COGTA plans to resolve municipal debt to Eskom; with Deputy Ministers

Public Accounts (SCOPA)

03 December 2019
Chairperson: Mr M Hlengwa (IFP)
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Meeting Summary

The Committee was briefed by the Department of Cooperative Governance and Traditional Affairs (COGTA) on its plans to resolve the problem of municipal debt to Eskom. Representatives of Eskom, the South African Local Government Association (SALGA) and National Treasury were in attendance. The presentation noted that not just municipalities but also organs of state owed money to Eskom. COGTA identified the constitutional, structural and systemic challenges standing in the way of solving the problem of defaulting municipalities. The Inter-Ministerial Task Team set up in 2017 had tabled a list of recommendations in November 2018 which was approved by Cabinet. These included the installation of prepaid electricity meters and the requirement that Eskom conclude service delivery agreements. It was piloting smart prepaid meters in four areas. Through consultation with National Treasury, COGTA had managed to reduced the number of municipalities with unfunded budgets from over 120 down to 30. To address the culture of non-payment, COGTA had begun working on a communication strategy. Despite the efforts of stakeholders, municipal debt had continued to escalate, but asked the Committee to note the initiatives undertaken and proposed to address this problem.

SALGA said that it was in agreement with Eskom in quite a number of areas. There was a fundamental disagreement on the matter of the service delivery agreement (SDA), as Cabinet had approved an SDA not an operating agreement. SALGA argued that the inability of municipalities to pay their debt to Eskom was the even larger debt owed to municipalities by electricity customers. Organs of state and businesses should pay their debts first to municipalities. It suggested a bill to cancel household electricity debt for households simply unable to pay. Where households and businesses were able to pay, municipalities should be assisted in forcing them to pay, just as they were forced to pay taxes. Businesses must prove that they are above board with their municipal affairs. The Municipal Structures Act prohibiting municipal employees from owing should be extended to all government employees. SALGA requested that the Cabinet resolution on the IMTT recommendations should be implemented. It appealed to the Committee to assist them to deal with a root cause, which was the inability of municipalities to collect. The installation of prepaid meters would be a good practical step, but it would require capital. Provinces urgently needed to set up structures to focus on the debt.

The Eskom Board Chairperson said municipal debt to Eskom had ballooned from R9.8bn in February 2017 to R19.9bn in October 2019. From March to September 2019 it had increased by R6bn. The culture of non-payment was increasing not decreasing as customers stopped paying because there was no incentive to pay.

Members disagreed on whether non-payment by customers was caused by political or socio-economic factors. However, they agreed that municipalities needed to be firm: non-paying customers could not continue to receive electricity. This should be done without “plunging the country into darkness”. Members were not satisfied that the solutions presented were sufficiently concrete or effective in the short term. The Chairperson said that Public Works would be summoned to discuss its Eskom debt. All ministers whose departments had outstanding debt would be instructed to submit payment plans by February 2020. He instructed SALGA to submit a payment plan for the top 20 defaulting municipalities, to take up their issues with COGTA, and submit a progress report on their actions. Bailouts could not continue indefinitely. The Committee needed accountability and commitments. Political will had to be found to address this.
 

Meeting report

The Chairperson noted an apology from the Minister and welcomed Deputy Minister of Cooperative Governance and Traditional Affairs Parks Tau and Deputy Minister of Public Enterprises Phumulo Masualle. He said the Committee would continue to interrogate the impasse between Eskom and municipalities until concrete action was taken to address this. There did not seem to be the necessary urgency to resolve this. Inaction in the face of escalating debt was not acceptable. Payments simply had to be made. He noted with concern that some organs of state were also not paying their electricity bills.

Mr A Lees (DA) observed that a very large delegation was present, but the issue was political. The presentation was long and full of important information, but he wanted answers about the culture of non-payment for electricity. There seemed to be no presentation from Eskom.

The Chairperson stated that the Inter-Ministerial Task Team (IMTT) on Defaulting Municipalities would not meet in the Sixth Administration, Eskom would have a chance to explain why it had not submitted a presentation. He then gave the floor to Deputy Minister Tau.

