Outstanding Eskom debt by municipalities: COGTA, SALGA, National Treasury & Eskom briefing

Meeting report

Ms N Mazzone (DA) at the outset of the meeting wished to bring it to everyone’s attention that the Committee Secretary of the Portfolio Committee on Public Enterprises had failed to inform its members about the present meeting. She was at present the only one present from the Portfolio Committee on Public Enterprises because Mr K Mileham (DA) had informed her about the meeting. She hoped other members of her Committee would be able to join the meeting as she had attempted to inform them about it.

Department of Cooperative Governance (COGTA): Inter-Ministerial Task Team (IMTT) efforts on constitutional, structural and systemic challenges in electricity reticulation
Prof Muzamani Nwaila Director General noted that the presentation was a consolidated presentation of all relevant departments on the IMTT. Ms Lerato Thwane Executive Manager: Finance, COGTA and a member of the IMTT undertook the briefing. The reticulation of electricity in SA was mainly by two main service providers: Eskom and municipalities. Both having been issued licences by the National Energy Regulator of SA (NERSA). The issue was that there were different interpretations and perceptions of legislation that governed electricity reticulation, distribution and supply. The problem was that municipalities were concerned that their constitutional authority was undermined by Eskom. Municipalities saw Eskom as a service provider that provided a service of electricity reticulation that a municipality should provide. In the absence of contracting and regulatory mechanisms like Service Delivery Agreements (SDAs) between Eskom and municipalities, amongst the problems that arose was that municipalities were unable to levy surcharges in Eskom supply areas as well as being unable to exercise credit control in Eskom supply areas. There was also a lack of tariff parity between municipal supply areas and Eskom supply areas. There were several structural and systemic issues that arose from the current dispensation and these could be attributed to the escalation of Eskom debt by municipalities. Systemic challenges included that Eskom’s credit control mechanisms for municipal bulk accounts were not aligned to the Local Government Municipal Finance Management Act (MFMA) and the Public Finance Management Act (PFMA). There was also the need to rationalise municipal tariffs and to reconcile the municipal debt to Eskom. Other systemic challenges were the historical debt owed to and by municipalities and also the unsustainability of current payment agreements between Eskom and municipalities. Some of the concessions approved by the Eskom Board to address the systemic challenges were to reduce the interest rate charged on overdue municipal bulk accounts from prime plus 5% to prime plus 2.5%, payment terms were extended from 15 days to 30 days for municipal bulk accounts and also that payments received from municipalities being allocated to capital first then interest. However the writing off of historical debts of municipalities raised by the South African Local Government Association (SALGA) was not addressed and would therefore require a policy intervention. Key recommendations by the IMTT to the President's Coordination Council (PCC) included that the PCC endorse the resolution of the IMTT that the High Court be approached for a declaratory order to express itself on the two opposing views with regard to the constitutional challenges relating to electricity reticulation. In addition that Eskom align its credit control policies to that of municipalities to ensure that Eskom supported and assisted municipalities with credit control in Eskom supply areas. Furthermore that historical debt of municipalities for bulk municipal accounts be written off. In response the PCC resolution was not to support the seeking of a court declaratory order but rather that the executive members of relevant government departments and entities should meet to discuss and take resolutions on issues raised. In addition that the Ministries of Finance, COGTA and executives of SALGA should further engage on the municipal funding model. The resolution of the PCC was being implemented.

