Municipal Debt owed to Eskom: inputs by Eskom, COGTA, SALGA, National Treasury

Public Accounts (SCOPA)

16 May 2018
Chairperson: Mr T Godi (APC)
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Meeting Summary

SCOPA met with Eskom, Department of Cooperative Governance (COGTA), South African Local Government Association (SALGA), and National Treasury to discuss municipal debts owed to Eskom. The Committee was concerned about the dangers the mounting debt posed to the financial sustainability of Eskom and the economy.

Eskom had reported in its meeting with SCOPA on 6 March 2018, the amount owed by municipalities continued to grow from R9.5 billion in 2017 to R13.5 billion 2018 - a 42% escalation in one year. Since then, the new Eskom Board had been appointed and it had notably turned some worrisome issues in the organisation. Executives who were implicated in wrongdoing were no longer with the organisation. This allowed the Chief Executive Officer and his team to focus on the primary business of generating electricity. The outstanding municipal debt remains a key pressing challenges for Eskom, more so since it also faced serious financial challenges.

Collection of municipal debt requires a shift in approach. Stricter penalties had been imposed from increasing the period of interruption from four and half hours to six hours each day and 14 hour interruptions had been approved for non-responsive customers. However, efforts to collect debt through supply interruptions are interrupted by court interdicts. Eskom strived to collect the debt within the ambit of the law. Financial sustainability for Eskom will remain difficult if was not able to recover its debt. It needed bold decisions and an understanding that all stakeholders should do the right thing. Eskom pleaded with its debtors to fulfill their obligation to enable Eskom to fulfill its own obligations.

The Inter-Ministerial Task Team (IMMT) was formed in February 2017 and several meetings were held at a technical and provincial level and out of those meetings certain concessions were made to assist municipalities to pay their debts. These were: the rationalisation of Eskom’s municipal tariffs, decreasing the interest rate from prime plus 5 percent to prime plus 2.5 percent,             changing the payment period for municipal bulk accounts from 15 to 30 days, changing the payment allocation to capital first and then interest and allow municipalities to pay connection charges over a period at a relevant interest rate instead of cash up-front.

SALGA in its presentation contended that some of the concessions assisting the municipalities and most of the proposed interventions were only advantaging Eskom. SALGA reported that there were systemic and structural challenges affecting the ability of municipalities to pay with the greatest being the constitutional issue of electricity supply between Eskom and municipalities. SALGA alleged that the constitutional authority of municipalities had been undermined by Eskom for years. The license issued by NERSA to Eskom to reticulate electricity is defective as it bypasses the executive authority of municipalities.

Eskom in its presentation argued that by NERSA issuing it the licence, it gave them the right to service customers in those areas. It was a matter of legal interpretation. SALGA had informed the IMTT that it would be going to court to seek a declaratory order to define the roles of SALGA and Eskom in supplying electricity. The IMMT agreed that there should be an advisory panel to provide technical guidance on the constitutional issue of electricity supply between Eskom and municipalities. All other mechanisms had to be exhausted before going to court for a declaratory order.

The municipalities’ audit reports were studied to identify the cause of municipalities not paying. Stakeholders had also done assessments of this. It was found that there is gross financial mismanagement and misconduct in the municipalities. There was no leadership and proper governance which impacted on the functioning of municipalities and their ability to pay Eskom. Also, municipalities are operationally bloated and too much is spent on salaries. Emphasis was made that only once it is known what municipalities are spending on, the culture of non-payment will not end.

Members were concerned that the presentations did not propose collective actions to recover municipal debt. There had been no teamwork and instead it was more of a blame game than compromise and consolidation of proposed interventions. It could not be seen what had been done to solve the problems.

Members asked how Eskom considers it customer friendly to loan municipalities with a prime plus 2.5 percent interest rate. How was it customer friendly to charge interest on municipalities who owe you billions and evidently cannot pay you? If someone cannot pay the amount owed how will they be able to pay the interest? Another member expressed disapproval at Eskom interrupting electricity supply and that it was a serious violation of human rights. Another member asked about the interventions in the provinces that were doing exceptionally well and paying municipal accounts and debts. Members complained that the pertinent question of when the municipalities would pay Eskom was not answered.

The Chairperson confirmed that the Committee had agreed to meet the top ten affected municipalities to hear from them why they had not been paying Eskom. It was clear that the problems were bigger than the finances and that leadership played an important role.

Meeting report

Introductory Remarks
The Chairperson said that this was the third time that the Committee was meeting on this matter and this shows concern and willingness to assist in finding solutions. The Committee had previously engaged Eskom on the matter. Eskom’s balance sheet was still not improving and the cause of this was discussed at length. The non-payment by municipalities had been identified as a risk and so the Committee had called Eskom to present its state of affairs. It was not a pleasant presentation and compelled the Committee to investigate beyond Eskom on the role of government. This was the reason for all the allied parties present. The Committee wanted to hear from COGTA what it was doing since municipalities fall under them and National Treasury because it disburses the money, and SALGA as an association of municipalities.