COGTA Deputy Minister remarks
Deputy Minister of Cooperative Governance and Traditional Affairs, Mr Parks Tau, said that the presentation included inputs from all the relevant role players, including Eskom and the South African Local Government Association (SALGA). The presentation would deal with the work of the IMTT, which was going to be taken forward by the Inter-Ministerial Committee (IMC) on Service Delivery as part of the rationalisation of inter-ministerial committees. The presentation would include information about water debt as well as electricity debt. He assured the Committee that the presentation would be summarised to allow more time for discussion.

COGTA Presentation
Dr Kevin Naidoo (Acting Deputy Director-General: Institutional Development, COGTA) revealed that as much as 41% of water revenue across the entire value chain was not collected. The situation was similar for electricity revenues. Moreover, municipal debt owed to water boards and Eskom was increasing. He made the point that municipalities were, in turn, owed a total debt of R165bn by households (R118.5bn), commercial (R24.7bn) and government (R10.2bn). He listed the 20 municipalities that were owed the most and listed the debt owed by organs of state. The Department of Public Works alone owed R3bn.

He detailed the challenges leading to the escalating debt, which the IMTT had been established to address. The challenges had been grouped into constitutional, structural and systemic issues. The constitutional challenges revolved around provisions of the Municipal Systems Act, in particular the obligation of Eskom to sign a service delivery agreement (SDA), and the role of the National Energy Regulator of South Africa (NERSA). The structural issues included public lighting and the delineation of areas of supply, where there were sometimes disagreements between Eskom and municipalities. Systemic issues included the alignment of credit control mechanisms for bulk accounts with relevant legislation, the need to rationalise municipal tariffs, and matters around the Notified Maximum Demand (NMD) of municipalities. He outlined the work done by the IMTT since its establishment in 2017, ending with the IMTT list of recommendations tabled in November 2018 and approved by Cabinet. These included the requirement that Eskom conclude SDAs and the installation of prepaid electricity meters.

Dr Naidoo said that through consultation with National Treasury, COGTA had managed to reduced the number of municipalities with unfunded budgets from over 120 down to 30. Funded budgets were needed to ensure regular payments of current accounts. The arrear debt would be ring-fenced and re-negotiated. To address the culture of non-payment, COGTA had begun working on a communication strategy. He discussed some of the other IMTT proposals to discipline defaulting businesses and the piloting of prepaid electricity meters in four areas. COGTA believed that smart meters had the potential to alleviate the debt problem. The impasse between Eskom and SALGA had been resolved, the only remaining issue being the development of an acceptable SDA. He noted that despite the efforts of stakeholders, municipal debt had continued to escalate, but asked the Committee to note the initiatives undertaken and proposed to address this problem.

The Chairperson said it was difficult to accept this, given that municipal debt had increased. Where was the money? There was no progress.

SALGA comments
Ms Thembi Nkadimeng, SALGA President, said that SALGA was in agreement with Eskom in quite a number of areas. There was a fundamental disagreement on the matter of the SDA, however. Cabinet had approved an SDA not an operating agreement. She reminded the Committee that municipalities were collectively owed R165bn, of which R10bn was owed by government and R24bn by businesses. This was money that could be collected relatively easily. And yet it was the municipalities who were blamed for non-payment. She said that in areas where municipalities were licensed to provide electricity, collection rates were above 70%, whereas in areas where Eskom was licensed, collection rates were at 10%. Electricity and water accounts were linked and municipalities could shut off one service to entice payment of the other. According to the Constitution, municipalities were responsible for the reticulation of electricity and water, but were in fact only reticulating 40% at present. Municipalities were providing services for which they were not being paid. She made three suggestions (i) A bill to cancel household electricity debt for some households simply unable to pay, as according to StatsSA. (ii) Where households and businesses were able to pay, municipalities should be assisted in forcing them to pay, just as they were forced to pay taxes. Businesses must prove that they are above board with their municipal affairs. (iii) The Municipal Structures Act prohibiting municipal employees from owing should be extended to all government employees. SALGA requested that the Cabinet resolution be implemented.

