the same tariff.
- Some municipalities were charging a lower tariff for the supply of electricity than what they are being charged by Eskom thereby setting themselves up for the accrual of debt.
- The electricity supply infrastructure in some municipalities was so old that it needed to be replaced
- The submission of unreliable information by municipalities affected proper assessment by NERSA for tariff approval as some tariff applications could not be approved because the electricity loss (non-revenue electricity) was too high.
- Some municipalities resorted to the use of equitable share transfers to pay Eskom.
- There were consumers in municipalities who paid for electricity regularly, however because municipalities were not passing the payment on to Eskom, these consumers might be unfairly affected when Eskom cut off the electricity supply to municipalities that did not pay their debt.
- The agreements with the Water Boards were very vague.

Mr Sigidi said there was persistent non-compliance with electricity licence conditions by municipalities. Electricity asset data was not available and distribution systems were dilapidated. There was a lack of critical skills like artisan electricians as well as electrical engineers in the sector. Electricity theft and cable theft was prevalent. The revenue from electricity sales was not ring-fenced for the sustainability of the supply of electricity. Municipalities were not implementing tariffs approved by the Regulator. Tariffs were not structured to reflect the cost of providing the service.

He said there was a two-pronged approval process for NERSA applications. A municipal council approved the annual budget of a municipality, which included all municipal tariff increases. A municipality may not impose a tariff that was not approved by NERSA. A municipality must therefore submit to its Council for approval a municipal electricity tariff that complies with the NERSA approval processes.

Immediate actions that COGTA would undertake were to declare war against electricity losses as well as cable theft; to reduce municipal debt to Eskom for bulk electricity supply; to manage the demand management side of electricity provision; to promote energy efficiency and to implement the pre-paid meter in place of conventional meters; to re-skill the electricity units in municipalities; to ring-fence the electricity business; to set cost reflective tariffs that reflected the cost of bulk purchases, the refurbishment of infrastructure, to monitor operational costs, to manage the notified maximum demand/reserve capacity; to monitor the regular inspection of the network and monitor the licence conditions effectively.

By 28 April, 20 of the 59 municipalities complied with the requirements and received their equitable share payments and Treasury had met with 29 municipalities.

Mr Madonsela said that matters related to debt were presented to the Forum of Directors General (FOSAD) and to Cabinet and that a memorandum was being prepared. The principle of ‘pay now and complain later’ by national and provincial departments had been undertaken and a minimum of 80% of national and provincial debt to municipalities had to be paid.

National Treasury briefing
Mr Sandesh Ramjathan, from the Local Government Budget Analysis Unit at Treasury, explained why Treasury withheld the equitable share and the engagements and processes Treasury had undertaken in its interactions with municipalities. The engagements to address arrears started in 2009.

A Treasury official said Eskom and the Water Boards were the highest single creditors that municipalities owed. In this context and in the context of the challenges raised around Eskom and the Water Boards’ sustainability as well it being a finance issue, were key to the decision for withholding the equitable share.
Eskom and the Water Boards’ financial health was a growing concern from the point of view of service delivery, as was the ability of municipalities to service accumulated debt and still pay for provision of services. The approach of these engagements with municipalities was to try to understand the root causes of a municipality’s failure to pay its creditors. Municipalities had repeatedly agreed that they would pay amounts they owed, but in many cases this commitment has not been followed through. Municipalities tended to overstate their debtor figures and understate their creditor figures. The equitable share allocation for 59 municipalities was withheld at the end of March 2015.

Some of the issues Treasury had found were that there was no independent regulator or review mechanism for water tariffs like there was for electricity. Eskom had a 15 day period for payment after which interest was due while municipalities allowed households 60 days to pay. Treasury would compile a comprehensive diagnostic report on non-payment following on representations by municipalities to Treasury. The Finance Minister would then make representations on the way forward. Areas that needed to be addressed were institutional and governance challenges, especially poor financial management. One municipality owed a combined R2b rand to Eskom and its Water Board. Another challenge was weak institutional arrangements between district municipalities and local municipalities. Sometimes it was not clear where the ownership of assets lay. The absence of service level agreements with bulk service providers despite it being a requirement was another problem. Where Eskom supplied electricity directly it charged a different rate to municipalities. There was concern over the reluctance of Eskom to allow longer repayment periods. In conclusion, municipal debt was symptomatic of a larger set of problems.

