Defaulting municipalities: Eskom briefing

Meeting report

Introductory Remarks
Dr Ben Ngubani, Board Chairman, Eskom, made a brief introduction about how defaulting municipalities affected the power ttility, and subsequently the nation in its supply of electricity. He noted that the municipal debts are so significant that they have an impact on the overall electricity supply, where Eskom resorts to cutting its supply to local municipalities. Eskom supplies the municipalities, and they supply consumers i.e. households and businesses, and in turn pay Eskom.

Briefing by Eskom
Mr Matshela Koko, Interim Group CEO, Eskom, explained that Eskom had initiated the Promotion of Administrative Justice Act (PAJA) process in November 2016, and on 5 January 2017 the High Court ruled that it may interrupt municipalities for non payment. The total overdue debt including interest at the end of November 2017 was R10.2 billion, as at 26 February 2017 the overdue debt has again increased to R9.9 billion from R9.5 billion at the end of January 2017.

Eskom currently has 54 (from Top 66 Defaulters) Payment Arrangements finalised supported by Council resolutions. Interruptions to eMalahleni and Msukaligwa in Mpumalanga were suspended on Wednesday 22 February 2017 until 03 March 2017 to allow these municipalities some time to remedy the breach of their agreements. The sustainable solution is to move municipalities from post payment to prepaid meters. Of the 180,000 customers in Soweto, Eskom has installed a total of 49,865 prepaid meters to date. The power utility is currently addressing the top five issues raised by municipalities, which include:

-proposing the rationalisation of Municipal Tariffs to reduce tariff options from 11 to 3;
-decreasing the interest rate charged on overdue balances from Prime plus 5% to Prime plus 2.5%;
-changing the payment period on municipal bulk accounts from 15 to 30 days;
-changing its payment allocation policy to allocate payments to capital first and then interest; and
-allowing municipalities to pay connection charges over 20 year period at relevant interest rate in stead of cash up front

The average debtors days increased from 55 to 65 days with 54% of debt overdue. The total overdue debt has been growing over the past three years and only started decreasing after implementation of the PAJA process. The top ten overdue municipalities are overdue by R6.241 billion, whilst the top 20 are overdue by R7.587 billion. There are only 66 municipalities that are overdue by more than R10 million, the three provinces contributing R7.648 billion include Free State (R4.481 billion), Mpumalanga (R2.324 billion), and North West (R0.843 billion). R8.6 billion of the R9.9 billion debt is overdue by more than 90 days, and of all the Eskom supplied areas, Soweto has the largest outstanding debt. So the collection efforts have been focused on Soweto by installing smart and prepaid meters. To date, 10 071 meters have been installed and 10 404 meters converted to prepaid and disconnected 17 350 customers in Soweto. As at end January 2017, Soweto’s debt was at R12.1 billion including interest, but only R5.291 billion excluding the interest.

In conclusion, he noted that Eskom is monitoring the adherence to payment arrangements with municipalities and it will implement PAJA if and when required.

Discussion
Ms N Khunou (ANC) said that the reality is that our people are not working, the rate of unemployment is very high and the inequality gap continues to get wider. These are the factors that need to be considered by Eskom before cutting electricity supply in municipalities that struggle to make payments. Secondly, green energy was not mentioned in the presentation and this is something that could help the rural communities. She asked about Eskom loans and where they come from and whether it is money that comes from the funders or financial institutions. Secondly, how many years is the debt going to continue, because if you live a debt for such a long time it becomes significantly high that people are not able to pay off that debt? Which brings the question, why was something not done when the debt was still low. Another reality that is troubling Eskom and municipalities is that people steal electricity, and some Eskom officials may be accomplices to this, so what is Eskom doing about this issue, if the power utility is aware of this.

The Chairperson appealed to the members to first deal with the trade receivables issues or ask questions related to the trade receivables account.

Mr Koko said that he had addressed upfront why it took this long to let the debt grow. Furthermore, it should have been done much earlier and for as long as he is the accounting officer he takes full responsibility for why this has been allowed to continue happening. In December there were convictions made, where four syndicates were convicted for 1000 counts of electricity theft, this was made possible by the fact that Eskom is working with the Hawks to address the issue. Every single month people are getting arrested, but Eskom is also upgrading its meters to minimise the losses.

Mr Louis Maleko said that Eskom took a technical approach in trying to minimise electricity theft with the Smart Meters being installed in households, which provides the power utility with the information regarding tampering, unusual activities, and how long ago electricity was loaded on the meter. This information is provided directly to Eskom by the smart meter, and it is monitored at an Eskom facility. The new technology is tamper-proof to a certain extent and it will help reduce electricity theft.