Eskom Board Chairperson comments
Mr Jabu Mabuza, Eskom Board Chairperson, apologised that the presentation had not reached the Committee timeously. He welcomed the opportunity to address this big issue of municipal debt which impacts on Eskom’s finances and the municipalities’ impact on the economy. Before this was discussed he requested to briefly appraise the Committee on what it viewed as another key challenge which was the coal stock levels that were a problem at six of its power stations. The matter enjoyed much public interest and on the back of it caused a lot of public panic. Eskom wanted the Committee to know that it was addressing the matter and it was primarily caused by a decision it took about three years ago not to invest in coal plus mines tied to its power stations. This affected production capability and aligned to that there was a strategic decision taken by Eskom to have Tegeta as the preferred supplier. Other suppliers, subsequently, had to look elsewhere to sell their produce and Tegeta struggled to meet the demand. It had adversely affected three of its power stations. Eskom had now been granted permission by Treasury to procure coal on an emergency basis and veer from normal procurement processes. It is now in a position where more than half of its power stations are receiving coal stock within 20 days. Eskom can never guarantee that there will never be loading shedding. It did however confirm that there was nothing in its system that suggested there would be load shedding, it is ready for the winter demand.

Since the new Board appointment three months ago, it had notably turned around the worrisome issues in the organisation. Executives who were implicated in wrongful doing were no longer with the organisation. This allowed the Chief Executive Officer and his team to focus on the primary business of generating electricity. The outstanding municipal debt remains one of the pressing challenges for Eskom more so since the organisation also faced serious financial challenges. The amount owed by municipalities continued to grow from a notable R9.5 billion to R13.5 billion in one year. A 42 percent escalation between 2017 and 2018. This was of serious concern because it challenges the sustainability of Eskom. Investors are concerned that the increasing municipal debt impacts on Eskom’s ability to service its own debt. ‘If it cannot collect its own debt how is it going to pay their debt?’ investors have asked.

Following Eskom's meeting with SCOPA on 6 March 2018, the situation had not improved. Collection of municipal debt requires a shift in approach. Stricter penalties had been imposed from increasing the period of interruption from four and half hours to six hours each day and 14 hour interruptions had been approved for non-responsive customers. However, efforts to collect debt through supply interruptions are interrupted by court interdicts. Eskom strived to collect the debt within the ambit of the law. Financial sustainability for Eskom will remain difficult if it was not able to recover its debt. It needed bold decisions and an understanding that all stakeholders should do the right thing. Eskom pleaded with its debtors to fulfill their obligation to enable Eskom to fulfill its own obligations. The Inter-Ministerial Task Team (IMTT) made up of Ministers of COGTA, Finance, Public Enterprises and Water and Sanitation together with SALGA, the Water Boards and Eskom had met last week and agreed on a need to have further discussion the coming week.

Eskom briefing on municipal debt
Ms Ayanda Noah, Group Executive Customer Services: Eskom, said the municipal debt position had not improved, she reported. Slide number three demonstrates that in one year there had been a R4 billion increase which is more than 40 percent. The Free State stands out with a debt of over R6 billion. Mpumalanga following at R3.2 billion. Again, the key message was that the situation has not gotten better. In terms of the analysi, 64 percent of overdue debt was older than 90 days, in March 2017. A year later, now, 93 percent of overdue debt was older than 90 days, in March 2018. The impact of the concession was that debt older than 15 days had reduced due to the implementation of the 30 days payment period in July 2017. The principal used was to look at older debt in terms of reduction and try control newer debt and make sure current accounts were paid monthly. However, this had not been the experience in most municipalities.

Slide 7 demonstrated the top 20 municipalities which displayed similar patterns. Slide 10 showed the interest charged on overdue amounts during 2017/18. She gave examples of two municipalities. In 2018,R1.5 billion was the interest contribution that was charged that year. It has been raised previously that the interest charged is very high and Eskom may be making a lot of profit from it. Maluti A Phofung currently owes R2.7 billion, the last time it paid their bill was in August 2017 and only paid Eskom R5 million. Its current average monthly account is R18 million. Eskom received an interim court order against the municipality’s customers to pay Eskom directly. It was expecting to get payments, today, from the organised business community. Lekwa, in Mpumalanga, was another example and owes Eskom R437 million. It got a court order for the businesses to pay Eskom monthly. So currently, it gets R10 million from the business community. The set back was that Lekwa Municipality was not paying its balance of the monthly accounts, and since Eskom had made payment arrangements with the three businesses to pay Eskom directly it could not do interruptions on the municipality.

What Eskom had done to try collect the debt was reflected on slides 8 and 9. After SALGA approached Eskom to assist the municipalities it came up with the five concession on slide number 9. Rationalistion of Eskom’s municipal tariffs was one of them. The metros, who do pay on time, benefited from it but Eskom was challenged with cash flow and asked them to change the payment on municipal bulk accounts back to 15 days from 30 days. It decreased interest charged on all municipal bulk accounts from prime plus 5 percent to prime plus 2.5 percent. Eskom had also allowed municipalities to pay concessions charges over a period of relevant interest rate instead of an up-front cash payment so municipalities could upgrade their infrastructure.