Discussion
Mr K Mileham (DA) said he was concerned that the Ministers of Cooperative Government and Finance as well as Eskom were not present when there were discussions concerning R4.5b worth of debt. He was pleased to note that the Department had ring-fenced electricity revenue for the repayment of Eskom bills and for the maintenance of electricity infrastructure. He asked why Treasury was prioritising selected creditors in the form of Eskom and the Water Boards. Was Treasury acting as credit collector for Eskom and the Water Boards? Why did Treasury use section 216? Would section 139(1) or section 154 not have been more appropriate? Only 13 of the 60 municipalities identified for the withholding of their equitable share were placed under administration. What steps were taken to rectify the situation once municipalities fell under administration? Was it right that municipalities were targeted while they were under administration by the province? If they were under administration by the province would not the province be responsible for payments as it would then be the accounting officer? Why was the intergovernmental relations framework ignored and would this have prevented the draconian steps that were taken? He said the worst payers were the Departments of Health, Education and Public Works. Would the same steps be taken against them; would their monies and grants also be withheld? What steps were being taken against them? He noted anomalies in the figures provided by the Department for the debt by municipalities and the debt of the top 20 municipalities as the figures provided were the same. What were the correct figures? Treasury had withheld funds to municipalities that were not affected by administration orders. Why was there no discussion before their money was withheld? Municipalities were undercharging on their electricity sales. Why was this not identified beforehand, and what was NERSA doing about this?

Mr M Hlengwa (IFP) said skills development needed to be prioritised as an issue in a country where there was an employment crisis. He asked how the relationship between districts and local municipalities were being addressed. He commented that municipalities had a persistent problem of ‘borrowing from Peter to pay Paul’. What was Eskom’s rationale behind the 15 day payment cycle it instituted? Were municipalities complying within a 30 day cycle? He said that provincial and national departments undermined municipalities and as a Committee, they should stand up on behalf of municipalities.

Mr C Matsepe (DA) said he had not heard in any of the presentation reference being made to negative factors such as corruption which the Minister himself had alluded to. Corruption should have featured in the presentations. Was it so dreadful that the Department had not mentioned it?

Mr E Mthethwa (ANC) said he knew businesses were also owing lots of money to Eskom. Was there any information on their debt? He had heard that Eskom was considering the possibility of supplying electricity direct to households. How were the municipalities that were undercharging for the supply of electricity surviving? What percentage of municipalities effectively converted their equitable share into merely paying off accounts and debts?

Mr A Matlhoko (EFF) said there appeared to be a tendency for officials to be politicians and not administrators.

Ms N Mthembu (ANC) said it would be wrong to politicise these issues. The problem appeared to be a communication gap. She asked if Treasury acted because of the threat to Eskom. She said municipalities did not find it easy to pay because they were not empowered to collect debts.

Mr Sigidi replied that ring fencing was a legal issue and municipalities could run their affairs by creating a business unit or department relating to electricity. He apologised for the figures for the Water Board and Eskom and said there had been misprints on the two pages. On why municipalities were not engaging with NERSA for a tariff increase, he said municipalities could apply for a tariff higher than the threshold but then NERSA would have to engage with municipalities using other factors also. If municipalities had high losses it would not be given a higher tariff because NERSA would say they were overcharging paying customers to cross subsidise those who were not paying. Some applications by municipalities did not necessarily reflect the cost of providing that service. He said it was correct that many municipalities use the equitable share to service their bulk infrastructure services. Ideally the share should be used to service those that could not afford to pay for the services. Hence, revenue collecting methodologies should be looked at.