The R800 million figure is plainly caused by corruption, by people who exaggerated the invoices and it happened over five years. When it was picked up, the individuals who were involved which were senior level executives were identified and dismissed.

Ms Suzanne Daniels, Group Company Secretary, Eskom said there are a number of cases at the moment in that regard as well as criminal investigations that are going on. Some matters are with the CCMA and civil cases are going on.

Mr Koko said the Board’s direction on the matter is that dismissal is not enough, because this is the public purse so the money needs to be paid back. The civil and criminal cases will assist in recovering the money back.

Mr V Smith (ANC) said this is a very important matter, and the response that is being received from the acting CEO is very shallow and so if dealt with in this fashion a proper solution will not be reached. He suggested that this matter be dealt with some other time as a stand alone item on the agenda so that more details can be provided by the executive.

Mr D Ross (DA) fully agreed with Mr Smith's proposal, including all processes followed.

Mr Kekana also agreed and said that the Committee needs to go deeper into the responses provided by the delegation, so the matter can be deferred for a later scheduled meeting.

The rest of the members also agreed with the proposal.

Ms T Chiloane (ANC) shared her concern that the district that she comes from consists of four municipalities that are affected. Eskom took too long probably because it did not adhere to the Public Finance Management Act (PFMA) in a way that the systems were not occurring the way that they should be, because you do not have to wait for a debt to shoot up that high in order to act, you address it at inception when there are proper systems available.

With regards to reaching a workable solution with the municipalities, it was mentioned that some municipalities have paid the money (or part of it) and then Eskom stopped the interruptions in their areas. The money would have been paid but it is not the entire amount, probably so. She asked for more details on this matter – if the municipality defaults again, is Eskom going to go back to the interruptions, basically what is the sustainability of that agreement with those municipality? What is going to happen in the long term with the municipalities that are not able to pay back the money? Thirdly, the other issue is the potential danger that might be faced by municipalities – with communities resorting to social unrest and strikes.

With regards to the installation of the pre-paid meters, what is going to happen with the big businesses, because most businesses are also owing municipalities, are the meters also going to be installed in their premises? What is Eskom’s plan to solve that problem?

Mr M Hlengwa (IFP) said that it seems that there is no legitimate movement to reduce the debt, and from previous engagements (two years ago) with Minister Van Rooyen, the debt has been stagnant. He raised his concern whether the necessary seriousness is being applied to this. Whilst a portion of the blame may go to Eskom, it is not the collecting agent but it supplies the electricity. Municipalities may receive the monies but utilise it for other services with the thinking that Eskom will understand if they default in payment. Perhaps other collection methods need to be applied, and this is where the issue is.

There needs to be a detailed explanation on the 15 days cycle of collection, this matter was raised by SALGA a long time ago - the inconsistent collection cycle. Could that be the reason why the debt has increased or remained stagnant, and could that also be the reason why municipalities continue defaulting? The field needs to be levelled, otherwise it may be used as a defence mechanism for continuous defaulting in payment. He asked for a break down of municipalities to clarify the debt owing, in terms of how much they (municipalities) receive, how much they pay to Eskom and balances after payment. Finally, government departments’ debts also need to be listed as a line item for consideration, because in most instances you find that households are meeting their end of the deal but end up suffering due to defaulting businesses, municipalities and government departments.

Mr Ross said with regards to the debt, there is a common rule in law that the interest of the debt should not supersede/be above the capital amount, and asked if the executive of Eskom is aware of that. It seems that the interest has superseded the capital amount. The debt levels need to be looked at carefully. With regards to the income streams, the rights of paying consumers should be respected – Treasury should sensibly apply section 216 in the constitution so once the municipalities comply to that legislation the intervention can be withdrawn. For now it can be used until the municipalities pay up their debts in full. It would be helpful if there can be an open line to Eskom and Treasury around the times Eskom serves its notices for disconnections which is most likely around December.

With regards to contingent liabilities, he asked for an indication on why Eskom needs the guarantees (it receives a substantial share of the guarantees, but it does not impact on the budget deficit but the contingent liabilities) when the power utility turnover is over R20 billion. The guarantees certainly have an impact on the fiscus and the credit rating agencies are also watching that space. Lastly, he asked about the pricing methodology and determination, and whether inflation is taken into account in the price determination and how is the new build project funded. Also, what is the progress on the Medupi and Kusile power station?