Slide 8 reflected the payment arrangements. When the payment arrangements were first initiated municipalities would pay for the first three month and then stop. Eskom also started off by saying it will not have payment arrangements for more than three years but after visiting the Provinces, together with COGTA, it realised the need to be more flexible and increased payment period to five years to recover the debt. Municipalities have signed the arrangements, 28 were been fully honoured, 12 had partly honoured and others had not yet honoured the agreements at all. The efforts were not yielding the desired results. The interruptions been implemented had only been up to six hours because the municipalities do come forward and so it had not needed to implement 48 hour interruptions. Slide 15 showed the planned interruption list as at 7 May 2018. Some court interdicts had interrupted the interruptions and others were taken off the list after signing payment arrangements.

In trying to identify the challenges municipalities were facing in paying its debts Eskom looked to the municipalities’ Auditor-General reports, for 2015-2017. The financial health risks of the municipalities were shown on slides number 11, 12, 13, and 14. She gave an example of the Free State in 2014/2015 two municipalities there were in good financial health and three of the municipalities were of financial concern and 15 municipalities needed financial interventions either from COGTA and SALGA. In 2016/17 there was an increase and more municipalities required financial interventions. There was a correlation between the municipalities' ability to pay its debts and its financial health risk.

Interdicts from organised business, communities and individuals were reflected in slides number 16 and 17. It was never the municipality that took Eskom to court. A pattern of relief and remedies sought was discovered; Eskom must stop interrupting it had detrimental effect on businesses and livelihoods, to pay Eskom directly and for Eskom to take over the supply of electricity. Court orders prevented Eskom from interrupting supply to municipalities pending the review of the applications. Municipalities seem to take payment holidays when customers take Eskom to court which was not assisting the situation.

Slides 18 and 19 showed what more Eskom can do, looking at strategic relations, to resolve municipal debt. It had engaged with the IMMT advisory panel and updated the Committee on the government cash injection. It was considering more incentives for municipalities to pay Eskom. Pilots had been done to install meters to assist municipalities to collect payments and were looking into other providers to install the meters.

Soweto was included in Slide 20 for completeness because it had come up from time to time. There was debt collection problem in Soweto as well. Installation of smart solutions had been a challenge resulting in violent protest at Eskom depots. A cable was stolen in winter which angered the community who went to the offices and burnt all the vehicles there.

Eskom needs an aggressive communications strategy. The 49M programme aimed at energy efficiency throughout the whole country to encourage all 49 million South Africans, at the time, to save electricity. It urges people to use the user-pay (pre-paid) system. It wants to use marketing tools to get the message across and it had identified stakeholders to partner with for the success of the programme.

SALGA briefing
Mr Sebenzile Ngangelizwe, SALGA Deputy President, made a few remarks before the presentation. SALGA was participating in the PCC trying to resolve the same challenges that have been highlighted by Eskom. In the past four years, it has tried to assist Eskom and municipalities in the country. After receiving reports from the municipalities, it advised Eskom to sign Service Delivery Agreements (SDA) with municipalities to deal with the challenges. Also, Eskom’s business stands to disadvantage and the municipalities because of theabnormal interest, abnormal notice of maximum demand on penalties, and the billing cycle.It had tried, for the past four years, to work with Eskom to sign the SDA but it refused. SALGA then approached the PCC and informed it was approaching the courts for a declaratory order to define the role of Eskom and municipalities in distributing electricity.

Mr Nhlanhla Ngidi SALGA Head: Electricity and Energy, started off contending the notion that municipalities were the cause of Eskom’s financial situation.

The Chairperson interrupted and clarified that no such allegation had been made and that the problem of municipalities not paying was just one of  Eskom’s problems. No one said Eskom’s problems were due to the municipalities.

Mr Ngidi said it was important that he builds a picture around the structural issue. It is an assumption municipalities were operating in perfect systems but that is not the case. He stressed that municipalities operate in very challenging environments. There was no one simple answer why municipalities had not been paying and when exactly they would pay. He assured Eskom that its financial viability is important to SALGA but it was equally important that municipalities were able to provide sustainable and affordable services. In March 2015, Treasury invoked section 216 of the Constitution indicating intent to withhold equitable share allocations to municipalities defaulting on Eskom and Water Board payments. Concerns raised by the department included: escalating debt, inability of municipalities to honour payment, absence of resolution mechanisms between affected parties and breach of Municipal Financial Management Act (MFMA) and fiduciary responsibilities. The institutional profile of the municipalities had already been provided by Eskom. The administratively dysfunctional and financially instable municipalities tell a story around the economic activities of the municipalities and how it impacts on the ability to make enough revenue to be sustainable and able to pay Eskom. The economic hubs of the country compared to other provinces also provide insights on why some municipalities are not able to pay. Systemic and structural challenges municipalities constrain them from committing to pay Eskom as soon as tomorrow. Even the state of the economy speaks to that: people said they were not paying because they were not working because there is no economic activity in those provinces.