On who was responsible for payment for municipalities under section 139, he said there should be an accounting officer whose fiduciary duties included paying creditors.

On the other creditors of municipalities apart from Eskom and the Water Board, he said there was an agreement by the municipality and a service provider and they should engage with each other through other mechanisms. COGTA was pulled in because Eskom could not go to court without having had internal negotiations because those were the provisions of the Intergovernmental Relations Framework Act. Hence, as government, the focus on the Water Boards and Eskom.

On the prioritisation of artisans and electrical artisans, he said a program had been started through the Municipal Infrastructure Support Agent (MISA) but they were focusing more on the water related artisans than the energy artisans at present. The matter of districts and local municipalities was an issue that had been put on the agenda for policy review. COGTA had not looked at whether corruption was a factor in municipalities not paying for electricity.

On whether municipalities were paying Eskom within 15 or 30 days, he said that municipalities were complying and servicing their current debt predominantly paying according to the 30 day cycle. COGTA had not looked at the issue of debt by businesses as municipalities should use their credit control mechanisms to collect from businesses.

Mr Madonsela replied on the prioritisation of the Water Boards and Eskom, saying that Mr Sigidi had said that Eskom and the municipalities could not go to court. They could go to court but one had to exhaust all internal remedies. On what steps were being taken against national and provincial government, lots of work had been done. Task teams have been set up to assist with the collection of debt owing to municipalities. Between September and December 2014 R1.5b had been paid to municipalities. A challenge had been that many invoices had been contested by the departments so accounting officers were reluctant to stick their necks out and pay an unverified debt. The Department of Public Works had engaged a service provider to verify debts on behalf of departments and a second phase of work would be finalised in September 2015 which should see the remaining debt to municipalities being finalised. A rider was introduced where if there was a dispute, the national and provincial departments were asked to pay at least 80% of the debt upfront even while the verification process unfolded.

On the powers and functions of district municipalities, he said it was a project uppermost on the radar and they would give an update in future engagements with the Committee. It was important.

Mr Ramjathan said Treasury was making the point that the non payment of creditors affected the economy and in particular the viability of SMMEs. While Eskom and the Water Board were on top of the list, there was concern also for smaller businesses.

He said no municipalities had been placed under section 216 in this process. In the event municipalities breached agreements set now, it may lead to an intervention under section 216.

On progress with the other municipalities, Treasury had met with 29 of the 59 municipalities involved. Provincial departments had been requested to assist in meeting with the remainder. Treasury was concerned with the municipalities it had not yet met. There was concern about their viability. SALGA had been very helpful in getting arrangements between municipalities and Eskom into place.

On government debt, there was a task team in place to assist with government debt payments. As much as the equitable share was there to take care of the poor, the trend was that municipalities were revolving their credit payments around the equitable share tranche which was a concern. Many municipalities had an equitable share of R129m while their creditors list was R550m. It had to be borne in mind that the equitable share had to sustain the municipalities for three months. This was a huge problem. For many municipalities the creditors list far exceeded the equitable share. A concern for discussion was that if no payment was made to Eskom by the 15th day, the municipality accrued interest.

He said the theft of water and electricity was a form of corruption. Property rates were used to cross subsidise but there was a fine line as to what the community could pay. If payments crossed above that line, then the bad debt risk provision had to be increased.

Mr Madonsela said he did not have a list of businesses at hand that owed money to Eskom and the Water Board. He said supplying electricity was a municipal function that Eskom could not do. The real answer lay in the state and people developing a culture of paying and this would not be easy but it needed to be confronted. It could be started with municipalities supplying quality services efficiently. Good service delivery would empower a culture payment for services. This would need multi-party buy-in as one could not have political parties saying vote for me for the provision of services and similarly MPs and government officials had to take the lead. How many MPs were up-to-date on their municipal payments?