Mr Koko said the billing system and revenue collection systems are solid, Eskom had always known about its debtors, and there is no doubt on how that fits in the PFMA. For example, the power utility went to the Constitutional Court this week, because there was a case of Matjhabeng municipality mayor against Eskom. The case stemmed from the Supreme Court of Appeal where a payment arrangement was determined which Eskom made an order of court for payment that the municipality failed to meet, which then became a contempt of court. The municipal manager appealed the verdict, and the case is now in the Constitutional Court. This deals with the controls, every single time the debtors are being watched closely. It is not an ideal process to undertake, but measures need to be taken when obligations are not met.

With regards to the businesses, they are going to be put on the pre-paid meters as well, because it would not make sense to do this only for households and municipalities, people would not understand. On the 15 day payment cycle, Eskom does not agree that it is the problem. Part of the issue is that there are municipalities that when you look at them they are just not viable municipalities, and there is nothing that Eskom can do about it. There is a team set up by Ministers (Cogta, Minister Van Rooyen and DPE, Minister Lynne Brown) involved to deal with constitutional issues outside Eskom’s control. The Ministers involved want to solve this.

The interest is not more than the capital, when you pay Eskom in the past the money paid would be directed to reduce the interest first, but now with the new agreement the money paid will go towards reducing the capital debt.

With regards to the section 216 approach this was a solution that was put before by the Director General in the Treasury. The rights of paying customers’ pain is felt by Eskom, but the issue is the municipalities and there is nothing that Eskom can do about it. However, something is being done about it through the new projects undertaken to reduce losses.

Mr Kekana indicated that R10 billion is a lot of money for a debt, he then asked for a comparative analysis for areas that Eskom supplied electricity directly to the consumers and those supplied through municipalities. Is Eskom currently contemplating a strategy to supply electricity directly to the consumers or is it going to continue doing so through the municipalities?

Mr T Brauteseth (DA) asked which municipalities are due for cut off in Mpumalanga. There is another one that is due for cut off next week on 13 March; can the team provide more information on that?

Dr Ngubani said the basis of our democracy was reconciliation, but reconciliation can not happen without justice. The economy is mixed but the capitalist elements are still very strong and dominant. The SOEs adopted a very capitalist framework from inception, that you get a service you pay, but government has been trying to address the social aspect of it by saying that there will be free basic electricity for the indigent. This can work very well if only municipalities straighten themselves up. Therefore, the basis to which free basic electricity can work becomes defective. Eskom is forced through the PFMA to follow very strictly the capitalist model, perhaps, the PFMA should be tweaked a bit to account for these things. The reason the debt was allowed to accumulate was because cutting electricity would have a huge impact on the economy and it would have led to instability. The issue needs to be revisited of continued disruptions, but one solution is that if municipalities can waive their constitutional right to be electricity distributors and give that to Eskom in terms of prepaid meters, and give them the surcharge which they would have earned anyway if they were collecting themselves, might work.

Mr Koko said that Eskom will exceed its electricity target and aims for universal access by 2019. It is correct that there is a debt collection problem but at the same time out of the top 66 municipalities, there is a payment arrangement with the 54 municipalities.

Mr Malinga said that Eskom is offering a technical assistance to municipalities. There is a programme that Eskom has with SALGA called Active Partnering. In that there is a list of how to cost tariffs and the pricing model because municipalities sell electricity at a loss, because there are leakages in the system. At a strategic level, there has been a lot of interactions and Eskom started at local councillor wards. There are teams of people working with the councillors and engaging the communities in the community forums. The second layer of engagement is engaging the mayors and municipal managers. In the provinces stated there are technical teams formed between government, provincial and local government and Eskom. At a higher level, the CEO and GE Customer Services with Cogta and National Treasury engage with municipal managers and there are a lot of continuous engagements where inputs are being received.

Mr Koko said part of the engagements include sending Eskom’s engineers to assist the municipalities to resolve their technical issues, revenue and financial management. The municipalities that were due to be cut off on the 13th are Thaba Chweu and Govan Mbeki Municipality=ies in Mpumalanga, but based on discussions and negotiations it has become clearer that there won’t be cuts. The other two have reached agreements with Eskom.