There were also systemic issues in the electricity distribution industry. The manner of the operations wasnot in accordance with constitutional, and other legislative, provisions. It was not because municipalities do not want to pay but the money was not coming from the customers. To emphasis the metros are not paying because they were doing well, they are going through the same systemic structures with the electricity industry. The constitutional authority of municipalities has been undermined by Eskom. There are no contract and regulatory mechanism (SDAs) between Eskom and municipalities. Municipalities are unable to levy surcharges in Eskom supply areas and results in a loss of revenue to municipalities. Municipalities are also unable to exercise credit control and this makes the rates and taxes in the Eskom areas very high. The municipality does not have the authority to enforce customers to pay for rates and taxes. SALGA has been asking Eskom to assist with this by signing the SDAs. Eskom argued that it had been provided a licence by NERSA to reticulate electricity. In SALGA’s views the licence was defective if it gives Eskom service status as it bypasses the executive authority of municipalities. Only person that can give service status is the Council. The licence provided by NERSA is only to operate electricity, the service authority is with the municipalities. A lot of things can happen from the SDAS if implemented which will also improve the financial situation of municipalities. The municipalities will be able to do credit control and collect surcharges from the big creditors. Slide number18 illustrated what the municipalities had been doing without the SDAs and the impact it has had on the tariffs.Municipality were cross-subsidising the traffic in their areas. Slide number 13 was an illustration of Eskom supplying within the City of Johannesburg (COJ). The estimated revenue at COJ Eskom areas is R14 billion, the cost of sales is R10 billion the net impact is a loss of R4 billion to the COJ because of Eskom supplying in the COJ area. SALGA had tried to resolve some of the systemic issues with Eskom. There was an expectation that once the concessions were in place the municipalities will pay but without any changes in the environment. The economic, operative and legal challenges remain the same.

In terms of reconciliation of debt there was very old debt that was still accumulating interest. Municipalities are always expected to write off debt but Eskom has not been amenable. Treasury was requested to do a full diagnostic of the 60 highest owing municipalities to determine affordable repayment arrangements for each municipality, and that affordable and sustainable agreements are entered between municipalities and Eskom. There are municipalities that if they would collect 100%revenue they would still not be able to pay Eskom maybe because of the tariffs approved by NERSA. It requested a fast-tracked IGR resolution on the municipal challenges. Treasury study recommended that government must focus on supporting the municipalities that are financial unviable. The court judgments to get municipal customers to pay directly to Eskom was going to worsen the situation it was in favour of one party in a much bigger problem. All the proposed solutions so far are all for Eskom’s benefit. Provincial departments must support local government in accordance to s 156 of the Constitution.

In closing, SALGA had been involved in some of the proposed interventions. It proposed a resuscitation of the SALGA/Eskom MoU and utilization of the Eskom Training College to train municipal officials. The mandate of the SETA’s and MISA should be clear on how they should be supporting and capacitating municipalities. Revenue management is a problem for municipalities because most of them are not on prepaid so a revenue management infrastructure special grants was also proposed. Most of the municipalities owing Eskom do not have CFOs, SALGA had been working with them to make appointments. Capacitation is also needed in municipalities. The adoption of smaller municipalities by bigger municipalities was working well. SALGA has been engaging with Treasury on reviewing the funding and grant models of municipalities to talk to the economic situation and constrained fiscal. Lastly, SALGA had called for an energy sector summit to look at addressing some the issues. Everyone had agreed the current structure and environment municipalities are operating in was not working.

COGTA briefing
Acting Deputy Director General for Local Government Intervention and Support, COGTA, Mr Tebogo Motlashuping, outlined the support COGTA had given to municipalities who had not been able to pay Eskom. There had been a joint initiative with Treasury to assess the municipalities’ capacity and develop a support model to facilitate revenue management. The IMMT was also formed to renegotiate with Eskom the payment agreements to be realistic and affordable in order to limit the possibility of defaulting. COGTA had also established capacity to assist municipalities with the tariff deficiencies which results in low revenue generated from electricity and water business. Fast tracking the filling of critical posts in the affected municipalities was also important to improve the functioning of municipalities. There was also MISA who had deployed engineers and planners to support municipalities on planning, development, operations and maintenance of infrastructure for service delivery. It had also developed simplified revenue plans to assist municipalities to collect and enhance revenue and make it possible to pay Eskom and other creditors. The Programme Management Office (PMO) was established under COGTA to address service backlogs in 27 districts and assessments had been conducted in ten districts to date. The aim of the assessments was to determine the status of infrastructure and services backlog to identify funding projects to address the backlogs.

The IMMT is twofold, and all relevant stakeholders are participating with COGTA as the lead, Department of Energy, Department of Public Service and Administration, SALGA, Department of Water and Sanitation and the Water Board. There is a technical and a provincial team. All the issues that had been raised by SALGA are dealt with there and it also sought to find a sustainable solution to the electricity and water bulk services debt owed by municipalities. It had been meeting regularly to see how fast it can deal with the constitutional, systemic and structural challenges in electricity distribution and reticulation. The IMMT also agreed that there should be an advisory panel to provide technical guidance on the constitutional issue of electricity supply between Eskom and municipalities. The direction from the PCC was to exhaust all other mechanisms before going to court for a declaratory order. The scope of work of the panel is to interpret the law with respect to the legal provisions applicable to the executive authority of municipalities and its right to administer the reticulation of electricity and to resolve the differing viewpoints of local government and Eskom. There had been a renegotiation of payment agreements with Provincial Treasuries and COGTA, as mentioned by Eskom, to help ensure municipalities will be able to pay debts. COGTA, SALGA and Eskom were working together in trying to solve the challenges.