A SALGA NEC member argued that a holistic view would reveal that going after municipalities was merely addressing the symptom of the problem. Municipalities reticulated water and electricity services on credit to government, businesses and households. These three groups of customers needed to honour the user pay principle. It was not that tariffs were being collected and spent on other services – the fact was that users were just not paying. He stressed that municipalities were owed R165bn. SALGA believed that the debts of government and business should be addressed first – because it would be simpler and it was more likely that these customers would be able to afford to pay their debt.

The Chairperson interrupted to say that these comments had not been submitted in writing, prior to the meeting. This placed the Committee in a difficult position. He asked Ms Nkadimeng and her colleague to submit a written version of their comments. The problem was that the issues being raised might need to be addressed in a different setting and it would therefore assist the Committee to have them in writing.

The SALGA NEC member explained that SALGA had made inputs into the COGTA presentation, and he was only underlining certain issues.

The Chairperson replied that it would be for record purposes, and particularly because the SALGA NEC member was raising points quite sharply. He invited Eskom to deliver its presentation.

Ms Nkadimeng said that SALGA might have misunderstood what the Committee had invited them to do. She wished to place on record that SALGA had not been given the same opportunity that Eskom had, to deliver a presentation. SALGA was not being respected.

The Chairperson said that the issue on the table was the non-payment of debt owed to Eskom by municipalities. Therefore the Committee want to hear from the creditor. The Committee had visited the Medupi and Kusile power stations and the debt had been raised then. He noted SALGA’s concern and said he would not ignore them, but asked that everyone not lose sight of the bigger picture.

Eskom comments
Mr Jabu Mabuza, Eskom Board Chairperson, said that he would not deliver the presentation as all the matters in it were known by the Committee, and he would just make some comments. Eskom had been an active member of the IMTT, having attended more than 40 meetings, but despite this, debt had escalated. This was the most important thing. The debt owed to Eskom by municipalities had ballooned from R9.8bn in 2017 to R26bn in October 2019. From March to September 2019 it had increased by R6bn. He noted SALGA’s debts but said that they were SALGA’s and not Eskom’s responsibility. The SDA should also be discussed in a different setting.

Mr Mabuza said that the top ten defaulting municipalities accounted for 67% of the debt, and the top 20 accounted for 79%. The payment trajectory was a source of worry, however, over the last four years, payment had decreased from 93% to around 75%, with the top 20 defaulting municipalities paying only 44%. The issues raised by COGTA and SALGA accounted for just 5% of the problem and the presentations did not offer any real solutions, they only looked at the problems. The simple fact was that Eskom had to be paid what it was owed. There was a serious socio-political issue too. More and more customers who were able to pay had no incentive to pay.

Discussion
The Chairperson reminded the meeting again that the issue on the table was municipal debt to Eskom. He assured all present that the other issues would be dealt with.

Deputy Minister Tau prefaced COGTA’s responses to the questions by noting that the IMTT had been established in response to a problem which, it emerged, had complex legislative, political, systemic and structural causes. Due to this, it had resolved to seek technical advice. An advisory panel was thus set up, and both Eskom and SALGA had agreed to abide by its findings. As the IMTT had not been re-established, it had become necessary to re-assign responsibility to various departments. He said that it was almost inevitable that municipalities who produced unfunded budgets would default to its creditors. Interventions therefore needed to take place at this stage, and already 35 municipalities had had their equitable share withheld. This was a harsh but necessary measure.

Mr B Hadebe (ANC) asked why this action had not been taken earlier.

Deputy Minister Tau conceded that earlier interventions had been inadequate, but stressed that COGTA had intervened when it needed to.

Ms Nkadimeng prefaced SALGA’s responses by noting that the current crisis had been anticipated in 2012/13. A memorandum of understanding with Eskom had been signed at the time, but it had fallen through. It would have allowed municipalities to collect revenues from areas where Eskom was reticulating the electricity supply, thereby enabling them to pay for the services they were receiving. Even after the establishment of the IMTT and the advisory panel, the problems remained.

Mr M Dirks (ANC) asked if Eskom would take the same measures to recover debts from areas where it was responsible for reticulation, such as Soweto, as it would where municipalities were responsible for reticulation.

