Eskom debt: hearing with municipalities

Public Accounts (SCOPA)

13 June 2018
Chairperson: Mr T Godi (APC)
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Meeting Summary

The Standing Committee on Public Accounts held a meeting with ten municipalities that owe Eskom to explain their debts. The municipalities in attendance were as follows: Maluti A Phofung, Matjhabeng and Ngwathe in the Free State; Emfuleni in Gauteng; Ditsobotla and Naledi in North West and eMalahleni, Govan Mbeki, Lekwa and Thaba Chweu in Mpumalanga.

The Chairperson indicated the meeting was pursuant to a previous engagement with Eskom to which the entity’s challenges were discussed extensively. Part of the challenges which were identified was of unpaid bills by municipalities. Therefore, the Committee wanted to hear from the municipalities about what the real issues were in an effort to map the way forward. Eskom is critical to the economy, and solutions to these challenges of debts owing needed to be found.
The ten defaulting municipalities explained why they continually failed to settle their debts to Eskom. The numerous challenges which were highlighted included: spiralling debt, compounded revenue losses, a chain of non-payment and 'ghost vending'. They cited structural challenges in their own financial practices as well as historical financial constraints. They also blamed their own communities for refusing to pay power rates, and in some cases, said Eskom had unrealistic expectations of their ability to pay their debts. Most municipalities that owe Eskom billions for bulk electricity supply painted a bleak picture of their finances. They cited high unemployment, resistance from consumers to pay and illegal electricity connections for their inability to pay the entity. Some municipalities indicated that they will never be able to settle their debts to Eskom unless the interest costs were waived.

Matjhabeng Municipality, told the Committee that there was a high percentage of unemployment and poverty in Matjhabeng, which has historically had a negative impact on revenue collections. The municipality owes Eskom the sum of R1.7 billion. It was pointed out that consumers were stealing from the municipality through illegal connections. The municipality presented a financial recovery plan to Eskom to audit its meters, as it was found out that even those who can pay are stealing electricity. The municipality was also losing out on revenue from mining houses who have direct supply agreements with Eskom. Notably, before July 2014, the municipality was charging a flat rate for electricity, and not the tariff that Eskom was awarded. But when this was introduced that in July 2014, there was resistance. The municipality went to court and was challenged by the Goldfields Chamber of Business to which a relief in favour of business was granted.

Naledi Municipality told the Committee that Eskom was at the top of its creditor list, alongside other large creditors including the South African Revenue Service, the office of the Auditor General, the Development Bank of South Africa and the South African Local Government Association. The payment of suppliers within 30 days as required by Municipal Finance Management Act (MFMA) was a challenge due to cash flow challenges. Eskom remains the municipality’s biggest liability with the debt currently at R274 977 064. Municipality was currently in negotiations with Eskom for a payment arrangement which should be finalised by the end of the month May 2018. The intention was to ensure that the current account is maintained to avoid further penalties and maintain the payment arrangement entered into with Eskom. The municipality was seriously overspending on capital projects. It also cannot afford its fire, traffic and library services. The commitment of municipal employees, 80% of whom were ostensibly overpaid was questioned. The municipality was spending R1 million a month on their car allowances alone. The municipality has a serious problem of a lack of commitment from staff members. His colleagues were more of politicians than administrators. Residents were also not prepared to pay their bills because they only receive an intermittent water supply from the district municipality which is responsible for water and sanitation. The money the municipality got for electricity was often used to pay salaries and to fund other expenditure items such as fire services, library services and running traffic by-law enforcement at a loss.
 

Meeting report

The Chairperson welcomed everyone and indicated the meeting was pursuant to a previous Committee engagement with Eskom to which the entity’s challenges were discussed extensively. Part of the challenges which were identified was of unpaid bills by municipalities. Therefore, the Committee would want to hear from the municipalities about what the real issues were in an effort to map the way forward. Eskom is critical to the economy, and solutions to these challenges of debts owing needed to be found. He invited the ten municipalities to make their presentations.