South African Local Government Association (SALGA) on electricity distribution industry challenges
Mr Charles Stofile Councillor in the National Executive Committee (NEC) of SALGA stated that COGTA presentation had covered broad ground. Mr Nhlanhla Ngidi Energy and Electricity: SALGA undertook the briefing. The Committees were provided with background on electricity distribution in SA. One of the key questions being asked, was things getting worse? The answer was a definite yes. Municipalities owed Eskom over R11bn and it was increasing. Municipalities themselves were owed over R116bn and most of it was irrecoverable. The impasse between SALGA and Eskom had been elaborated upon in the previous COGTA presentation. However SALGA reiterated that the constitutional authority of municipalities was being undermined by Eskom. SALGA felt that the licence issued by the NERSA to Eskom to reticulate electricity was defective as it bypassed the executive authority of municipalities. Without an SDA, Eskom’s service unlawfully encroached upon the constitutional powers of the municipality. Several intergovernmental relation engagements had been initiated by SALGA with the NERSA, Eskom, COGTA, National Treasury, the Department of Public Enterprises (DPE) and the Department of Energy (DoE) over the past five years and beyond but to no avail. No mutual agreement could be reached. SALGA felt that Eskom did not recognise section 156 of the constitution which would allow municipalities to regulate Eskom. There were many other issues which SALGA and Eskom did not agree upon. SALGA had decided to take legal advice and wished to take matters forward legally. When the IMTT was to be formed to try to find solutions SALGA was asked to stop legal processes. SALGA reiterated that the IMTT observing that the constitutional matter could not be resolved recommended that a declaratory court order be sought. The PCC however rejected the recommendation of a court declaratory order. Members were provided with practical examples in areas of the impasse between municipalities and Eskom. However Eskom had entered into SDAs to assist municipalities by way of installing electricity smart meters. Eskom was trying to comply with the Municipal Systems Act. SALGA felt that SDAs should cover all issues and should not be limited to the smart meter issue. SALGA was hopeful that perhaps a solution could be found at the next PCC meeting scheduled to take place in the second week of November 2017.

National Treasury on Municipal Financial Sustainability & Payment of Trade and other Payables
Mr Jan Hattingh Chief Director: Local Government Budget Analysis, National Treasury undertook the briefing. National Treasury was aware that the matter at hand was a difficult one to solve. National Treasury had some years ago threatened municipalities with cut offs if they did not pay Eskom outstanding amounts that were due. Parliament had however reprimanded National Treasury for doing so. On the state of municipal finances as at 30 June 2017 municipal debt continued to grow and this was exacerbated by the culture of non payment in SA. Municipalities owed creditors to the tune of R43bn. Although under spending against the adjusted budget was significant the key question was whether there was cash to fund this expenditure in the first place. Secondly was the under spending in conditional grants supported with cash in the bank. Some municipalities were failing at effectively delivering services, billing for services and collecting revenue due. Consequently, outstanding debtors were increasing and municipalities were not able to maintain positive cash flows to pay creditors within the 30 day time frame that was prescribed. Governance at these municipalities was weak with inadequate leadership and guidance. Some stakeholders argued that local government was underfunded a view that he did not share. Local government had extensive revenue raising powers but the question was whether they collected properly and whether they utilised the funds properly. The reality was that real infrastructure allocations were increasing yet service provision was decreasing. Even though more money was being set aside for service delivery less money was reaching households. Another reason why municipalities could not pay Eskom was because they had bloated organisational structures. Some external contributory factors included institutional arrangements where for example municipalities performed functions that were not part of their core functions in terms of the constitution. On powers and functions COGTA was leading the process of reviewing the functions of district municipalities. The impact of amalgamations also had far reaching consequences, that is, combining two dysfunctional/distressed municipalities did not yield a functional municipality. Misalignment of legislation did not help either. The overlap between the Municipal Systems Act and the Municipal Finance Management Act had blurred the functional responsibilities for local government performance monitoring and oversight that was shared amongst national and provincial Treasuries and COGTAs. Members were provided with insight into a proposed multi-pronged approach to address the financial sustainability of municipalities. The focus was on those municipalities with liquidity challenges. The approach looked at actions to be taken in the immediate term, the next three months and lastly for a six to twelve month period. Stakeholders such as National Treasury, provincial treasuries, COGTA, SALGA, the DPE, the Department of Water and Sanitation, Eskom and water boards were key participants to structure a suitable remedy. Parliament could provide oversight and monitoring. Members were provided with an overview of the 62 affected municipalities. Collection rates for almost all the municipalities were overstated and most of them presented an operational deficit. 37 municipalities presented a deficit after commitments were considered whilst 19 presented a surplus after commitments were considered. The analysis could not be undertaken in 6 municipalities due to incomplete documents. Total creditors was R14bn and R1bn (s71 Q4 prelim) was owed to these municipalities by organs of state. None of these municipalities had funded budgets. Why were these municipalities proceeding with unfunded budgets? He felt that none of the municipalities would be able to honour their commitments to Eskom.