Ms Ayanda Noah, GE Customer Service, Eskom, said 42% of the revenue comes from the municipality, and it's important to understand this from a context point of view. The issue of supply is regulated by NERSA, Eskom sells to municipalities in bulk and they sell to their different customers where they have their own infrastructure and mechanisms. There is no continuity in terms of the connection. From an Eskom point of view, it has no sight on where the connections are, the status of their networks, which ones are on or off and which households are owing, so it just cuts the bulk supply. Municipalities have a lot of losses and sometimes they have customers that do not have any meter boxes at all, in some cases customers can afford but normally those who can not afford are normally on free electricity based on the provision of the municipality. With the prepaid system, Eskom will put in a meter that is secure and accessible to it, so the technology that is now going to be implemented does not allow people to defraud the meter boxes. In the process you can also get the municipality to lower their bill, so what is charged to them is lowered by virtue of the new technology, and this will be an opportunity to assist the municipalities to reduce their debts to Eskom.

On the revenue collection on the Eskom direct customers, there are systems in place and the customer will meet with Eskom and get their meter through the contract, the meters get more sophisticated depending on the level of the customer. Eskom can read through the system how much the municipality (or customer) is consuming, and so Eskom has means to monitor how the customer is using the electricity. In Sandton, Eskom is installing the smart prepaid meters and the programme will be finished later in September this year.

Mr Koko clarified that Eskom has no intention of taking over the duties of municipalities, what is in the plan is to provide the billing system and revenue services to the municipalities.

A Memeber shared her concern that the R10 billion debt was the case two years ago. Eskom says it is working with local government, and so it should come back to the Committee and report, maybe on a quarterly basis to provide an update on how things are moving in that regard. Most of the time when electricity is cut, it is only cut in the townships not the cities and suburban areas, and the marginalised people suffer the most.

Ms Chiloane asked a follow up question on the sustainability on the arrangements made with municipalities that initially were going to be cut. In terms of Eskom’s engagements with stakeholders, are there any engagements with stakeholders that are representing the communities.

Mr Booi asked what type of policy challenges are there or faced by Eskom, and are there internal regulations within Eskom to have ensured that the debt was kept low. Nothing has been said here about what role Eskom played to keep the debt low. Also, is Eskom managed in a proper way?

Mr Hlengwa did not think that it is fair for people who have paid their accounts and debts to be punished at the expense of those who do not pay. Punishment should be directed at those that are defaulting in payment. When Eskom cuts the power, the municipality does not provide transparency about the fact that it is not paying the money due to Eskom – it just points directly to Eskom. The people that are doing the injustice here must be the ones held accountable.

Mr Ross asked how the disconnection in the town affects the people who are already at a disadvantage, is Eskom engaging with NERSA as the regulator to see what the regulator can do to assist in the matter, in addition to that what do you think Parliament can do to also assist and strengthen the regulator. Secondly, what is the progress on the municipalities that are seeking exemption of payment from the court, and what is the position of NERSA is this regard.

Mr Booi asked how Eskom is dealing with Izinyoka, and communities to assist with criminality of electricity theft.

Mr Kekana asked a follow up on the areas that Eskom supply directly, are there payments received and what the payment level is and is that covered in the report.

Mr Koko said that in the areas that Eskom supplies the payment rate is 90%, but the biggest problem is Soweto. The PAJA process includes public participation and for communities to speak for themselves, voice out their concerns and Eskom also goes to local municipalities to advertise and set up meetings with the local communities to explain the issues.

Dr Ngubani said it is fair to hold Eskom accountable particularly with regards to public engagements and participation, because it can not only inform the municipality but also the provincial government and the local Member of Parliament in that area, so this is an approach that will be taken going forward.

Mr Koko said the indigent register is an issue, but Eskom’s hands are actually tied to deal with indigent registers but this will be handled by Cogta. The Mpumalanga case of the Emalahleni municipality was struck of the court roll yesterday. The payment agreements were done after an affordability analysis that was done by National Treasury and DPE for the payment arrangements, and SALGA came back to Eskom to review those arrangements. In addition, it is difficult to say that there will be no interruptions in the near future in those municipalities. There are sound internal processes in place at Eskom, and it is embarrassing how it allowed the debt to be that high. The internal processes are sound, and he takes full responsibility for where the debt is.

Mr Booi said that more information is needed on how Eskom allowed the debt to be that high, so that when the Committee members engage with other relevant and affected stakeholders, members can point out to legitimate information.

Mr Koko said between November and February Eskom collected R1.3 billion, the debt is currently R9.9 billion and at the end of the year the Power Utility projects to have the debt sitting at R9.5 billion, and between now and December it projects to collect about R400 million.

