Eskom debt owed by municipalities; SONA impact on local government, with Minister

This premium content has been made freely available

Cooperative Governance and Traditional Affairs

21 February 2017
Chairperson: Mr M Mdakane (ANC)
Share this page:

Meeting Summary

Eskom said that they were making good progress with implementing the Promotion of Administrative Justice Amendment Act (PAJA) process initiated in November 2016. The PAJA process has helped Eskom recover debt of R1.3b. The total overdue debt had been growing over the past three years and only started decreasing after implementation of the PAJA process. The combined debt of the top 20 debt defaulters was R7.39b. The solution was to move municipalities from post payment to prepaid meters. Eskom had also agreed to resolve the top five issues raised by the municipalities: Eskom would decrease the interest rate charged on overdue balances from prime plus 5% to prime plus 2.5%. Eskom would change the payment period on municipal bulk accounts from 15 days to 30 days. Eskom would change its payment allocation policy to allocate payments to capital first and then interest. Eskom would allow municipalities to pay connection charges over a 20-year period at a relevant interest rate instead of cash up front.

National Treasury presented the financial status of municipalities that owed Eskom and spoke to the structure of the local government equitable share formula. The new equitable share formula corrected flaws and had a more redistributive structure. The transfers were designed to fund services for poor households, it was never intended to fully fund municipalities. Treasury then spoke to whether municipalities were using these grants to pay Eskom as envisaged, their performance and their audit outcomes as well as the state of municipalities’ finances. The audit opinions of these municipalities were evidence that financial management was in disarray.

SALGA focused on three challenges experienced by municipalities: constitutional authority, financial challenges and institutional challenges. The executive authority of municipalities in respect of electricity reticulation was not recognised by all role players in the energy sector. There had been no reconciliation of ESKOM claims on historic debt. There had been no real progress with respect to the resolution of debt owed to municipalities by national and provincial departments. There was a lack of tariff parity in municipalities between areas serviced by Eskom and those serviced by the municipality itself. Municipalities were being charged a penalty for the whole year if it exceeded the Notified Maximum Demand and this did not take into account new connections as part of the electrification program. Municipalities were thus penalised for increasing its area of service delivery. Eskom had proposed a “revenue collection” process where it installed pre-paid meters and used its vendors to sell electricity, but this was flawed because municipalities would remain liable for Free Basic Electricity, would receive no income from electricity yet the operation and maintenance of the grid would remain the responsibility of municipalities.

Department of Cooperative Governance and Traditional Affairs  (COGTA) said there was a culture of non-payment in society which in certain cases affected the credit rating of institutions negatively and more pertinently. Many SMMEs were on the brink of collapse as the result of non-payment by municipalities. Certain municipalities had become persistent defaulters. The challenge faced by Eskom extended to other major creditors, like the water boards.  Government itself had adopted the culture of non-payment and national and provincial departments owed municipalities for property rates and for services rendered.

Members said Eskom had every right to be paid for the services which they delivered. Eskom was not getting its money from municipalities and so ended up going to NERSA asking for price increases. The problem was that municipal managers and CFOs had no idea what they were doing because they were not trained in negotiating deals. The equitable share was being used to buy luxury motor vehicles. It was criminal and these officials had to be held to account. Members said repayment arrangements were not affordable or realistic. What was Treasury doing to decrease the burden on municipalities. If Eskom went the route of prepaid meters, from where would municipalities get their revenue to pay off its debt to Eskom? Members said Matlosana City had the capacity to pay Eskom but there was no municipal manager nor a CFO. How could one expect them to honour agreements if there was no leadership? With whom was Eskom signing the debt agreements? On the question of payment within 15 days, Members asked if they were charged after fifteen days or at the end of the month because this would mean municipalities were charged twice. Who was going to service the prepaid meters? How would the balance of debt by municipalities be repaid and how would they generate the money to honour the agreements with Eskom? The Committee needed to see the bigger picture of who owed what, to whom. Members were concerned whether there were adequate monitoring systems in place to ensure that grants allocated to municipalities were used to pay Eskom. What was Eskom’s debt collection policy? What informed Eskom to have a 15-day payment policy? Eskom had installed prepaid electricity in Soweto. What were the problems it had encountered there?