National Treasury briefing
Director General, Mr Dondo Mogajane, said that the system can only be effective if the whole part functions. If there are some parts of the system that do not function, then the focus must be on the root causes which were shown on slide number six. He reported that there is weak and ineffective political leadership and accountability in the municipalities and provinces. Proper governance structures are not place and this impacts on the challenges that are persisting. If a municipality does not pay Eskom the risk exposure becomes a financial challenge and threatens its sustainability. So, he proposed a balance of the approaches to solve the problems. There are obligations on both sides and it should not be seen as a problem when Eskom exercises its rights. This was picked up in SALGA’s presentation. The principle of user-pay should be a principle everyone applies.

National Treasury Chief Director: MFMA Compliance, Mr TV Pillay, stated that the requirement of financial recovery plans was a legal on stipulated in the MFMA and deals with the process to be followed for interventions. Treasury had geared up to assist municipalities with financial recovery plans by going to the municipality to diagnose the issue, do a status report and then come up with a recovery plan. In doing so, all the bases were covered; organisational, financial, and governance including service delivery. It is not a short-term measure; in New York, it took 20 years for the recovery. The biggest issue was the commitment from the municipal Council to implement the recovery plans with the support from provincial and national government including SALGA. Where there had been success on the recovery it was because of regular monitoring and reports to Council or the Provincial. Although the plan may be sound the implementation of the plan could pose as a serious challenge because of the technical nature of the plans and political leadership. The onus then was on the municipality to support implementation of the recovery plans. It was working collaboratively with COGTA to assist the struggling municipalities and more had to be done to address the three areas; governance, service delivery and financial management.

National Treasury Deputy Director General: Inter-governmental Relations, Ms Malijeng Ngqaleni, spoke about the funding because it was important to have a balanced view of what the problem was and to have shared understanding on what needs to be done. It was clear that the problem was multi-dimensional and the approach needs to take this into account. One of the issues municipalities raised was the lack of sufficient revenue base in the affected municipalities, ‘the economy is not performing so not able to raise revenue’. The equitable share to local government considers the assigned functions and assigned revenue capacity. Allocation considers that not all municipalities have the same revenue capacity. The element of equity was then brought in to be more responsive where there was quick revenue capacity. It also allowed municipalities whose revenues were not strong to utilize other means to accelerate revenue such as subsidisation. Municipalities are also operationally bloated and the costs are too high. The tabling of unfunded budgets was also a fundamental problem. Not because they do not know but municipalities continued to spend money they do not have. The budgets were not adjusted to the payment plans. Fiscal discipline needs to be instilled.

The Chairperson said that what remains after all the presentations was that Eskom is owed. It went beyond been, simply, a ‘pay back the money’ issue. He observed that financial issues are not the only impediments but leadership in municipalities also plays an important role.

Mr D Ross (DA) wanted to confirm what Mr Dondo Mogajane said about not only facing a debt crisis but a financial risk to the fiscal, as well, because of the position of Eskom which is the first leg of risk. Eskom has an insolvency and liquidity crisis, high in the billions and poses a risk. The presentation reported that it was perhaps caused by preferential procurement in coal supply and the country is possibly facing load shedding. Eskom is dependent on municipalities paying them which leads to the second risk: municipal debt to Eskom. Does this constitute a debt crisis and a financial crisis within municipalities? The R4.1 billion increase especially increases in the Free State and Mpumalanga points to a certain direction compared to the Western Cape where the is no debt to Eskom. It brings to question some of the presentations and the executive management in the provinces. He agreed with Ms Ngqaleni and wanted her to confirm that the budgets of municipalities need to be funded and if unfunded it means it was non-compliant with legislation. The municipalities deliberately ignored court orders to comply and that needs to be looked into. He agreed that the municipalities carried a bloated personnel structure and administrations are not collecting revenue and impairs the financial statements as the presentation showed. What was the position Treasury was taking in terms of the financial impairments, is it taking note of it? Perhaps it is funded through the equitable share allocations that it has now indicated is standard practice? He was concerned about the possible cutting of budgets and what impact that will have on the equitable share. What were the interventions that had been done in the provinces that were doing exceptionally well and paying municipal accounts and debts? Why has Treasury taken so long to implement s 216 which gives Treasury the authority to hold these institutions to account? Lastly, to avoid the collapse of service delivery the whole province needs an intervention but he appreciated the work been done in his municipality.

Ms T Chiloane (ANC) responded to the Chairperson of Eskom on the return to cost plus mines and was feeling comforted that it had attended to the matter and jobs had been spared. She was not comforted on the issue of debt owing to Eskom. Most of the municipalities from her district are affected. In terms of the litigations on slide number 16 of the Eskom presentation where the companies or businesses were paying Eskom and other municipalities directly and until the interim orders municipalities were taking payment holidays. Did it mean that when litigation was in process municipalities were not paying any of the money owed until a court ruling? She went on to say that it was fortunate that Eskom was here with their stakeholders but wanted to suggest the Committee agrees to call the top ten municipalities as well. A good sense of what was happening had been provided by the presentations and it seems the problems are bigger than what was anticipated. According to the Auditor General reports and the status presented on the top ten affected municipalities, the speed of malpractice and maladministration in financial management was concerning. How was COGTA assisting the municipalities? The presentation by SALGA appeared to be defensive and that the issues it had raised were pertinent but why were they being raised here and not with the IMMT? She still had not heard from SALGA what measures it was doing to assist municipalities? Lastly, she asked what is an old debt and how do you describe old?