Matjhabeng Municipality
Mr Thabiso Tsoaeli, Municipal Manager, Matjhabeng Municipality, told the Committee that there was a high percentage of unemployment and poverty in Matjhabeng, which has historically had a negative impact on revenue collections. The municipality owes Eskom the sum of R1.7 billion. The municipality entered into a payment arrangement with Eskom in March 2018. The arrangement was tabled in Council for adoption. Since the payment arrangement was been entered into, the municipality has been paying the current account sums ranging between R33 million and R35 million per month. The payment arrangement commenced in March and the last payment would be made in July 2031. >From July 2017 to date, the total amount paid to Eskom was R181 million. There was an in principle agreement with Eskom that if Matjhabeng paid R45 million each time it received the equitable share from government, it would be able to pay the debt over a 13-year period.

Mr Tsoaeli pointed out that consumers were stealing from the municipality through illegal connections. The municipality presented a financial recovery plan to Eskom to audit its meters, as it was found out that even those who can pay are stealing electricity. The municipality was also losing out on revenue from mining houses who have direct supply agreements with Eskom. Notably, before July 2014, the municipality was charging a flat rate for electricity, and not the tariff that Eskom was awarded. But when this was introduced that in July 2014, there was resistance. The municipality went to court and was challenged by the Goldfields Chamber of Business to which a relief in favour of business was granted.

Mr Nkosenjani Speelman, Executive Mayor, Matjhabeng Municipality, said a Revenue Enhancement Committee under his purview had been established. The committee consists of councillors and senior officials of the municipality and meets on a weekly basis. All issues relating to revenue, setting of targets and monitoring of performance were performed by the committee. He added that one of the issues that Parliament should take into consideration was the challenge of departments not paying the municipalities what is owed to them.

Emalahleni Municipality
Mr Sizwe Mayisela, Acting Municipal Manager, Emalahleni Municipality, said the mining town which falls under Emalahleni Municipality has a growing population and high rates of poverty. Population had grown almost threefold in five years. The unemployment rate was high especially for the youth owing to technological innovation which meant the mines no longer use the traditional methods, and thereby no longer employed a lot of people to operate the draglines for opencast mining processes. Emalahleni has a lot of people depending on social grants, increasing from 34 000 to 89 000 between 2012 and 2017. The unemployment rate increased from 25% to 27% in the same period. Among the youth, the unemployment rate is as high as 32%. He noted that Emalahleni is close to Eskom’s Kusile Coal Power Station. The station’s construction was winding down, and a huge number of the people that relied on those jobs during the construction and development phase were returning to Emalahleni with no source of income.

Mr Mayisela told the Committee that former mining villages were refusing to pay for electricity previously paid for by the mines. Emalahleni has a large number of Eskom employees, and the municipality is told that they are involved in illegal connections to electricity in the area. The town was teeming with Eskom electricians who are able to bypass the cut-offs by the municipalities. There is also a culture of non-payment and resistance from the communities, and local officials are threatened when they urge residents to pay. Councillors’ houses were being attacked for trying to encourage people to pay. These were huge challenges as non-payment of service charges by communities meant that raising enough revenue was an uphill task. Emalahleni was currently settling its debt to Eskom. However, while the outstanding balance on the debt in 2012 stood at about R58 million, Eskom arrived at a figure of R1.7 billion in outstanding debt in a space of five years, all while the municipality was servicing the debt.

Ms Linah Malatjie, Executive Mayor, Emalahleni Municipality, disputed the R1.7 billion Eskom bill and also took issue with the seasonal tariff structures which affects municipal billing and yearly financial planning. The municipality was failing to understand how Eskom reached the figure and would want the entity to indicate how the debt escalated up to this level. She requested further engagement with Eskom for the revaluation of the debt as the municipality could not afford to repay Eskom R4 million per day. Eskom has not been engaging the municipality as to how to bring the situation under control. She recommended the waiving of interest charges and agreements on flexible payment plans to ensure the debts are settled. She expressed the municipality’s commitment to implementation of cost containment measures and ensuring electricity users are billed properly.