Mr Malinga said the NT engagements are very much around the tariffs, because the tariffs that Eskom and the municipalities charge to customers are different, so we have agreed with the municipalities to have a joint approach with SALGA included to rationalise tariffs in a way that the winter tariffs and the summer tariffs are adjusted appropriately. There is a standing forum and engagements with NERSA regarding the licensing and distribution business, where there is discussion about how to improve the services to the customers, so there are robust engagements with the regulator about the problems that the municipalities are having.

Ms Daniels said that there are a number of matters brought up by municipalities before the constitutional court regarding the direct supply of electricity, and between paying customers and non-paying customers. Eskom seeks to consolidate the matter so that the constitutional court can hear the matters at the same time, a date has been set and the lawyers have all agreed to the set date and the constitutional court will be available for a sitting on the set date. The challenges had so far been the notices to interrupt supply, a number of the applicants have raised the issue of direct supply from Eskom because municipalities and SALGA maintain that electricity supply is the exclusive right if the municipality. However, that is not so in terms of the constitution. The court has emphatically said that there is that dual responsibility. Eskom can enter into service delivery agreements with the municipalities, the roles and responsibilities need to be articulated explicitly.

Ms Noah said when the process started in December 2015 with cutting supply in municipalities, there has been progress made but there are also concerns about the sustainability of the payment arrangements. From a shareholder point of view there is a very deep concern about the non payments, as one may recall at some point (in 2015) Eskom had to dispose some of its capital equipment in order to raise equity and recapitalise. If on the one hand the revenue streams are not coming in or collected, it creates an imbalance and a spiralling cycle and the sustainability of Eskom becomes in question. In the last two years in dealing with Eskom debt, even though there are focus discussions around the debt, it is only a one sided conversation. In the work done with Cogta and the National Treasury, and provincial departments it has become very apparent that this is not just an electricity problem, there are issues that are affecting the payments. National Treasury has a report that shows that 71 municipalities in the country are not sustainable. Municipalities themselves are owed over R100 billion by a number service providers, but the amount owed by government departments is minimal compared to that and the broader point is that there is an issue of capacity in municipalities in terms of collections of payments and administration. Even though Eskom can go through a legal process to determine whether Eskom can supply electricity directly, the point is that there is an impact on whatever decision is reached. If the municipalities can take over the entire distribution sector, the question is whether the municipalities have the capacity to administer that service at that level and the readiness of municipalities to do so. There is also a price impact that consumers will have to face, so all those things will need to be balanced.

With regards to the funding model, there are policies that government has put in place in order to position poor households but the ability to have up to date indigent registers and to ensure that the free basic electricity is provided to those households is indeed important. Lastly, even though Eskom has not faced load shedding in 15 months the issue is that there are households that are still facing power supply due to infrastructure at distribution level that is not up to scratch.

Mr Jan Hattman, Chief Director: LGBA, National Treasury, said that the numbers that will soon be published is part of the second quarter report, the total creditors that municipalities owe to service providers is standing at R34 billion and that number since last year has increased by R6 billion. Ways and means need to be devised to deal with this issue decisively; otherwise, it will spiral out of control. The history of the debt has come a long way, in March 2015 when NT intervened, 59 municipalities – with the Eskom’s part it was standing at R6 billion, but now it is standing at R9 billion. All these municipalities that have signed the agreements it was just merely a compliance matter. Of the biggest 20 municipalities, the Treasury could only find one municipality that made provisions in its budget to entertain the agreement. There needs to be more effort collectively to deal with this issue.

R Hattman suggested that there needs to be proper research done investigating the comparisons between the areas that Eskom supplies electricity to directly and those that are supplied by the municipalities, and that information will be provided to the Committee. The whole issue about whether Eskom should intervene in changing the model, he cautioned that the fiscal arrangement has been designed in a particular fashion, and because this issue needs to be dealt with decisively, he advised that the model is not changed until the problem is addressed.

The reason it took so long for Treasury to intervene, the hard reality is that every time that Treasury wanted to intervene and switch off there has been legitimate interference. Now if Ministers and politicians intervene then Treasury is not put in a position to enforce credit control which is an essential vehicle through the PFMA to do the right thing, but we also understand the other side – the eloquent social balance.

The Chairperson said that the figures provided by Eskom, with regards to the capital debt and the interest, the interest appears to be larger than the capital. When Eskom impairs some of the debt, it impacts on the tariffs, so the people that actually pay end up suffering the consequences as well which is not ideal.

The meeting was adjourned.