Eskom on key issues raised by SALGA and municipalities around municipalities’ ability to deal with Eskom overdue debt
Mr Sean Maritz Chief Executive Officer (CEO) Eskom stated that the briefing would confirm much of what had already been said. Ms Ayanda Noah Group Executive for Distribution, Eskom undertook the briefing. She wished to briefly speak to some of the matters that had come up in the previous presentations. She pointed out that Soweto as one of the practical examples spoken about by SALGA had been transferred from the municipality that was servicing it to Eskom. The licence NERSA had granted Eskom had two conditions attached to it: service quality and type of service. The NERSA monitored these conditions and Eskom was required to submit reports to the NERSA as well. The previous CEO of Eskom had committed to the signing of the SDA. The intention was about how to solve the problem. On credit control the surcharge was regulated in terms of section 21 of the Electricity Regulations Act. In terms of the Act Eskom’s hands were tied. She said that Eskom would like to engage on the reports on municipalities that SALGA had presented such as practical examples like Sandton for example. The briefing continued with the Committees being provided with an overview of the Eskom municipal debt. The total municipal overdue debt at the end of August 2017 was R11.245bn. It was an increase of R171m from the end of July 2017. The Promotion of Administrative Justice Act (PAJA) had assisted Eskom to reduce the overdue debt in the past. Eskom did not have complete disconnections. The first interruptions were scheduled from 15 September 2017. In support of suspending interruptions Eskom collected an amount of R142m (as at the end of September 2017) from eighteen municipalities across the Eastern Cape, the Free State, Gauteng, Mpumalanga, the Northern Cape and North West Provinces. These municipalities also agreed or reconfirmed payment arrangements. There were however still seven municipalities from the Gauteng, Mpumalanga and Free State Provinces that were still on the interruption list. These lists were dynamic and changed at any given time. To limit the impact on municipal customers Eskom had decided to interrupt supply and not to completely disconnect supply, a right of Eskom confirmed by the High Court. Eskom recommended that consideration be given to intervention at provincial and/or national level to “rescue” these municipalities. A problem was that municipalities were not billing their customers. There were no meters in place. Eskom had suggested putting in meters. Eskom had identified 35 municipalities that required urgent attention. Additional interventions from Eskom were active partnering by way of for instance Memorandums of Understanding (MOU) with SALGA and previously with COGTA. Eskom also came up with concessions which allowed for more time to collect own revenue from own customers as well as a reduction in penalties and interest on overdue debt. There was also a Revenue Collection Agency which provided assistance with prepaid/smart meter installation in addition to providing a vending service. The concern was that municipal debt had increased to unsustainable levels and required drastic action. This could include placing municipalities under administration.

Discussion
The Chairperson stated that the meeting had been convened so that information over the issue could be provided to members. There was no way that the issue would be resolved in the present sitting. Perhaps when the Committee next met over the issue possible solutions could be suggested.

Mr E Mthethwa (ANC) asked SALGA whether it had trust in the IMTT to solve the issues at hand. SALGA had raised many issues and even wished matters to be taken to court. What if the court decided against what SALGA expected? Addressing National Treasury he referred to slide 13 and asked why between 2001 and 2011 when there had been less cash injections service delivery was at acceptable levels but from 2011 onwards when there was greater cash injection there had been less service delivery. He proposed that a workshop with municipalities and National Treasury be held. In this way the Committee could be enlightened as to what was expected of them. He had picked up that there were divergent views between Eskom and SALGA. How was the Committee expected to assist when SALGA and Eskom could not resolve issues? He felt that perhaps smart meters should be provided to municipalities by Eskom if it could assist municipalities with service collections.