Members asked what the total debt owed to Eskom was; did role players meet regularly to discuss issues rather than only meet when there was a crisis; who the other creditors were who prioritised over Eskom; how old was the Soweto debt and had any been written off. Members said the 2016 inter-ministerial task team was to look in depth and analyse the problems between Eskom and municipalities, but to date, there were only recommendations for the short term. What had COGTA done to ensure the top 20 defaulters met their payment agreements with Eskom; what was COGTA doing about the high operating costs of municipalities; what was COGTA strategy for poor revenue management by municipalities as this was an old issue; leadership vacancies in municipalities; was Eskom only dealing with the top 20 defaulters and these were just the tip of the iceberg; was COGTA playing a meaningful role because it was the custodian of municipalities; what here Eskom's contingency plans; what was being done currently to ensure that Eskom stopped cutting electricity.

Minister Des Van Rooyen said that lots of work had been done around capacitating municipalities and that competency requirements were prescribed. It was wrong to generalise that all municipal managers and CFOs were incompetent. He said a lot had happened post the inter-ministerial task team meeting. There had been focussed interventions on 20 municipalities and the total municipalities had been 64 when it had started. He said the ‘Back2Basics’ (B2B) had provided for constant monitoring for all municipalities in the country. Of the top 20 defaulters, only two had experienced disconnection. He said it was not at a stage that one could call it a crisis. A joint team had been established led by the Department of Public Works to verify money owed to municipalities. There was, however still a culture of non-payment in the community which was holding development of the economy to ransom. Minister Van Rooyen said he was concerned that there was an impression that no work was being done on remuneration, this was not the case. Regulations had been introduced which were being enforced.

On State of the Nation Address (SONA), Minister Van Rooyen said the key highlights were the development of a conducive environment for radical socio-economic transformation and this elevated the role of COGTA. Secondly it was about how to use the budget provisions to expand access and employment for the less privileged. He said COGTA had made progress on popularising Cabinet approved integrated urban development frameworks.

COGTA said SONA had implications for municipalities and the Department would use B2B as the anchor for transformation. The Department went through the highlights of SONA 2017. Local Government would remain the only space for implementation of national programmes and projects and therefore coordination and cohesive state action in municipalities was critical for the integrated delivery of services. A pre-condition for engaging in developmental outcomes was to do the basics right. Hence the importance of B2B which was starting on its second phase targeting programs and projects that had high visibility and a direct impact on service delivery which would affect a broad segment of citizens and bring a noticeable change in the lives of ordinary people.

In response to SONA, COGTA would prioritise and target municipalities receiving disclaimers for more than three years; look at  revenue enhancement; the appointment of senior municipal managers; resolve the misalignment between Treasury and COGTA regulations on minimum competency requirements; look at service and infrastructure and the state of municipal technical capacity and capability; put in place regional support contractors to assist municipalities to improve infrastructure delivery and operation; mobilise more funding for rehabilitation, refurbishment and replacement of ageing infrastructure; from government grants and loan funding, make municipal infrastructure procurement more efficient; it would strengthen the role of district municipalities and strengthen the capacity and role of provincial COGTA departments; continue to promote a harmonious relationship between Traditional Leadership and Local Government; and facilitate access to land for development by municipalities.

Members said constant reference had been made that chiefs must release land for municipalities to develop; on what legislation were municipalities relying when they said land was communal land and a communal property association was a legal entity; and set aside time for a thorough discussion on land.

Meeting report

Eskom presentation on municipal debt
Mr Matshela Koko, interim Eskom CEO, said that while total overdue debt, including interest, was R10.2b, they saw the end in sight because they were making good progress with implementing the PAJA process.

Eskom currently had 54 defaulters where payment arrangements had been finalised and supported by Council resolutions. eMahlahleni and Msukaligwa municipalities had defaulted on their payment agreement and were not honouring their current account. They were therefore subject to daily scheduled interruptions.
The total overdue debt had been growing over the past three years and only started decreasing after implementation of the PAJA process. Average debtor days were worsening and overdue debt was in excess of 54%. The escalating trend in municipal debt seen over the past three years was not sustainable and the Soweto area had the largest debt. The PAJA process has helped Eskom recover debt of R1.3b.
The combined debt of the top 20 debt defaulters was R7.39b. He said the solution was to move municipalities from post payment to prepaid meters.

Eskom had also agreed to resolve the top five issues raised by the municipalities: Eskom would decrease the interest rate charged on overdue balances from prime plus 5% to prime plus 2.5%. Eskom would change the payment period on municipal bulk accounts from 15 days to 30 days. Eskom would change its payment allocation policy to allocate payments to capital first and then interest. Eskom would allow municipalities to pay connection charges over a 20-year period at a relevant interest rate instead of cash up front.