Mr T Brauteseth (DA) raised two points. ‘Eskom, in what universe do you think it is customer friendly to loan municipalities with a prime plus 2.5 percent interest rate? How can you possibly argue that was customer friendly to municipalities who owe you billions of Rands and evidently cannot pay you?’ he asked in amazement. SALGA says municipalities do not exist in a perfect environment and so they cannot deliver on what they are expected to deliver. SALGA says Eskom makes it impossible for local government to operate and pay its bills but SALGA is not investigating what exactly municipalities are spending their money on because they do get money from equitable share, fees and tariffs. The Treasury reports points out that in some instances up to 40% of the budget is spent on salaries and in worst cases up to 80% and figures of up to 50% loss on water and electricity account collection. There was far too much spending on huge salaries and big festivals, for instance, his municipality spent R600 000 hiring a carpet for two days. It cannot be said that municipalities are poor. Mayors and municipal managers should also have been present today to feel the heat as well and hopefully that will affect their behaviour. What is Mr Ngidi’s opinion on what I have said on the financial mismanagement of municipalities?

Ms N Mente (EFF) expressed her shock about cutting off electricity. She raised the Constitution and said despite the Bill of Rights, SALGA and Eskom bragged about cutting off electricity. That was a serious violation of human rights. How do you cut off lights for a student who must study and do homework? It cannot take away a basic human right from someone to make them pay that was ‘lazy thinking’, she said, and leveraging of constitutional rights is not allowed. She agreed fully that the municipalities are getting too little in terms of the equitable share as they provide the most basic service to impoverished people. There was no reason to take anything away from a poor person. For example, Emalahleni in Mpumalanaga is an economic hub, what is the justification for them being in the top ten? There is money coming in but where is it going to? The answer was simple there is lack of leadership and focus on things that are not supposed to be done. There is no revenue problem in Emalahleni it seems they have an ‘I do not care, we wo not pay’ attitude. Litigation cost a lot of money and municipalities should be focused on servicing people. The MoU between SALGA and Eskom must be argued at COGTA and not here. The problem was how money is being spent in the municipalities. She asked why Treasury was not invoking section 139 on the municipalities that do not want to work. Lastly, how can you say Eskom is an unfunded budget? It is a serious basic service that must be provided to the people.

Mr K Mileham (DA) agreed with Ms Chiloane about SALGA as it had missed the point completely. This was not about constitutional issues it was about money owed by municipalities to Eskom and what had been done to assist the situation. The constitutional issues must be dealt with in the courts and not here - and everyone agreed. The Electricity Regulation Act makes provision in s4(a) for the allocation of licences; it stipulates that NERSA has the responsibility to issue licences for the distribution of electricity. It does not provide that Eskom must get a licence and municipalities must not or that municipalities must get a licence and Eskom must not. It says that NERSA has the authority to issue and authorise licences. That is the law of the land it must be upheld. On the inability of municipalities to enforce credit control, what had SALGA done to engage with and ask Eskom to enforce the credit control? Is it a possibility for Eskom to act as a collection agent for the municipalities? He clarified to SALGA a municipality buys electricity that they resell at a profit, it had to pay for what they buy, user pays principle, it gets the revenue and equitable share for those who cannot pay so it is not about the Eskom supply areas been a loss of revenue because it had not incurred any costs in those areas. It cannot list it as a loss of revenue until it incurred costs. Where costs have been incurred there needs to be payment plans. Does Eskom understand that the interruptions to municipal supplies means less revenue for municipalities and will be less likely to pay its debts? It has a huge impact on the local economy. This was when the economy then fails and the municipality less likely to pay that was the impact of Eskom’s actions. Some of the payment arrangements by Eskom have been very heavy handed. When municipalities disclosed on what they were able to realistically pay Eskom refuses and threatens to cut off the electricity if the agreement was not on their terms. There was no willingness from SALGA and Eskom to compromise to make it work.

Mr M Booi (ANC) was concerned on SALGA’s interpretation of the engagement. It needs to be more pragmatic in its approach and be able to say exactly what it was doing about the culture of non-payment. What was their approach in dealing with the culture of non-payment? He asked Mr Motlashuping how long he had been running the programme? What are the time frames to pay? After all the engagements in the IMTT can SALGA answer when will municipalities pay Eskom? What were the timeframes? The reality is there is no payment and the economy is collapsing, he said. SALGA and Treasury are not specific on exactly what it was going to do? The same position remains that Eskom has a legitimate complaint and its stakeholders are not assisting. No one is taking any blame and there are no results shown from the interventions presented. We need solutions on how to resolve the problems and rescue the economy, he asserted.

Mr E Kekana (ANC) said he had been thinking of a solution to the problem because after listening to the presentations they had not assisted in coming up with the solutions. The problem is Eskom is owed money and nobody had come up with a proposal to recover the money expect a blame game was had on who was responsible. His concern was if cabinet was not assisting then he was worried how it was going to be solved. The issues on supply and tariffs raised are old issues from twenty years ago. He asked Eskom, if it had developed a communications strategy that targets the people who owe? It needs to zoom in to those areas and the strategies must speak to those people instead of having national dialogues with people who were not involved. This is not a mere Eskom problem; money is not owed to Eskom but to the country. We do not want Eskom to collapse so it is our responsibility to come up with solution, he urged, and proposed SCOPA meets with the IMC to see on that level what proposal it can come up with. The IMC managed to assist with the SASSA problem so that might be the better route.