Mr Stofile on whether SALGA had trust in the process that had been established said that SALGA had been involved to find a solution to the problem. A solution would be found. On taking the matter to court he said that SALGA had been involved for 3-4 years and no clarity over the matter had been reached. SALGA had seen no leadership in the processes and had felt it prudent for the constitutional court perhaps to give clarity on the matter.

Mr Maritz stated that putting in smart meters had a whole system attached to it.

Mr Hattingh agreed that smart meters were not a simple solution. There was a need to deal with systemic issues first. He cautioned that things should be done smartly. He noted that the advice of National Treasury had been ignored on the amalgamation of municipalities.

Mr K Mileham (DA) was disappointed that Minister of Cooperative Governance and Traditional Affairs Mr David van Rooyen had not attended the meeting. Minister van Rooyen was after all the Chairperson of the IMTT. He felt that the content of both COGTA and SALGA briefings had been irrelevant given that the brief for the meeting was about the municipal debt crisis to Eskom. There were 23 municipalities in crisis whose electricity had been cut and there were 62 municipalities that were at risk. He was pleased that National Treasury had stated that joining two dysfunctional municipalities did not make one functional municipality. He was concerned about the unsustainability of payment arrangements. National Treasury was asked how it could facilitate sustainable payment arrangements between Eskom and municipalities. He felt that Eskom’s concession of having payment against capital and not interest to be a meaningless concession. He was concerned about the disregard of the in duplum legal rule about interest not being more than that of the capital amount of the debt. He asked whether municipal recovery plans had been implemented by provincial national treasuries. If it had been implemented what change was seen.
Addressing Eskom he asked how old the debts at each municipality were. He said that many municipalities had complained that they could not afford the payment arrangement amounts that Eskom had demanded. Why had Eskom started pilot projects on smart meters in municipalities that were not at risk? He asked why when Eskom interrupted electricity supply some areas were cut off and others were not. Was there fairness?

Mr Maritz responded that the age of debts varied. There were some debts that were as old as three years. Pilot projects on smart meters at municipalities were by agreement. National consent was required.

Ms Noah said that the perception was that on most arrangements Eskom did not engage with municipalities. The reality was that Eskom asked provincial treasuries to assist so that arrangements with municipalities were affordable. Eskom was sensitive to affordability. Eskom had rejected payment arrangements for some debts that were beyond 5 years old. Eskom dealt with each municipality’s debt on a case by case basis. For example there was one municipality that only paid R1m a month when Eskom was well aware that it could afford to pay more. The limit was 3-4 years within which to settle debt. She added that pilot projects on smart meters were implemented at four municipalities that were at risk.

Mr Hattingh on the signing of agreements between Eskom and municipalities felt that in the beginning there was malicious compliance. Now it was done collectively with provincial treasury. When he had met with 59 municipalities he had questioned managers whether they knew what their consumption on water and electricity was. Not one of these municipalities was using their equitable shares correctly. Indigent registers at municipalities were also outdated.

Mr Stofile on the relevancy of SALGA and COGTA presentations said that the aim of the process was to reach a solution. The root cause of the problem must be identified. The historical context had to be borne in mind. People were aggregated based on their abilities. It was SALGA’s mandate to represent and advocate the interests of municipalities within a policy framework. SALGA needed to address loopholes in the framework. When municipalities were forced to sign agreements by Eskom on the repayment of debt, municipalities had defaulted as they could not afford to make the payments.

Mr N Khubisa (NFP) stated that it seemed as if there were proposed resolutions. All stakeholders should come together to resolve issues. He noted that Eskom’s concessions did not make sense if the Committee did not understand what SALGA brought to the table. The municipal debt was increasing. The Committee needed to hear from municipalities themselves. It was difficult for municipalities to generate revenue. At present there was no solution in sight but another meeting was needed.

Professor Nwaila stated that he hoped after the next meeting of the IMTT on 17 November 2017 there would be some sort of solution. Some of the tensions were caused by conflicting pieces of legislation on the ground.