South African Local Government Association (SALGA) briefing
Mr Thabo Manyoni, SALGA Chairperson, said he was present to share SALGA’s observations about the the withholding of the equitable share to 59 municipalities. The major issue was about how it had been implemented. The matter could have been handled better if Treasury had stuck to the intergovernmental relations framework especially in light of unviable municipalities which had to survive. Hence the work of the Municipal Demarcation Board was important. He said municipalities had disputed invoices from Eskom and now Treasury was withholding its equitable share. Treasury should have indicated the invoices they had trouble with. The MFMA allowed 30 days to pay yet Eskom required payment within 15 days. The 30 days was a law while Eskom’s 15 days was a rule not a law.

Mr Mpho Nawa, SALGA Deputy Chairperson said, in answer to a Member’s question, that while the Minister had referred to corruption he did not bluntly say that local government was corrupt.

He gave a background to the withholding of the equitable share and said a 6 March email was sent by Treasury to about 60 municipalities requiring them to comply with certain measures in dealing with their debts to Eskom and Water Boards. The deadline for this compliance was 13 March, failing which Treasury would withhold the allocation due on 22 March. Very little time was allowed for internal municipal discussion as a special council meeting needs at least 7 days’ notice. SALGA wrote to the Minister of Finance on 9 March requesting that this action be held in abeyance until a meeting was held between the Minister and SALGA to find amicable and sustainable solutions to the matter. To date such a meeting has not been held and a letter of reminder about the request was sent on 17 April by SALGA. Another letter was also sent to the President requesting his intervention on the matter before SALGA could formally lodge a dispute.

On 30 March SALGA was advised by the affected municipalities that each did not receive the equitable share (ES) allocation and that they were battling to pay staff salaries, other creditors and to render general services He said the equitable share was not a conditional grant. A meeting was held on 1 April to seek an urgent resolution and get clarity on the matter. A special National Executive Committee (NEC) of SALGA was convened on 2 April to deliberate on the matter. Amongst the resolutions taken by the NEC were that SALGA obtain a legal opinion on the constitutionality of the action by Treasury as it viewed the actions of Treasury as unconstitutional.

It continued to engage Treasury and COGTA so that viable and sustainable solutions were found to the management of creditors (not just Eskom and Water Boards) and debtors by municipalities. It called on Treasury to take a balanced approach on the matter, for example, equally demanding that national and provincial governments honour their debts to municipalities. It urged municipalities to aggressively initiate a concerted credit control drive. SALGA is concerned about the lack of consultation before this action was taken as it has dire implications for local government. Despite the B2B programme and action plans being implemented in municipalities, drastic action was taken, without prior dedicated support and interventions, as contemplated in Section 154 of the Constitution and Section 34 of the MFMA.

SALGA noted that some of the municipalities were unjustly penalised based on incorrect information by Treasury. SALGA raised a concern about the ability of affected municipalities to function without the allocation. SALGA requested to be included in the task team that deals with this matter and expressed a desire to participate in the War Room so that it can be part of the solution. SALGA is concerned about the effect of this on the poor and vulnerable, as the equitable share financed Free Basic Services. The preferential treatment of two creditors may negatively affect other creditors.

SALGA has been part of all the interactions between Treasury and the affected municipalities. Impacted municipalities were struggling to meet their current account payments to Eskom and the Water Board.
The longer the equitable share was withheld, the feedback from municipalities was that there would be an impact on operations and service delivery. The withholding of the equitable share remains a contentious and an unsustainable instrument. Municipalities were sometimes not charging cost-reflective tariffs for electricity for affordability reasons.
Water/electricity losses were extremely high. He then listed a number of actions municipalities would have to address as a way forward.

Mr Parks Tau, SALGA NEC member, said the matter was raised with Eskom and he expressed his concerns that the electricity for an entire community (Soweto) was switched off for 10 hours and regularly for four hour periods. He said no part of the equitable share had a credit control provision. Treasury had decided arbitrarily to withhold the equitable share. It was not a conditional grant and SALGA had sought senior counsel opinion which was that Treasury had not acted in line with the law. They had ascertained that electricity tariffs might have been wrong and the tariffs were done by NERSA, not the municipalities. In any event, the tariffs were for a basket of goods and services that municipalities supplied, yet municipalities had to apply to different tariff regulators. This did not allow for the full picture to be presented when applying for tariffs. Treasury’s actions had been inconsiderate and SALGA had not yet received any response to written correspondence engaging the Treasury.