Ms N Khunou (ANC) said the presentations did not report on the IMTT meetings and if they had had the meetings, to get to the bottom of the problem, the presentations would have been different. She felt that more time was needed to deliberate on this matter and three hours was not enough. Eskom’s presentation just reiterated the problem and did not propose solutions and should have done so, especially in front of its stakeholders. Taking municipalities to court and the prices hikes are not assisting. If someone cannot pay the amount owed how will it pay the interest? How much is Eskom paying for litigation and how is it getting the value of it? How is Eskom trying to solve the decline in revenue and sales? It is not just an Eskom problem it is a national problem. COGTA should have proposed specific programmes on how it was going to help municipalities who were in financial distress and how it would assist them with budgeting and revenue collection.

The Chairperson said he received a call from a law firm representing various business chambers and a number of industrial and commercial concerns across the country who wanted to come to the meeting and make representations. Another lawyer also wanted to come and represent municipalities on the illegal actions of Eskom. The Committee had agreed it needs to call the municipalities it just had to work out when. The presentations today were very scattered because they were individual directions and not collective action by the team which should have been agreed on at the IMTT meetings. This is what will bring out the solutions; team work in the IMMT. He was reluctant to blame SALGA that much since it was their first time appearing before the Committee and it needed to present how it viewed the problem.

Mr Dondo Mogajane, DG Treasury, said he could not dictate to SCOPA what to do but it must allow administrative and political oversight to be taken to a different level and to take the unthinkable route. Section 216 of the Constitution gives Treasury specific responsibilities, there are provincial structures (Treasury and SCOPA) who have specific roles on how to manage finances. In the same spirit, there is the MFMA and the PFMA which gives specific instructions to accounting officers, in municipalities. The difficulty sometimes was making the accounting officers accountable. The difficulty was with dysfunctional municipalities who have accounting officers that are not doing anything to improve the situation. Treasury must intervene to hold the leadership of the municipality to account. There are more than 200 municipalities so it was impossible for Treasury to cover all of them and that is why the IMMT must work to find solutions. Provincial Treasury in North West appeared before the provincial SCOPA, what were the engagements there? The interventions need to be consolidated to tackle this big challenge. The inter-governmental system needs to function properly to make it possible for Treasury to execute its functions. Unfunded budget means the municipality was knowingly tabling a budget which does not equal its revenue base. It is worse when the municipalities do not collect revenue. If the system allows a municipality to present an unfunded budget, then already the solution becomes much more difficult to solve. The whole system will not function. He supported the call to meet with the mayors and municipal managers of those municipalities who do not want to do the work. Treasury also acknowledged and accepted the Committee’s call for all the stakeholders to work together to come up with collective solutions to deal with the problems.

Mr Motlashuping, Acting DDG COGTA, indicated the support that COGTA has been giving to municipalities to ensure their financial viability needed to be supported by interventions to other challenges. In some municipalities, the same amount owed to Eskom is equal to the amount owed to the Water Board. A financially viable municipality must not only be able to pay Eskom but must also be to pay all its other creditors. So COGTA’s approach is to assist the municipalities beyond what it owed to Eskom so they will be able to perform their constitutional obligations. The IMMT was formed in February 2017 and several meetings were made at a technical and provincial level and as a result of those meetings certain concessions were made such as the interest and payment periods. So, work was done and IMMT was making progress. The advisory panel had been given four months to conclude its work on the advisory of the constitutional issues on the provision of electricity and the systematic and structural issues. COGTA had developed simplified revenue plans in 42 municipalities, it needed to do any analysis on the impact of implementation. It was also looking into doing financial recovery plans with the municipalities and together with Treasury, and Eskom so municipalities are able to repay all its debts to all creditors. Municipal Public Accounts Committees (MPACS) were also been reviewed and Councilors were being capacitated to effectively manage the financials to be able to pay all debt, he insisted, not only Eskom.

Ms Sindi Mabaso-Koyana, Eskom chair of the Audit and Risk Board Committee, gave a board response to some of the comments raised to Eskom. As an entity, it was already dealing with the challenges and had shared in the past, to SCOPA, what Eskom was doing to address its solvency and liquidity. It might be beneficial that this was shared with the stakeholders as well to understand the number of steps it had taken to address governance challenges and mismanagement in Eskom. One of its responsibilities is indeed the collection of debt owed to Eskom so it is important that it was understood as a priority. Eskom was mindful of the environments and circumstances municipalities operate in but it still had obligations. There have been several interventions to assist municipalities to be able to financially manage local government properly and retired chartered accounts had been brought in to assist. Unfortunately, a few of them had to leave because of violent threats from the municipalities who did not welcome the interventions.

Mr Phakamani Hadebe, interim CEO Eskom, responded to the queries on municipalities’ holiday payments. The interruption of electricity was Eskom’s last resolve; it tries to avoid interruptions. The municipality debt is compromising investment in Eskom and the security of its debt. Municipalities do take payment holidays, once the parties had gone to court and the date of the court hearing had been set, they do not pay and in some cases this goes up to seven months of non-payment.