Mr Mabuza replied that it was.

Mr Dirks said that no one had yet raised the point that debts to municipalities prescribed after three years, and it was likely therefore that Eskom was asking SALGA to achieve something impossible. Most of the R165bn it was owed would have to be written off.

Mr Lees said that the end of the IMTT should be celebrated as it had clearly been a failure. He recalled that conditional grants had been available for the installation of prepaid electricity meters as far back as 2000, and asked COGTA why it was still doing a pilot.

Mr Hadebe added that the City of Cape Town had already installed prepaid meters. Why was COGTA still doing a pilot project?

Mr Lees asked if it was legal for a municipality to pass an unfunded budget.

Mr Lees asked SALGA if it really believed that there were no municipalities that used revenue from the sale electricity for other items, without paying Eskom. He found this hard to believe.

Mr Lees asked again for the figures for organ of state debt to municipalities and municipal debt to Eskom

Mr Mabuza replied organ of state debt to municipalities: R10.2bn. Municipal debt to Eskom: R19.9bn.

Mr Lees noted with interest that the COGTA presentation did not break down the municipal debt by province. The Eskom presentation did give a provincial breakdown. Comparing the debt in the Free State (R10.6bn) with the Western Cape (R19m) proved his point that it was a political issue. There was no political will to fix the problem. Some municipalities were offering 50% discount to customers who had not paid their bills which was encouraging more customers to stop paying. The bottom line was that Eskom need to cut off the supply to customers who did not pay.

Mr Dirks replied that the Stats SA report revealed that the problem was more socio-economic than political. It resulted from poverty.

Mr S Somyo (ANC) said that the fact that organs of state had Eskom debt was very worrisome. Why were they not paying? Organs of state should not be allowed the get away with non-payment.

Mr Hadebe agreed that organs of state could not be allowed to go on owing Eskom billions of rands. These debts should be deducted from their budgets.

Mr Mabuza explained that organs of state accounted for less than 3% of Eskom’s total debt. It was more important to address the big debtors. Eskom would get no joy from cutting the supply to a municipality, knowing the social impact it could have.

Mr Somyo said that contrary to SALGA’s view, Eskom did shut off supply to defaulting municipalities where it was responsible for reticulation. He noted that the Nxuba municipality, which had a culture of non-payment, had been incorporated into Raymond Mhlaba municipality, negatively affecting its sustainability. He doubted the constitutionality of disconnecting a customer’s water supply because of non-payment of its electricity bill.

Ms Nkadimeng replied that SALGA followed the law in this regard. Moreover it was proven that terminating services led to payment. She gave the example of Mankweng municipality. It included a hospital and owed around R14m. She had cut power to the head office and the debt had been paid.

Mr Somyo said that there were already policies in place to deal with people who could not afford to pay for municipal services. The authority to deal with this lay with municipalities. The fact remained that Eskom should be paid what it was owed.

Ms Nkadimeng replied that these policies did not cover the socio-economic matters that Stats SA had researched. The inability to pay for electricity led to illegal connections.

Ms N Tolashe (ANC) municipal debt owed to Eskom should remain the focus of the meeting. The Committee should steer away from political matters and focus on its role of following the rands. Many of the issues being discussed should be clarified by the IMC rather than the Committee. The IMC should go back to its terms of reference: what was it meant to do? SALGA and the IMC needed to up their game. If the municipality shut off a customer’s electricity supply, the threat of negative publicity would persuade the customer to pay. She was not satisfied with the IMC outcomes and asked that they come and show the Committee concrete plans.

Ms T Marawu (ATM) agreed. She had been expecting to see a clear way forward. The plans that had been presented had no time frames and would likely take more than a year to implement. It was critical for the Committee to be given a clear picture of how Eskom would be paid.

Mr Hadebe said that the Committee needed to know how the debt to Eskom was going to be prevented from escalating any further. The most urgent requirement was for the situation to be stabilised. The Committee needed to know how this was going to be done. How was money going to be recovered from customers who were able to pay? The plans presented contained many holes. Unimplementable policies were useless. The Committee wanted to see practical plans.

Mr Dirks agreed that he had been expecting to see practical solutions such as billing systems. The Committee still did not know how the problem was going to be solved.

Deputy Minister Tau conceded that the presentation did not go into the specific details of the solutions. He understood the Committee’s call for immediate action, but added that interventions could either precipitate a crisis or manage it in a way that allowed a solution to be found. Was simply cutting off electricity supply to schools, hospitals or whole cities really a solution? There were other things that could be done. For example, there were cases where a municipality paid more for bulk electricity than it charged for reticulated electricity. This was a regulatory issue that could be resolved.

Ms Nkadimeng agreed that there would be huge disruption to services if power was simply cut off. A solution needed to be found together. SALGA fully intended to pay Eskom but the fact remained that while municipalities collectively owed Eskom almost R50bn, municipalities were themselves owed R165bn.

The SALGA NEC member appealed to the Committee to assist them to deal with the root cause, which was the inability of municipalities to collect. He admitted that the work of the IMTT had been merely theoretical. The installation of prepaid meters would be a good practical step, but it would require capital. Provinces urgently needed to set up structures to focus on the debt.

Mr C Brink (DA) agreed that the problem was political. It was also constitutional. The Constitution provided that a province should intervene where a municipality was unable to meet its obligations, and if this failed, that the national government should intervene. The intervention did not necessarily have to take the form of placing a municipality under administration; there were many simpler interventions that could be made. The national executive needed to ask itself how it was using these powers of intervention. COGTA needed to take a proactive role in preventing municipalities from defaulting in the first place. He warned that paying customers would use legal means to interdict Eskom from cutting off their supply.

Ms B Van Minnen (DA) said that the only remaining explanation for non-payment was political. Eskom’s continued supply to non-paying municipalities was throwing good money after bad. Why was a firmer line not being taken? What was driving Eskom to continue supplying non-paying customers?

Mr Mabuza said that Eskom followed a debt management process, but customers still sometimes did not pay. The Promotion of Administrative Justice Act put in place certain requirements for claiming payment, which had to be followed before services could be cut off. Then Eskom could be interdicted and the matter further delayed in the courts. Over 70% of the R26bn debt was tied up in court action.

Deputy Minister Masualle said that Cabinet needed to be advised of the need to reappraise the situation. Eskom had been declared too big to fail. There was some rethinking that needed to be done.

Mr Dan Mashitisho, COGTA Director-General, said that while the IMTT had made certain achievements, the problem of debt remained. The IMTT had brought together various stakeholders, and had made it clear who distributed electricity in different areas.

The Chairperson was unimpressed by Mr Mashitisho’s account of the successes of the IMTT. The IMTT had failed because the debt had escalated. He should not try to sanitise the crisis.

Mr Mashitisho continued, saying that results would be seen in the implementation of solutions such as the installation of prepaid meters.

Mr Hadebe agreed that such solutions would produce results but he did not see evidence of firm action being taken immediately. The low-hanging fruit of money owed by organs of state should be collected without delay. What was being done? Why was it so complicated to collect from the state itself?

The Chairperson said that the Department of Public Works would be summoned to discuss its Eskom debt. All ministers whose departments had outstanding debt would be instructed to submit payment plans by February 2020. He instructed SALGA to submit a payment plan for the top 20 defaulting municipalities, to take up their issues with COGTA and submit a progress report on their actions. He called on all parties not to entertain the idea of plunging the country into darkness. Debts must be paid to avoid this outcome. Bailouts could not continue indefinitely. The Committee needed accountability and commitments. The political will had to be found to address the issues.

Mr Hadebe asked for a list of the top 20 defaulters in the private sector. They should be named and shamed.

The Chairperson said that a fully functioning state machinery was the basis from which they should move. Municipalities needed to be firm, and non-paying businesses should be cut off from supply. He warned whoever was responsible for the COGTA Twitter account not to accuse the Committee of having an agenda, as had happened following the cancellation of the IMTT meeting. Disagreement was acceptable but baseless allegations were not. He confirmed the Committee’s working visit to SAA on 5 December [later cancelled].

Meeting was adjourned.

 

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