Discussion
Mr Hlengwa said the biggest issue was that the political heads were not present at the meeting to provide policy responses. It was not healthy if SALGA had to take Treasury to court and the matter should be prioritised. Eskom’s point of view also needed to be heard so it might require a multi portfolio approach.

Mr Mileham said Treasury’s decision was not taken under section 216, so under what authority was the decision to withhold the equitable share taken? He said to the COGTA Director General that national and provincial accounting officers did not want to stick their necks out but municipalities were asked to stick their necks out and pay invoices that they were querying from Eskom. He said that only 13 of the municipalities identified for the withholding of equitable share funds had ever been sanctioned under section 139. If a municipality was under administration, the accounting officer would be the administrator appointed by the province and therefore province should be held accountable. Comment had been made that the equitable share was to provide bulk services for the indigent, so if the equitable share was withheld then surely the indigent would suffer. Why has Treasury not yet met with those municipalities that have not yet responded if the matter was so important. Why was the interest rate charged on overdue accounts not discussed with Eskom?

Mr A Mudau (ANC) said he had heard that ring-fencing of electricity funds is against chapter 4 , section 17 of MFMA  and section 28 and section 41 of Local Government Municipal Systems Act.

Mr Matlhoko said the questions being asked should be directed to the Minister not the officials.

Mr A Masondo (ANC) said that there was a sense of arrogance when he had had interactions with Eskom officials in the past and these officials should stop acting as if they were public officials. Treasury as a department was viewed as a department with unlimited powers overriding even political considerations. SALGA had made a strong case which deserved attention.

Mr Ramjathan explained that no municipality was invoked under section 216. They were invoked under section 65 of the MFMA. Treasury was not a debt collector. Eskom and the Water Boards had been targeted because they had the highest amounts owed. If these utilities were neglected, it could result in downgrades to the sovereign debt ratings which would affect everybody on the ground. If there were disputes raised with Eskom, municipalities had demonstrated that money had not been kept aside. If there was a dispute with Eskom, they should keep money aside to pay for the service. Municipal cash flow suggested that no money had been kept aside and this was a concern to Treasury.

Mr Madonsela said a fuller session was needed with the relevant Ministers present and COGTA would await an invitation to such a meeting. He would be good idea for Eskom to be present at such a meeting but the discussion should not be limited to Eskom and should include the Water Boards and the relevant Minister so that the outcome of the meeting could result in work being done.

Mr Mileham, addressing Mr Ramjathan, said section 65 had nothing to do with the withholding of funds. To the COGTA Director General, he asked who the accounting officer was according to section 139? Why was the interest rate and the 15 day period for repayment not discussed with Eskom?

Mr Sigidi replied that there had been discussions on the interest rate at a technical level. What was needed was discussion at Eskom Board level or at Department of Public Enterprises level.

COGTA Director General, Mr Madonsela, replied that as to who was responsible under section 139 was a matter of law and he would respond in writing to the question.

Mr Ramjathan said that section 65 had to be read in conjunction with section 18(1) of the Division of Revenue. He would provide the list of municipalities requested.

Mr Tau (SALGA) said he shared the concerns of members and it appeared that Treasury was not clear on which law was being used. He asked Treasury and the Department why Eskom and the Water Boards received preferential treatment. There was no law that said Eskom and the Water Board ranked higher so it was an arbitrary decision. Who moved Eskom ahead into a preferential creditor position? The matter of withholding the funds had to be resolved. It was unfortunate that SALGA should seek recourse to the courts but SALGA would consider it if it was placed in an unviable position.

The Chairperson said the Committee would hold the proposed meeting involving all relevant departments and Eskom and the Water Boards. He appreciated the challenges facing municipalities that were non-viable.

The meeting was adjourned.