National Treasury: Financial status of municipalities with Eskom debt
Ms Malijeng Ngqaleni, Treasury Head: Intergovernmental Relations, spoke to the structure of the local government equitable share formula (LGES). Transfers were designed to fund services for poor households, it was never intended to fully fund municipalities. The local government fiscal framework was very different in urban and rural areas and the new formula corrected flaws and had a more redistributive structure. Redistribution to poorer resourced municipalities was achieved through the Division of Revenue Act.

A Treasury official then spoke to whether municipalities were using the grants to pay Eskom as envisaged. He gave an analysis of the top 20 municipalities which owed money to Eskom. The audit opinions of these municipalities showed evidence that financial management was in disarray. Many municipalities were persistently distressed and this was concerning as municipalities were more than sufficiently subsidised.  When budgeting, municipalities were not taking secondary cost into consideration and their billings and collections were less than the bulk cost, making the electricity provision function unsustainable and unfunded budgets contributed to the problem. In all municipalities, amounts owing to creditors exceeded the cash at the end of the second quarter. Apart from the Eskom debt, the bigger problem was amounts owed to other creditors.

Many municipalities were not aware of their consumption patterns for bulk services. There were high operating costs so a large part of the equitable share was used to pay salaries. Tariffs for electricity and water tariff setting were not cost reflective, Theft/losses of electricity equalled as much as 50 per cent of purchases in some cases. Poor asset management lead to infrastructure failure and increased losses. Poor revenue management meant that payments due to creditors far exceeded revenue collected. Even though municipalities had adopted cost containment measures, the reality was that many were not practicing the measures. There was no evidence of reprioritisation of budgets in terms of importance. Municipalities were not utilising the LGES subsidisation for poor households as intended. Poor leadership and weak financial management led to mismanagement of finances, as reflected by poor audit outcomes, which in turn allowed the debt to escalate. There was a lack effective internal controls.

South African Local Government Association (SALGA): municipal challenges with Eskom debt
Ms Lorette Tredoux, Executive Director: Governance and Intergovernmental Relations (IGR), focused on three challenges experienced by municipalities: that of constitutional authority, financial challenges and institutional challenges.

The executive authority of municipalities in respect of electricity reticulation was not recognised by all role players in the energy sector. SALGA proposed that the executive authority of municipalities in terms of electricity reticulation be recognised and that the National Energy Regulator (NERSA), in granting licences, require legislative compliance by Eskom, including a requirement to sign a Service Delivery Agreement (SDA).

She pointed out that no reconciliation of ESKOM claims has been done on historic debt. No determination has been made on which portions of the amounts claimed have prescribed. SALGA proposed that Treasury assess the historic debt owed by municipalities to Eskom to determine the actual amount due and payable.

There had been no real progress in the resolution of debt owed to municipalities by national and provincial departments. SALGA proposed that the task team appointed to resolved government debt owed to municipalities submit a revised action plan to resolve the matter within a fixed timeframe and that Treasury, COGTA and SALGA develop proposals on how to address historic debt owed to municipalities.

There was a lack of tariff parity in municipalities between areas serviced by Eskom and those serviced by the municipality itself. Municipalities were responsible for the electricity consumed by traffic lights and public lighting in areas where Eskom reticulated to end users and municipalities covered Free Basic Electricity in Eskom reticulation areas.

Municipalities were unable to impose surcharges in Eskom supply areas, thus undermining their ability to generate revenue from electricity user fees and to cross subsidise other non-trading services. SALGA proposed that the signing of a service delivery agreement would allow municipalities to levy a surcharge in Eskom areas to address disparity and to fund additional expenses related to electricity.

SALGA proposed that Eskom enter into affordable and sustainable payment agreements and to suspend interest once such agreements have been reached and that COGTA, Treasury and SALGA develop proposals on how to assist non-viable municipalities.

On institutional challenges, she said that a penalty was charged against the municipality in the event of the Notified Maximum Demand (NMD) being exceeded, but the penalty was not limited to the month it exceeded but for the whole year. In addition, the NMD did not take into account new connections as part of the electrification program. Municipalities were thus penalised for increasing its area of service delivery.

Eskom had proposed a “revenue collection” process where it installed pre-paid meters and used its vendors to sell electricity, thus recovering current and historic debts, but this was flawed because municipalities would remain liable for Free Basic Electricity, would receive no income from electricity and the operation and maintenance of the grid would remain the responsibility of municipalities.