Ms Ayanda Noah defined old debt. Municipalities have 30 days to pay its accounts from date of receipt. If accounts were not made on day 31 then it is late. If they continue to not pay for another 60 days then there will be another bill that will then start on day 31. That was how the age worked when debt was not paid. She explained that interest charged was intended to discourage municipalities from not paying their bills and remove the perception that Eskom is a bank which was why the prime plus 5 percent was more than the banks would charge. Eskom does borrow money as well so during the time municipalities are not paying it goes into financial difficulty. When the interest was reduced to prime plus 2.5 percent it was still a means to discourage municipalities from not paying or borrowing money from Eskom. It was looking into a process of how it can write off debt in Soweto but it will take time because of Eskom’s internal governance processes. The issue of not disconnecting Soweto is not true. In the last financial year 40 000 households were disconnected in Soweto. When disconnections are done on a one-on-one basis it was not published and Eskom does not have to go through the Promotion of Administrative Justice Act (PAJA) process like it is required to do for municipalities.

Eskom has a Credit Management Policy to ensure it recovers its money timeously and to also assist municipalities to recover their money by encouraging its customers to move to prepaid so the customers will decide what they can afford. The interruptions were also intended to cause an inconvenience and it was not that Eskom had not considered the economic impact of the interruptions which is why it had to go through the PAJA process so people can make alternative arrangements during the interruptions. She agreed that the payment arrangements did start off heavy handed but as mentioned it was flexible and reviewed the period from three to five years. Provincial Treasury also had oversight now on what municipalities can afford. Rationalisation of tariffs was to ensure rural municipalities were considered but NERSA had to decide on the tariff issue. Lastly, there are community strategies targeting energy efficiency and promotion of legal use of electricity. It appealed to South Africans to use the user-pays principle.

Mr Nhlanhla Ngidi confirmed what the Chairperson had said, that it was SALGA’s first time at SCOPA and it felt it should clearly define what it viewed as the problem.

Mr Sandile Maphumulo, independent municipal expert and former Head of eThekwini Electricity, responded to some of the questions addressed  to SALGA. It has always acknowledged debt owed must be paid and needed to be paid on time. The conditions to meet financial obligations depended on sufficient revenue collection. Possible revenue streams, after conclusion of the legal process is the raising of surcharges and granting municipal powers to levy surcharges on services done on its behalf. This was the reason for the push to sign the SDAs. They had approached different government departments to intervene. SALGA was involved in engagements in IMMT and have engaged with Eskom for years, since 2010, to get the revenue raised. Numerous meetings have been held to try persuade Eskom to sign the SDAs so it can raise the instruments to raise funds to meet Eskom’s payment obligations, amongst others. The licence issued by NERSA to provide services to municipality who are service providers themselves is what was been disputed.

The Chairperson intervened and asked Eskom why it did not want to sign the SDAs.

Ms Ayanda Noah responded that the main reason was Eskom believes through NERSA issuing them the licence, it gave them the right to service customers in those areas. It was a matter of legal interpretation. This was a legal contestation.

The Chairperson said it was not desirable for the institutions to take each other to court and the IMMT must provide guidance on what needed to happen. The issue of the SDAs is a very important and needed to be resolved.

Ms Chiloane wanted to understand why the Soweto debt was been written off and not the other municipal debts. How is the free electricity to people calculated? How do they bill electricity? This information will be useful to have before the meeting with the municipalities.

Ms Mente advised that the revitalising plan from COGTA must also consider the Auditor General reports 2015/16 where it indicated a need to pay special attention to certain municipalities. Revitalisation will not be effective if there was no leadership and financial measures in place. She feared that the Committee will only be calling the top ten municipalities when there are others municipalities who are refusing to cooperate. Municipalities sell electricity for double the price of Eskom this was also not sustainable even the Eskom hike was a pinch in the pocket.

Mr Brauteseth urged investigations into the conduct of the debtors. If municipalities showed they were cooperative and compliant but still ca not pay its debt, then they must be assisted. When municipalities are spending in excess in other areas, unnecessarily, then no leniency should be granted to them. In the situation were debt is written-off it comes with certain terms and conditions and should seriously consider putting the financial departments of municipalities, whose debt was written-off, under administration or replacing the top management with court appointed management. This will then make sure municipalities function properly. You cannot write off a debt and leave the same people in the same position to do the wrong thing again.

Mr Ross said the DG of Treasury did not deal with the extent of the crisis. It was very clear what the Constitution expects Treasury to do.

Mr Sebenzile Ngangelizwe said that he would have wanted more time to discuss the policy gaps and thought this is what the Committee wanted SALGA to present. It accepts the inputs from the Committee to come up with a consolidated plan to recover municipal debt. SALGA will go back and reflect on the critical issues raised by the Committee. It regards Eskom as a business entity and respects it as such and municipalities should be afforded the same respect. SCOPA must scrutinise the business model of Eskom. Finally, IMMT will meet to finalise and consolidate its approach.

The Chairperson agreed that the issues were too much to engage in four hours but two processes are concurrently running: the IMMT and the meetings with affected municipalities. These two engagements will happen before 18 June 2018.

The meeting was adjourned.

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