Mr N Masondo (ANC) pointed out that there was clearly tension between SALGA and Eskom. Issues needed to be confronted head on. SALGA had conceded that there had been engagement with Eskom but no agreement could be reached. SALGA had confirmed that its Memorandum of Understanding (MOU) with Eskom had fallen through. The relationship between SALGA and Eskom was not where it was supposed to be. It looked as if no progress had been made. He asked what the legislative mandate in respect of the conflict was in terms of the constitution and relevant legislation. Some years ago the Regional Electricity Distributor (RED) idea was abandoned but there were still unresolved issues which had to be resolved. He stated that historically Soweto had remained as an Eskom provision area. Eskom had been reluctant to hand over Soweto to the City of Johannesburg. Eskom however needed to clarify where it stood on the matter of Soweto and Sandton. He pointed out that the Gupta emails issue was damaging to the reputation of Eskom. What damage had been done? It was an issue that was part of the public discourse. He felt that there was depth in what National Treasury had presented.

Mr Stofile pointed out that there were many issues in the market of energy distribution. There was a policy shift taking place.

Ms D Rantho (ANC) pointed out that the presentations made were a repetition of what had been presented to members before. She did not see any improvement. It was an unfortunate state of affairs. One would have thought that if matters were left in the hand of technocrats they would come up with solutions. She was concerned about the attitude of departments and of SALGA. She said that Eskom had not said anything about not cutting off municipalities that had made some form of payment. She asked whether SALGA dissuaded municipalities when they wished to pay Eskom’s debt so that the funds could be utilised where it was priority. SALGA was asked whether there would ever be a solution that SALGA could provide to the Committee. Eskom needed to be functional and without funds Eskom could not be functional. She appreciated that National Treasury had recommendations but unfortunately they were not presented to the Committee. She would however read through them and ask questions on them at another time. She was concerned about the attitude between SALGA and Eskom. How was the Committee expected to assist when SALGA and Eskom could not come to some sort of agreement? She agreed with National Treasury that there were enough funds being allocated to municipalities. Municipalities often returned unspent funds but yet they could not pay their debts. Was SALGA preventing municipalities from paying their debts or were they assisting them to do so?

Ms Noah referred to slide 6 of the Eskom presentation which highlighted those municipalities that were taken off the interruption list. The list was of those municipalities who paid.

Mr Hattingh on the tension between Eskom and SALGA felt that government had to play a role in dealing with the issue. There was no need to go to court on a government matter. It would be an embarrassment if the matter went to court. If the matter went to court it would be a reflection of the Executive’s failure. On the two recommendations that he had made the first issue was about why provinces had not intervened in municipalities. He suggested a four step process to be followed in sequence which involved provincial COGTAS, provincial government, national government and finally section 216 of the constitution which spoke about national treasury control. The second recommendation was in relation to dealing with accountability where it belonged. He had in the past advised cities not to do certain things but his advice had been ignored. He suggested that the Committees should ask the question why there was acceptance by municipalities of unfunded budgets. National Treasury was of the view that everyone should be penalised the same. He noted that none of the interventions implemented were successful. It had been done for the wrong reasons. The interventions were not based on analytical reasons. Anything beyond 30 days was a risk. The Municipal Systems Act clearly set out a procedure for municipalities to collect debt. SA as a country needed to live within its means. SA found itself in a constrained environment. He tongue in cheek stated that he was confident that parliament would support National Treasury aggressively increasing taxes.

Members responded with laughter at Mr Hattingh’s comment about increasing taxes.

Ms N Mazzone (DA) pointed out that Thaba Nchu Municipality had paid R16m of its debt to Eskom. There was only a balance of R2m outstanding. Having said this she could not understand why the electricity supply had been cut off for days in the area. She noted that Eskom was blamed but it in actual fact was municipalities that had done the shut off. She wished to inform SALGA that members did do oversight on the ground and was well aware of what was happening. Members had gone on oversight to Soweto and people had complained that they wished to go back to City Power. Eskom could only stop increasing tariffs if their debt was sorted out. She noted that both COGTA and SALGA seemed to miss the point on this. This was why ordinary South Africans continued to suffer. When electricity was shut off the small spaza shops’ fridges went off which meant that its contents went bad. This was a huge loss to the spaza shop owner. The cycle of poverty was being perpetuated. She stated that SALGA and COGTA needed to get rid of people who were not doing their jobs and needed to arrest those who were stealing. She suggested that the Committees invite municipalities which understood that if you did not pay your bill you would not get a service.