Department of Cooperative Governance and Traditional Affairs (COGTA)
Ms Zanele Ndlaleni, Senior Manager: Revenue Management at COGTA, said she would not cover points of her presentation that had already been raised by other presenters. There was a culture of non-payment in society which in certain cases affected the credit rating of institutions negatively and more pertinently, many SMMEs were on the brink of collapse as the result of non-payment by municipalities. Certain municipalities had become persistent defaulters. The challenge faced by Eskom extended to other major creditors, like the Water Boards.  Government itself had adopted the culture of non-payment and national and provincial departments owed municipalities for property rates and for services rendered.

Discussion
Ms N Mazzone (DA) said Eskom had every right to be paid for the services which they delivered. Eskom had negotiated every means possible to get payment made. Eskom was not getting its money from municipalities and so it ended up going to NERSA asking for price increases. She felt that SALGA had used up whatever negotiation room they had. The problem was that municipal managers and CFOs had no idea what they were doing because they were not trained in negotiating deals. The Equitable Share was being used to buy luxury motor vehicles. It was criminal and these officials had to be held to account.

Ms D Rantho (ANC) spoke to the unfunded budgets mentioned by Treasury. Repayment arrangements were not affordable or realistic. Municipalities were currently in debt and she did not see them coming out of that debt. What was Treasury doing to decrease the burden on municipalities? If Eskom went the route of prepaid meters, where would municipalities get the revenue to pay off the debt to Eskom? In Aliwal North, the province and departments were not paying the municipalities what was owed to them.

Mr E Mthethwa (ANC) said Matlosana City had the capacity to pay Eskom but there was no municipal manager or a CFO. How could one expect them to honour agreements if there was no leadership? With whom was Eskom signing the debt agreements? On payment within 15 days, he asked if they were charged after fifteen days or at the end of the month because this would mean municipalities were charged twice. Who was going to service the prepaid meters? How would the balance of debt by municipalities be repaid and how would they generate the money to honour the agreements with Eskom? Another meeting was needed because in future water and sanitation could cut supplies and there would be another crisis. The Committee needed to see the bigger picture of who owed what to whom.

Ms Maluleke (ANC) was concerned whether there were adequate monitoring systems in place to ensure that grants allocated to municipalities were used to pay Eskom. What was Eskom’s debt collection policy? What informed Eskom to have a 15-day payment policy? Eskom had installed prepaid electricity in Soweto. What were the problems it had encountered there?

Mr N Masondo (ANC) asked what Eskom’s total debt owed was. Was it the R10b or R13b as mentioned in different places in the presentation? He asked what the bigger picture was for distressed municipalities. Why were there problems? Did role players meet regularly to discuss challenges rather than meet only when there was a crisis? Who were the creditors who were owed and were prioritised over Eskom? How old was the Soweto debt and had any been written off?

Ms D Letsatsi-Duba (ANC) said her main concern was that the 2016 inter-ministerial task team was to look in depth and analyse the problems between Eskom and municipalities, but to date, there were only recommendations for the short term. According to these recommendations, Emahlahleni had to present plans but there were no plans submitted by Emahlahleni to date. What had COGTA done to ensure the top 20 defaulters met their payment agreements with Eskom? What was COGTA doing about the high operating costs of municipalities? Poor revenue management was an old issue, could the Department assist in this regard? Who would carry out the recommendations while there were vacancies and no leadership in municipalities?

A Committee member said he was worried because the Committee was only dealing with the top 20 defaulters and these were just the tip of the iceberg. He was not sure if COGTA was playing a meaningful role because it was the custodian of municipalities. A big picture was needed of what was happening in municipalities as the Committee were like fire fighters putting out fires. What had Treasury done to alleviate the problem?

Mr C Matsepe (DA) said the situation would not turn around until the Minister said ‘enough is enough’. The bloated municipal organisational structures employed people with no skills.

Mr Ben Ngubane, Eskom board chairperson, said Eskom saw prepaid meters as the solution to the debt problem. Eskom could have an agreement where a subsidy could be given to back to municipalities.

Mr Koko, Eskom CEO, said that even though the court had entitled Eskom to cut electricity, it had looked for alternative solutions. Overseas funders were saying that Eskom was failing to collect money from government bodies which were not repaying Eskom. Eskom was now boxed in. Eskom had signed agreements with people who were duly delegated and authorised to sign. Historically, Eskom had had agreements to pay coal suppliers in seven days therefore Eskom’s 15-day payment term for municipalities. It had however agreed to change this from 15 days to 30 days.

Eskom had disconnected Soweto twice already and written off debt twice, so writing off debt was not the solution. It was not about having agreements, it was about meeting these agreements. The total debt outstanding was R10.2b. Eskom had made a proposal to municipalities that Eskom would pay for the installation and servicing of prepaid meters. He took full responsibility for having let the debt to grow to the current amounts. Eskom needed a tariff that would support the economy, as currently it was restraining the economy.