Ditsobotla Municipality
Mr Thabo Sebothenyane, Acting Municipal Manager, Ditsobotla Municipality, said the municipality’s current debt with Eskom stood at about R305 million. In 2016, the municipality entered into a payment agreement. Between then and now, the municipality had paid around R50 million, but it was evident that the debt had not decreased. He illustrated the financial crisis of the municipality by noting that the average collection per month was R18 million and operation costs were R20 million, while the salary bill stood at R14 million. On top of this, they had to find a way to pay R10 million to Eskom. Ditsobotla spends 35% of its monthly budget on salaries - but still had to use consultants because staff are incompetent. Municipality also has a high overtime bill, although there was no equipment and money to do the work needed. When an analysis is done, it would be apparent that the majority of the municipality’s headcount was not fit for purpose.

Mr Sebothenyane pointed out that the collection rate at the municipality stood at 50%, and efforts to improve on revenue collection for electricity were being made. Residents were blocking municipal officials from checking their meters, they have burned down the homes of councillors and have also set the council chambers up in flames. Collection rates in five townships were very low - most are Eskom supply areas. The municipality was thus unable to use the mechanism to cut off services in the event of non-payment as this function was under the purview of Eskom. Regulation 32 contracts were also draining the municipality and were a wastage which could be done away with.

Ngwathe Municipality
Mr Bruce Kannemeyer, Municipal Manager, Ngwathe Municipality, said the municipality owed Eskom R969 million spanning from 2013 to 2018, with interest on the debt constituting about 50% of the value. The municipality, however, felt there is basis for the review of the debt owed to Eskom. A payment plan which the municipality believed was more realistic had been developed. He pleaded with Eskom to understand the wide-ranging challenges within the municipality. Notably, technical constraints and efforts by some residents to crook the system had undermined revenue collection from residents that consume electricity. A high level analysis between the consumption billing from Eskom to Ngwathe and Ngwathe municipal billing to the consumer was performed and its outcome indicates that the council had lost R169 million over a period of three years due to technical losses. By-passing and ghost vending (illegal selling of pre-paid electricity) continue to compound the municipality's losses, allowing households to access unlimited electricity without proportional or even flat rates for the power they consume. Some of the cases had been taken to court but most of the judgements were not deterrent enough to assist the municipality. More so, the debts owed by ratepayers presented challenges in raising revenue. Of the total debt to the municipality of about R750 million, more than half of it was owed by domestic households. The average collection was below average and ranged between 43 and 47%.

Govan Mbeki Municipality
Mr Thisha Mhlanga, Acting Municipal Manager, Govan Mbeki Municipality, said the conflation of historical debt to Eskom and the debt on the municipality’s current account made it impossible to get a grip on the spiralling debt. The municipality paid R542 million of the Eskom bill, but was struggling with old historical debt. If this was addressed, the municipality would not have a problem with setting its debt with Eskom.

Govan Mbeki Local Municipality has challenges in revenue collection with significant amounts of money owed to the municipality by its customers. The debt book balance has accumulated over a period of time to R1.1 billion to date. Causes of financial distress included: unfruitful debt collection service provision; impoverished communities where cut-offs creates volatile relations/ protests and municipal property vandalism; high distribution losses (electricity & water); dilapidated, ageing infrastructure [electricity, water, sewer and roads]; and unfruitful debt collection service providers. Notably, in an effort to consolidate its R600 million debt book, the municipality outsourced the services of debt collectors. However, the exercise had proven unfruitful with debt escalating to over R1.1 billion over 5 years and resulting in a legal dispute with service provider. Also, up to 22% of potential revenue was lost through illegal connections and ghost vending.

Ms Thandi Ngxonono, Executive Mayor, Govan Mbeki Municipality, stated that in an effort to curtail the high electricity distribution losses, the municipality, in coordination with Eskom had already generated new Supply Group Codes to Eliminate Ghost Vending. A new Smart Metering prepaid electricity solution acquisition tender was underway, and illegal connections and electricity tampering was to be addressed on a targeted basis with support from South African Police Service and using smart meters that can be monitored on a live basis. She expressed the municipality’s commitment to repayment of Eskom debt and pleaded with the electricity provider’s indulgence mindful of the challenges.

Lekwa Municipality
Mr Lindokuhle Dhlamini, Executive Mayor, Lekwa Municipality, told the Committee that one of the biggest challenges in repaying the debt to Eskom was that payment culture remained extremely low among residents. The municipality was dealing with a situation where it is given 15 days to pay Eskom whereas it gives its consumers 30 days to pay, which allows the interest to accumulate aggressively. The municipality is experiencing challenges in enforcing credit control due to the fact that Eskom is the distributor to the defaulting areas. Because the municipality is partnered with Eskom, it looked up to the electricity supplier to assist in resolving this constructively. Tariff structure also presents challenges and impacts the ability of the municipality to settle its debt obligations.

In its debt collection efforts, the municipality has identified top 200 business and top 200 residents that will be subjected to debt collectors. A tripartite debt collection agreement has been signed with Mpumalanga provincial Department of Cooperative Governance and Traditional Affairs and a company of debt collectors to assist with the following services: handover of the top 200 identified business and residential defaulters; instituting recovery mechanism to recover outstanding debt; preparation of summons; obtaining judgements; negotiation of acceptable payment arrangements; and obtaining emoluments attachment order. Building a culture and attitude of payment of services was paramount.

Naledi Munucipality
Mr Tshepo Bloom, Municipal Manager, Naledi Municipality, told the Committee that Eskom was at the top of its creditor list, alongside other large creditors including the South African Revenue Service, the office of the Auditor General, the Development Bank of South Africa and the South African Local Government Association. The payment of suppliers within 30 days as required by Municipal Finance Management Act (MFMA) was a challenge due to cash flow challenges. Eskom remains the municipality’s biggest liability with the debt currently at R274 977 064. Municipality was currently in negotiations with Eskom for a payment arrangement which should be finalised by the end of the month May 2018. The intention was to ensure that the current account is maintained to avoid further penalties and maintain the payment arrangement entered into with Eskom.

Mr Bloom said the municipality was seriously overspending on capital projects. It also cannot afford its fire, traffic and library services. He also questioned the commitment of municipal employees, 80% of whom he says are overpaid. The municipality is spending R1 million a month on their car allowances alone. The municipality has a serious problem of a lack of commitment from staff members. His colleagues were more of politicians than administrators. Residents were also not prepared to pay their bills because they only receive an intermittent water supply from the district municipality which is responsible for water and sanitation. The Auditor-General gave Naledi an unqualified audit, but noted that the council was not a going concern. However, there was little to celebrate there, because if a municipality gets an unqualified audit and cannot deliver services, it does not mean anything. The money the municipality got for electricity was often used to pay salaries and to fund other expenditure items such as fire services, library services and running traffic by-law enforcement at a loss. He proposed that the provincial sphere take on the funding of these functions instead.

Mr N Skalk, Executive Mayor, Naledi Municipality, concluded by indicating that the municipality has the potential to grow over the long term as it has many strategic opportunities in terms of its location and surrounding economic activities. However, the Eskom debt places a difficult decision at the end of each month as income is lower than expenses, such that the municipality finds itself in a predicament to pay debt instead of servicing the communities as mandated by the Constitution. A cash injection/bailout or better payment agreement between the municipality and Eskom should be investigated as it would be the most efficient and effective way for the municipality to strategically turn the situation around and hit the ground running with full service delivery as expected by communities.