Ms Noah on the Thaba Nchu Municipality issue explained that municipalities usually had more than one point of supply. There were four points of supply and choices were made on which to pay. Some debts were settled whilst others were not. Eskom chose to target those debts that rolled over year after year.
It was a technical issue and she agreed to have a look at the Thaba Nchu Municipality matter.

Mr Stofile responded that the Municipality of Johannesburg had historically never provided electricity to Soweto. It was the responsibility of Eskom. If residents wished to go back to City Power he asked what it meant. He explained that it meant that they wished to be served by the municipality.

A SALGA representative added that the organisation encouraged municipalities to pay their debts if they could afford to. The people of Soweto had spoken that they wished to go back to City Power and did not wish to be supplied by Eskom. SALGA had come to the meeting to make its case for wanting to go to court over the matter. He pointed out that none of the members had addressed the issue of the powers and functions of municipalities as contained in section 156 of the constitution.

Mr Mileham responded that the purpose of the meeting was to discuss municipal debt owing to Eskom. The meeting was not about the reticulation of electricity.

The Chairperson said that it had to be remembered that 50% of South Africans were chronic poor, 20% were vulnerable and 70% were poor. The reality was that people could not pay. There was a bigger problem. Even if Eskom switched off power it would not resolve the problem.

Mr Hattingh understood the frustration of members. The fact that COGTA was coordinating the IMTT was considered a good thing as in the past everyone ran in their own directions. Eskom had done good work since 1994. StatsSA had figures to show that good work was done on getting rid of electricity backlogs and on providing new connections. The issue was about the cost of taking the service to the people. There was an element of cost escalation. Fraud and corruption was another thing to consider. A technical investigation was needed. The point had now been reached to decide what Eskom’s space was going forward. What was Eskom’s role going forward? The Committees needed to provide guidance in this regard.

Mr Mileham pointed out that his question on the allocation of payments to capital and not interest had not been answered. He reiterated that he felt the concession by Eskom to be meaningless. He said that Eskom had stated that there would be a council resolution. National Treasury on the other hand had said that there was malicious compliance. He suggested that Eskom look at the manner in which it interacted with municipalities. Eskom was asked whether it would be prepared to write off debt and interest. Municipalities could not afford to pay the debt. Addressing National Treasury which spoke about mayors and managers at municipalities having to be held accountable, asked whether such a statement was fair on present mayors and managers as often it was old debt being owed.

Mr Maritz said that there were not malicious agreements as Eskom did take affordability into consideration now.

Ms Noah said that it was difficult to write off debt. In the past Eskom had offered to write off debt. First one needed to find a solution to stop debt from creeping up. Only once this was done could debt be written off.

Mr Maritz added that writing off debt needed to be looked at responsibly.

Mr Hattingh on the interest issue said that National Treasury assisted Eskom on the issue. Eskom statements would be made more transparent. Where debt was written off municipalities installed prepaid meters. He provided an example that in 1994 when Mr Trevor Manuel was appointed the Minister of Finance the South African government was technically bankrupt. Minister Manuel could have just given up but he chose to work towards getting things right. It took almost 8-9 years to get SA back on track. He felt that the same applied to the current problem. Anything was possible if effort was made. He pointed out that a municipality was like any other organisation. Irrespective who the mayor or managers of the municipality was at present the debt was inherited. There was no easy fix. Commitment and willingness had to be there.

The Chairperson noted that it was not advisable to take a government structure to court. There were lots of other options such as arbitration and mediation. Back to Basics was important. There was no overnight solution. It would take many years to resolve.

The meeting was adjourned.