Minister Des Van Rooyen said that lots of work had been done around capacitating municipalities and that competency requirements had been prescribed. It was wrong to generalise that all municipal managers and CFOs were incompetent. A lot had happened post the inter-ministerial task team meeting. There had been focused interventions on 20 municipalities and the total municipalities had been 64 when it had started.

‘Back2Basics’ had provided for constant monitoring for all municipalities in the country. Of the top 20 defaulters, only two had experienced disconnection. It was not at a stage that one could call it a crisis. A joint team had been established led by the Department of Public Works to verify money owed to municipalities. There was, however still a culture of non-payment in the community which was holding development of the economy to ransom.

Ms Ndlaleni, COGTA, explained that Matlosana City had no municipal manager or CFO but was led by an administrator under section 179. There had been an initiative to support 30 municipalities and 20 other municipalities. The creditors were predominantly the water boards, Eskom and the Auditor-General.

Ms Letsatsi-Duba asked what the actual contingency plans of Eskom were. What was being done currently to ensure that Eskom stopped cutting electricity?

Ms Ngqaleni, Treasury, said municipalities tabled unfunded budgets. The budgets that were not realistic. Municipalities overestimated anticipated revenue and based their expenditure on that revenue while Eskom’s agreements with the municipalities had not been built into the budgets. There was a need to prioritise spending by municipalities, even if there was more money. Treasury had said it would hold back the money of municipalities until it could see that there was a plan and that the municipalities were executing the plan. While the Equitable Share was unconditional, Treasury did monitor spending. The remuneration model where the local government CFO remuneration was more than at the provincial level was wrong.

Minister Van Rooyen said he was concerned that there was an impression that no work was being done on remuneration, this was not the case. Regulations had been introduced which were being enforced.

State of the Nation Address (SONA) impact on local government
Minister Des van Rooyen said that key highlights were the development of a conducive environment for radical socio-economic transformation and this elevated the role of COGTA. Secondly it was about how to use the budget provisions to expand access and employment for the less privileged.

Mr Charles Nwaila, Director General: Department of Traditional Affairs, said SONA had implications for municipalities and the Department would use ‘Back2Basics’ (B2B) as the anchor for transformation.

Mr Themba Fosi, Director General, Department of Cooperative Governance, went through the highlights of SONA 2017. The State of the Nation Address focused strongly on economic emancipation and radical socio-economic transformation. In the Local Government context, local government remained the only space for implementation of national programmes and projects and therefore coordination and cohesive state action in municipalities was critical for the integrated delivery of services. A pre-condition for engaging in developmental outcomes was to do the basics right, hence the B2B which was starting on its second phase which would target programs and projects that had high visibility and a direct impact on service delivery; would affect a broad segment of the citizens; and bring a noticeable change in the lives of ordinary people.

In response to SONA, COGTA would prioritise and target municipalities receiving disclaimers for more than three years; look at  revenue enhancement; the appointment of senior municipal managers; resolve the misalignment between Treasury and COGTA regulations on minimum competency requirements; look at service and infrastructure and the state of municipal technical capacity and capability; put in place regional support contractors to assist municipalities to improve infrastructure delivery and operation; mobilise more funding for rehabilitation, refurbishment and replacement of ageing infrastructure; from government grants and loan funding, make municipal infrastructure procurement more efficient; it would strengthen the role of district municipalities and strengthen the capacity and role of provincial COGTA departments; continue to promote a harmonious relationship between Traditional Leadership and Local Government; and facilitate access to land for development by municipalities.

The Chairperson said the topic needed further discussion because there were still a lot of non-viable municipalities. He asked how one could ensure that what an entity did, did not contradict what was already government policy.

Mr C Matsepe (DA) said constant reference had been made that the chiefs must release land for municipalities to develop. On the basis of what legislation were municipalities relying when they said this as the land was communal land and a communal property association was a legal entity.

Mr Masondo proposed that the land matter not be discussed until a time slot had been identified to have a thorough discussion on the issue.
 

An ANC committee member agreed with Mr Masondo. The presentation assumed there was harmony between leaders and municipalities but this not so on ground.

The Chairperson said perhaps a joint meeting with the Department of Land Affairs should be arranged.

Minster Van Rooyen said the Department had made progress in popularising Cabinet approved integrated urban development frameworks.

The meeting was adjourned.

Share this page: