Municipalities owing Eskom debt: Inter-Ministerial Task Team report

Public Accounts (SCOPA)

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

The briefing presented an update on the work of the Inter-Ministerial Task Team (IMTT) on the constitutional, systemic and structural challenges in electricity reticulation. This meeting stems from a meeting the Standing Committee on Public Accounts (SCOPA) had with Eskom, South African Local Government Association (SALGA) and the Department of Cooperative Governance and Traditional Affairs (COGTA) on 15 May 2018, followed up by a meeting on 13 June 2018 with the top 10 municipalities owing Eskom R10 billion of the R13 billion electricity debt owed by municipalities to Eskom. Municipalities had raised several challenges, including the challenge of illegal connections in communities, the high unemployment rate which leads to people unable to pay the municipality while the municipality continues to provide electricity, ageing infrastructure, debt collectors overcharging municipalities, and municipalities not being assisted by police when they report illegal connections by people who are operating like gangsters who have weapons and are a danger to municipal officials.

Municipalities are concerned that their constitutional authority is undermined by Eskom. They see Eskom as a service provider which should provide a service (electricity reticulation) on behalf of a municipality. The difference in views has created a tension between municipalities and Eskom. The IMTT was established to find solutions to the constitutional, systemic, and structural challenges in electricity reticulation. The scope was further extended to include bulk water-related debt. It comprised of the following members: Minister of Cooperative Governance and Traditional Affairs (as Chairperson); Minister of Finance; Minister of Energy; Minister of Water and Sanitation; Minister of Public Enterprises; President of South African Local Government Association (SALGA); and the Eskom Board chairperson.

The municipal position is that the current dispensation whereby Eskom reticulates and distributes electricity within a municipal boundary without a service delivery agreement is in conflict with Section 156(1) of the Constitution. Section 160 provides that a municipal council makes decisions concerning the exercise of its powers and the performance of all the functions of the municipality. This authority entails that municipalities are not only responsible to ensure that the service is rendered, but must also ensure that by-laws are promulgated for the effective administration of such matters. In addition, the municipality has the right to exercise any power concerning a matter reasonably necessary for, or incidental to, the effective performance of its functions. This includes determining the level of service rendered, the tariff charged for the service and the collection of fees for the service rendered.

A contradicting view which is held by Eskom is that “executive authority” is not defined in the Constitution and as such it does not imply an exclusive authority to municipalities on electricity distribution and reticulation. This is based on the Electricity Regulation Act (ERA) which allows NERSA to issue licences for the distribution of electricity or the trading of electricity. It provides that the Regulator may make any licence subject to conditions relating to the format and contents of agreements entered into by licensees. The ERA allows NERSA to issue licences for the distribution and reticulation of electricity. ‘Distribution' means the conveyance of electricity through a distribution power system, excluding trading, and distribute' and 'distributing' have corresponding meanings. ‘Reticulation' means trading or distribution of electricity and associated services.

SALGA threatens to seek a judicial declaratory order on the constitutionality of electricity reticulation and distribution of Eskom (i.e. constitutional mandate). The Constitution states that “electricity and gas reticulation” is an exclusive Local Government function and hence the executive authority (Municipal Council) is exclusively responsible for the function and the provisions of Municipal Systems Act. Eskom essentially challenges not the location of the constitutional function, but the interpretation of what is defined as “executive authority” (i.e. political accountable institution). Also, Eskom claims its historic role in the generation, transmission, and distribution (public provider of last resort), hence its contestation of “executive authority”. Both raise the concern of economic and fiscal sustainability of Eskom and municipalities.

COGTA recommended that SCOPA notes:
• IMTT’s progress on the electricity constitutional matter between Eskom and municipalities as well as the work of the advisory panel.
• IMTT’s progress on the electricity-related structural and systemic challenges.
• The level of debt that is consistently escalating and that the CoGTA MINMEC has requested Provinces to enforce the payment agreements and ensure that municipalities demonstrate a commitment to do their part in this process.

Members sought more information on government debt to municipalities, the possibility of financial bailouts to the struggling municipalities, and why NERSA was not part of the stakeholders despite the municipalities complaining about who the licensing authority was. SCOPA looks forward to a report-back from the Inter-Ministerial Task Team (IMTT) in September and that there should be a solution to this matter by then. The Committee emphasised that the IMTT needed to get Eskom to stop the electricity interruptions since the matter was being given priority attention. This is so that ordinary South Africans can have peace of mind with the knowledge that Parliament and government are on top of the matter. The Committee emphasised that municipalities had to honour their debts and their payment arrangements. The fact that both Parliament and government were intervening did not mean that they should relax in their efforts. Municipalities should also jack up their financial management processes and systems and cut off the waste of public money.

Meeting report

The Chairperson remarked that there were industrial challenges at Eskom and the Committee did not wish to hear from junior officials, rather from senior officials and decision makers. He noted that the Committee had met the previous day with 10 municipalities to hear their side of the argument.

Minister of Cooperative Governance and Traditional Affairs
The Minister for CoGTA, Dr Zweli Mkhize, gave the apologies of the other members of the inter-ministerial task team (IMTT) because of other commitments and the demands of their responsibilities, but as the Chairperson of the task team, he was representing the others. He recalled that he had only been at the Department for barely three months, and that the issue of municipalities’ debts to both Eskom and the Water Board has been his prime priority. He understood the various challenges facing municipalities and that 70% of the debt came from the 10 municipalities that the Committee had met the day before, and 40% of that is from the municipalities in the Free State.

The Minister reported that he would be taking the matter of the R139 billion collectively owed to the municipalities by communities and the private sector, to the Presidential Coordination Committee. He outlined that the municipality mandates include distribution of electricity and therefore, complications in terms of who collects where in inter-connected wall to wall municipalities due to poor delineation and zoning.

The Minister stated that they were encouraging Eskom not to discontinue services in the defaulting municipalities and was encouraging the municipalities to pay as much as they could, despite their various challenges, so as to meet Eskom halfway. He outlined a need for a political decision to redefine the mandates of the two entities, Eskom and municipalities, instead of the matter being decided in the courts. There was a need for an amendment to sort out the overlapping mandates. He added that NERSA needed to have clear criteria for issuing licences. There was also a need to review Eskom’s billing system because the composition of the debts had both capital and interest (penalties), including compound interest. The municipalities were in a debt trap necessitating the debt having to be restructured. He outlined the need to eliminate ghost vendors and improve the system of collection to ensure consistent and predictable collections and revenues. He said that it was necessary to have a culture of payment by the State, municipalities, and the private sector. He said the various issues cropped up silently and without much attention, but had at this point grown into a monster that everyone needed to sit and plan how to tackle it. He reckoned that the IMTT report would be finalised and tabled in two weeks.

IMTT Report on plans to resolve impasse between Eskom and municipalities: COGTA briefing
Ms Lakela Kaunda, Chief Operations Officer, CoGTA, took the members through the presentation. Municipalities are concerned that their constitutional authority is undermined by Eskom. They see Eskom as a service provider which should provide a service (electricity reticulation) on behalf of a municipality. Eskom provides the service as a public company (regulated by company legislation) on the strength of a licence issued to it by The National Energy Regulator (NERSA); without reference to the Municipal Systems Act. This difference in views has created a tension between municipalities and Eskom. The IMTT was established to find solutions to the constitutional, Systemic and Structural Challenges in electricity reticulation. The scope was further extended to include bulk water-related debt. It comprised of the following members:
Minister of Cooperative Governance and Traditional Affairs (as Chairperson); Minister of Finance; Minister of Energy; Minister of Water and Sanitation; Minister of Public Enterprises; President of South African Local Government Association (SALGA); and the Eskom Board chairperson.

Legislative Framework
municipalities have the executive authority in respect of and the right to administer the reticulation of electricity (Sect 156 and Schedule 4B of the Constitution). Section 160(1)(a) provides that a municipal council makes decisions concerning the exercise of its powers and the performance of all the functions of the municipality. However; “executive authority” is not defined in the Constitution. Electricity Regulation Act, 2006 allows NERSA to issue licences for the distribution of electricity of electricity. Section 14 provides that the Regulator may make any licence subject to conditions relating to the format and contents of agreements entered into by licensees. Section 28 provides that a municipality must comply with Chapter 8 of the Municipal Systems Act and this Act prior to entering into a Service Delivery Agreement (SDA) with a service provider. A SDA entered into by a municipality with an external service provider must comply with the Municipal Systems Act, the Municipal Finance Management Act and this Act.