Emfuleni Municipality
Emfuleni Municipality acknowledged the debt it owed to Eskom. The municipality suggested that the Committee give consideration to recommending the writing off interest accruing on the debt owed to Eskom, which would ease the repayment burden. The second consideration by Eskom should be the number of days for the accrual of interest - the 15 day period vis-à-vis 30 days. The 15 days were exerting too much pressure on municipalities as aforementioned. Notably, Eskom issued a notice which creates a great deal of instability in municipalities back in March 2016.
The need for continual engagements on credit measure controls between municipalities and Eskom was identified as paramount. Eskom ought to be a partner rather than a mere service provider so that the municipality could be open about its financial accounts and challenges. Since the municipality entered into a payment agreement, it had been consistent in rendering its obligations. However, the affordability of the debt, adding to the interest, was a challenge the municipality was confronted with. Currently, the municipality was embarking on a turnaround strategy which involved the filling of senior management vacancies and engagement with local communities to encourage payment of services. These were tasks that the municipality was seized with and would appreciate any form of assistance.

Thaba Chweu Municipality
Mr Thoka Kgoale, Municipal Manager, Thaba Chweu Municipality, said most of the issues the municipalities would have wanted to ventilate had been talked to. The municipality owed Eskom R464 million currently. However, revenue generation challenges were a principal issue which the municipality was grappling with. The main defaulters in paying municipal services were government and household, the debt amounting to R283 million. Subsequently, the municipality was implementing the Credit Control and Debt Collection policy, which entailed procurement of a debt collector, negotiation of acceptable payment arrangements with the defaulters, and disconnection of electricity for the defaulting customers.
On relevant interventions, council approved the sale of land parcels projected to generate revenue solely to service the Eskom debt. Although there are challenges, the project was underway. The Housing Development Agency’s services have been secured to assist with capital raising and implementation (valuations, infrastructure condition assessments, sales and bond applications, design and construction) of the mega project. The project entails disposal of 170 invaded houses and disposal of about 3000 serviced stands and housing packages. Other quick wins the municipality was looking into pursuing were as follows:

  • Thorough consultation with all stakeholders on the Duma public-private partnership project.
  • High level political and administrative support to iron out the Eskom impasse and HDA related challenges.
  • Urgent employment of suitably qualified senior managers.
  • Joint tackling of electricity theft.
  • Accelerate removal of illegal connections and adherence to deadlines.
  • Development of monitoring and evaluation strategy for reconnections.
  • Full support for project Revenue Enhancement Team.
  • Allocation of full time/ dedicated electricians under project revenue enhancement.
  • Development of monitoring and evaluation strategy for reconnections
  • Secure political and administrative willpower to turn the Municipality around

Ms Selina Mashego-Sekgobela, Executive Mayor, Thaba Chweu Municipality, concluded by indicating that the municipality was willing to settle the debt despite a myriad challenges. She asked Eskom to allow the municipality to make a presentation before the entity about the projects being embarked upon to address its historical debt.

Maluti A Phofung Municipality
Maluti A Phofung Municipality said its Eskom bill amounted to R1.7 billion. It was pointed out that the municipality held a meeting with the business chamber in early March. At that time Eskom wanted the municipality to pay a R100 million upfront and then enter into an agreement to pay an average of R60 million monthly. It was proposed that a separate account be opened that would ring-fence all revenue from business. The money collected would then be used to settle Eskom debt monthly. Unfortunately, while the proposal was still under consideration, business went to court after disconnection of electricity early March. The basis of the court application was to challenge Eskom on two matters; namely for Eskom to stop the interruptions, not to cut electricity supply on that particular month. The second relief that they sought was for them to pay Eskom directly. These were businesses which provided a huge chunk of revenue to the municipality monthly. The court subsequently granted an interim order allowing these businesses to pay Eskom directly. It was a dire situation and the ruling could set a precedent across the country. Most municipalities were likely to collapse as a result of the ruling. Furthermore, the municipality was confronted with a number of revenue generation challenges largely owing to damaged meters, and by-passing by households among others. Treasury had committed to assisting the municipality in formulating a recovery plan which sought to deal with a lot of capacity constraints. Maluti A Phofung committed to finalising payment arrangements and recovery plan by August 2018.

The meeting was adjourned for lunch break.

 

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