Following the President's Coordinating Council (PCC) recommendation, the IMTT took the decision to establish an Advisory Panel to provide advice and legal clarity on the constitutional authority for electricity reticulation. The purpose of the Advisory Panel is to advise the Minister of Cooperative Governance and Traditional Affairs (COGTA) and IMTT on the constitutional Authority for electricity reticulation. The panel is in place and currently doing the work as assigned. The panel has held engagements/sessions with the two parties involved, SALGA and Eskom. They appeared before the panel to make presentations on their differing positions on the constitutional matter. Having identified different role players relevant to the constitutional matter, the following stakeholders have appeared before the panel:
National Energy Regulator of South Africa; Department of Energy; National Treasury; Department of Public Enterprises; Financial and Fiscal Commission; Municipal Demarcation Board.

Local Government Position
The municipal position is that the current dispensation whereby Eskom reticulates and distributes electricity within a municipal boundary without a service delivery agreement (SDA) is in conflict with Section 156(1) of the Constitution. Section 160 provides that a municipal council makes decisions concerning the exercise of its powers and the performance of all the functions of the municipality. This authority entails that municipalities are not only responsible to ensure that the service is rendered, but must also ensure that by-laws are promulgated for the effective administration of such matters. In addition, the municipality has the right to exercise any power concerning a matter reasonably necessary for, or incidental to, the effective performance of its functions. This includes determining the level of service rendered, the tariff charged for the service and the collection of fees for the service rendered.

The executive authority of municipalities in respect of electricity reticulation is not recognised by all role players in the energy sector. In addition, the Local Government: Municipal Systems Act, 2000, defines executive authority. It further provides that municipal services can be provided through an internal service delivery mechanism by the municipality itself or an external service delivery mechanism such as an organ of state licensed in terms of national legislation. In the absence of a contracting and regulatory mechanism (SDA) between Eskom and municipalities as envisaged in Section 76(b) of the Municipal Systems Act, municipalities are unable to exercise their executive authority for electricity reticulation. They are also unable to levy surcharges in Eskom supply areas and are unable to exercise credit control in Eskom supply areas. There is also a lack of tariff parity between municipal supply areas and Eskom supply areas amongst other concerns.

Eskom position
A contradicting view which is held by Eskom is that “executive authority” is not defined in the Constitution and as such it does not imply an exclusive authority to municipalities on electricity distribution and reticulation. This is based on the Electricity Regulation Act, 2006 (Act No. 4 of 2006) (the ERA) which allows NERSA to issue licences for the distribution of electricity or the trading of electricity. Sect 14 of the ERA provides that the Regulator may make any licence subject to conditions relating to the format and contents of agreements entered into by licensees. Eskom, therefore, provides this service as a public company (regulated by company legislation) on the strength of a licence issued to it by NERSA; without reference to the Municipal Systems Act.

The Electricity Regulation Act, 2006, allows NERSA to issue licences for the distribution and reticulation of electricity. ‘Distribution' means the conveyance of electricity through a distribution power system excluding trading, and distribute' and 'distributing' have corresponding meanings. ‘Reticulation' means trading or distribution of electricity and includes services associated therewith.

Structural issues
Public lighting is part of the package of electricity reticulation services; however, Eskom in its areas of supply does not provide public lighting (installation) and maintains it is a municipal function. Eskom at times delays the energising of streetlights that have been installed by municipalities, citing several issues like misalignment of specifications, standards and capacity which compromises public safety. Whilst municipalities install energy efficient lighting (through the Energy Efficiency Demand Side Management Grant) in Eskom areas, Eskom maintains a high flat rate tariff. The Department of Energy (DOE) is in the process of reviewing the electricity pricing policy, this will clarify and provide a policy direction on this matter. According to DOE, this project began in April 2018 and is scheduled to be concluded by March 2020.

NERSA is currently implementing the Geographic Information System (GIS) to review and update Schedule 1 (list of supply areas) of electricity distribution licences for municipalities and Eskom. Areas of Supply were never verified when licences were first issued. Some Distribution Licences for municipalities still reflects TLC or TRC which no longer exist. Demarcation of the municipal boundaries by the Demarcation Board under the Demarcation Board Act adds areas of supply to municipalities and the licence is left un-updated. Disputes between Eskom and municipalities over areas of supply cannot be resolved based on the above challenge.

Systemic Challenges
• Eskom credit control mechanisms for municipal bulk accounts are not aligned to the Municipal Finance Management Act (MFMA) and the Public Finance Management Act (PFMA)
• The need to rationalise of municipal tariffs
• Notified maximum demand and related penalties
• Reconciliation of municipal debt to Eskom
• The historical debt owed to and by municipalities
• The unsustainability of current payment agreements between Eskom and municipalities.

The Board implemented a range of concessions to address these challenges from 1 July 2017 including:
• Reducing interest rate on overdue municipal bulk accounts from prime plus 5% to prime plus 2.5%;
• Payment terms extended from 15 days to 30 days for municipal bulk accounts;
• Payments received from municipalities allocated to capital first then interest;
• The rationalisation of municipal tariffs from eleven to three has been approved by the Eskom Board and will be submitted to NERSA as part of the tariff approval process.

The IMTT discussed the concessions, however, there are still discrepancies in the level of implementation of these. Eskom will provide a detailed report on the implementation status at the next IMTT to be held before end June. The IMTT has requested Eskom to unbundle the debt to clearly show the classification of the amounts due to Eskom; to determine the capital, penalties and interest due respectively, as well as the amount legally recoverable by Eskom, taking into account prescription and the principle of quantum duplum.

At the 31 May 2018, the total overdue debt was R14.319 billion. Seven out 10 of the municipalities have court interdicts. This has a bearing on the municipal revenue.

Challenges facing municipalities
The Minister and Technical IMTT met with municipalities and identified common challenges:
• Widespread “culture’’ of non-payment by consumers
• Ageing infrastructure which results in higher electricity and water losses and as creates opportunities for illegal connections
• Maintenance and refurbishment backlog
• Unfunded budgets where most municipalities operating expenditure is greater than revenue
• Low collection rates as a result of high indigence rates and ineffective implementation of credit control and debt collection measures
• High vacancies and/or a lack of qualified and competent personnel
• Tariffs that are not cost reflective
• Revenue foregone from surcharges in Eskom supply areas
• Inability to use electricity as a credit control measure
• Illegal connections and illegal vending.

The CoGTA-led process has held engagements with top owing municipalities throughout the country. The process led to re-negotiations of payment agreements between the municipalities and its creditors with COGTA and National Treasury playing a key role (As at the end of February 2018, 55 agreements were signed by municipalities and only 32% are being honoured). DCOG has established the capacity to respond to the tariff deficiencies. Municipalities will be supported in their NERSA tariff application process to apply for more cost reflective tariffs in order to improve profitability, and DCOG continues to monitor municipality payment arrangements and maintains close working relationships with all stakeholders to ensure that the debt issue is resolved. The department supports prioritised municipalities on a simplified revenue plan and the project. The simplified revenue plan once implemented will ensure that there is improved revenue management, reduction of municipal consumer debt, and protection and enhancement of the municipalities revenue collection potential.

Section 154 of the Constitution empowers the national government  by legislative and other measures, to strengthen the capacity of municipalities to, inter alia, perform their function. The department is currently developing proto-type structures according to different categories of municipalities in fulfilment of the Ministers’ powers to develop uniform for amongst other staff establishments. The development of prototype structures will be completed between July and August 2018. Municipalities will be expected to implement the prototype municipalities. The main aim of the prototype structures is to ensure that the municipalities organize their administration within their financial capacity and to free funds earmarked for service delivery for their intended purpose; to ensure under-resourced municipalities are capacitated to perform their functions; and the Department developed regulations for senior managers for their appointments regarding minimum competencies, expertise and qualifications and are in the process of finalizing competencies for all staff members. The objective is to realize the professionalization of Local Government administration and to enable municipalities to perform their constitutional obligation.

Debt owed by Government Departments to municipalities
The challenge of government  debt to municipalities is a complex one that has been discussed by IMTT is also being taken to the President’s Coordinating Council to get all the departments to focus on resolving and paying their municipal accounts. Government Departments owed municipalities R7.9 billion or 5.7% of the total debtors’ book. The debt owed by provincial Departments was R4 billion as at March 2017 and the biggest debtor is the Provincial Department of Public Works (R2.1 billion). National departments as of March 2018 owed R3.2 billion with National Public Works having a recorded debt of R2.8 billion. Other State entities and inter-municipal debt amounted to R800 000.

The Department recommends that SCOPA notes:
• IMTT’s progress on the electricity constitutional matter between Eskom and municipalities as well as the work of the advisory panel.
• IMTT’s progress on the electricity-related structural and systemic challenges.
• The level of debt that is consistently escalating and that the CoGTA MINMEC has requested Provinces to enforce the payment agreements and ensure that municipalities demonstrate a commitment to do their part in this process.

IMTT Advisory Panel on Electricity Reticulation Interim Report to Minister of COGTA
This Preliminary Interim Report provides a brief overview of the matters influencing the impasse between SALGA on behalf of municipalities and Eskom, including a broad overview of stakeholders’ interpretation, and suggestions on how matters could be resolved between Eskom and SALGA.

SALGA threaten to seek a Judicial declaratory on the constitutionality of electricity reticulation and distribution of Eskom (i.e. constitutional mandate). The Constitution states that “electricity and gas reticulation” is an exclusive Local Government function and hence the executive authority (Municipal Council) is exclusively responsible for the function (i.e. exclusivity) and provisions of Municipal Systems Act. Eskom essentially challenges not the location of the constitutional function, but the interpretation of what is defined as “executive authority” (i.e. political accountable institution). Also, Eskom claims its historic role in the generation, transmission and distribution (public provider of last resort), hence its contestation of “executive authority”. Both raise the concern of economic and fiscal sustainability of Eskom and municipalities.

SALGA Position
municipalities have constitutional authority for electricity reticulation. In terms of Section 156(1) of the Constitution, municipalities have the executive authority in respect of, and the right to administer electricity reticulation (as per local government matters listed in Part B of Schedule 4 of the Constitution). As executive authority for electricity reticulation, municipalities decide the service provision arrangement.  SALGA endorses the definition of reticulation as outlined in the ERA, namely “trading or distribution of electricity and includes services associated therewith”. This executive authority resides in the council and cannot be delegated and by implications cannot be shared. Implementation of a municipality's function is facilitated by national legislation, in particular, the Systems Act. A municipality is the service authority as per the Municipal System Act, which is defined as "the power of a municipality to regulate” the provision of a municipal service by a service provider.

Eskom as a service provider must have a service delivery agreement with municipalities as the service authority. Where a service is provided through an external mechanism (such as Eskom) municipalities are required to enter into a service delivery agreement with the service provider

Eskom Position
Eskom is firmly of the view that they are not a Service Provider to municipalities and that the NERSA licence provides Eskom with the required “rights” to distribute and reticulate electricity. It is of the opinion that there is sufficient history to demonstrate the Eskom presence in the electricity distribution and reticulation business. Eskom is of the opinion that “Executive Authority” is not exclusive to municipalities and took a position not to sign the SDA as contemplated by the Municipal Systems Act. It is of the view that both Eskom and municipalities are key in the delivery of services to customers while Eskom is of the view that an agreement is required that recognise the rights of both Eskom and the municipalities to co-exist in electricity distribution within the municipal demarcated area. It wants the licence conditions of both Eskom and municipalities to be protected.

Based on the Eskom view, an interim mechanism is required to ensure that technical industry issues are addressed while government  reviews and proposes alternative reform/restructuring. They prefer municipalities to directly bill customers supplied by Eskom in the municipal area of jurisdiction to deal with the Levy and a review of alternative credit control measures is necessary.

NERSA position
NERSA has been waiting for the past two years for inputs on the Draft Amendments from SALGA (Eskom involved in drafting). Service Delivery Agreement must be based and referenced to the Electricity Regulation Act. A number of municipalities indicated that they do not have the competency or capacity to distribute electricity and want to hand over their electricity distribution/reticulation and trading licence to Eskom. Multiple participants (National Treasury, NERSA, municipalities) in the regulation of electricity delivery introduce unnecessary complexity and a Draft Amendment of Eskom Licensing that can include the agreed contents of the Service Delivery Agreement or full-Service Delivery Agreement is required.

The NERSA Geographic Information System (GIS) under development will assist in facilitating distribution network dispute resolution between Eskom and municipalities. Having current Eskom licence under review against the rest of the industry obliged to work under licences (two years under review due to non-response from SALGA).

National Treasury Position
National Treasury’s ideal strategy is to have financially viable municipalities and State-Owned Enterprises (including Eskom), as well as a stable electricity supply to power the economy. The current electricity distribution model is not sustainable and will need to be overhauled. The immediate focus should be on ensuring municipalities are collecting revenue and meeting current obligations to suppliers. The National Government will not bailout municipalities as the Local Government Fiscal Framework is adequate and municipalities are sufficiently funded for their obligations. Treasury holds no view on the Service Delivery Agreement as contemplated in Section 78 of the Municipal Systems Act without empirical evidence on the likely impact of the SDA.

Matters of concern
There are five key areas of concern:
• Historic urgency of electrification access crowds out importance of location of electricity reticulation;
• Economic and financial sustainability of both municipalities and Eskom;
• Constitution, subsidiary legislation and court judgments;
• Consequence and impact of continuity and discontinuity of electricity reticulation and distribution on the mix of customers – citizens and various industries (costs of previous multi-year infrastructure investment);
• Multi-layer classical disjuncture in governance, leadership and management, including ethical follow-through on agreements on electricity reticulation and distribution networks (institutional stubbornness against institutional arrogance).

Eskom and SALGA “took specific positions” and therefore to design a sustainable solution to the impasse will require radical and forward thinking. The signing of the SDA will not address the real challenges at hand or improve the financial position of municipalities and Eskom. Further deliberations are required on the constitutional competencies in respect of electricity and gas reticulation and the exclusive function. The EDI requires tighter regulation while benchmarking is essential to monitor the performance of the industry. A structured intervention is required to address the sustainability of the electricity supply industry (ESI) and municipalities

Discussion
Mr T Brauteseth (DA) recommended a quick summary of the presentations. He added that the previous day had been a historic occasion because it was the first time municipalities appeared in front of the Committee. He added that were municipalities to be given a financial bailout, there would need to be consequences and accountability because the management would have to be overhauled. This was because the management that led to the mess should not be allowed to be the one correcting it. There was, therefore, a need to think about who would oversee the various municipalities in the future, particularly after a bailout.

Mr M Booi (ANC) was of the view that the Members should not at this point blame Eskom or the municipalities, rather focus all energies on finding solutions.

Ms N Khunou (ANC) pointed out that what the ten municipalities were reporting on the day before was different from what COGTA had just presented, which presented a positive outlook. All stakeholders should have been in one room and wondered why NERSA was not part of the stakeholders, despite the municipalities complaining about who the licensing authority was. What was important was to review or amend the Electricity Act. She noted that financial management in the municipalities was very bad.

Mr C Ross (DA) maintained that the task team had not addressed the current financial crisis in the municipalities that was forcing private citizens to resort to legal action. This was because COGTA and municipalities were working in silos and that when the municipalities do not pay, Eskom was resorting to harassing individual consumers. All the municipalities in the Free State required intervention. He complained that Eskom was enforcing discontinuation notices on paying customers because of its liquidity problems. Due to the state of the national fiscus, bail-outs seemed unlikely and a report on the prescription of debts was required from the Department.

The Chairperson reiterated that it was important to hear the progress report and the outline of the challenges experienced.

Mr E Kekana (ANC) acknowledged that there was government  debt to the municipalities and hence a need for a separate process for it.

COGTA Minister, Dr Zweli Mkhize, responded that government  debt to the municipalities would be tackled in the next meeting. He added that an IMTT meeting would be held in two weeks to consolidate the issues and a preliminary report would be ready in a month or two. By September everything should be ready. Bail outs had not been discussed or addressed because it was for National Treasury to deal with. He would take the matters the Members had raised to the IMTT in its next sitting.

Mr Ross thanked the Chairperson for coordinating local government into the Committee’s sphere, by having the municipalities appear before the Committee.

The meeting was adjourned.

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