DEBT AND CONSTITUTIONAL ISSUES 2 May 2017

Macro issues In all our engagements we have emphasized that Eskom is an important national strategic asset and its financial viability is of paramount importance to us all. We encourage and support municipalities to pay – all their creditors Equally important is that municipalities must improve their revenue enhancement measures, implement their credit control policies and better manage both their creditors and debtors While Eskom is owed 10.2 billion Municipalities are owed R117 billion (s71 report, 30 September 16) by households (R76bn), government (R6bn), business (R27bn), other (R8bn) The complexity of this escalating debt situation requires solutions at a constitutional, structural and system level to ensure that both Eskom and municipalities are financially sustainable We’ve used the IGR system in an attempt to find mutually beneficial, realistic and long term solutions. Apart from some system level issues (payment period and interest charges) we’ve failed to resolve the macro issues which isn’t a result of lack of trying r

Constitutional issue Municipalities are service authorities for electricity reticulation (Section 156 read with Schedule 4B of the Constitution and section 160) Disagreement on the constitutional authority of municipalities for electricity reticulation Absence of SDAs between Eskom and municipalities as required by the Municipal Systems Act and Electricity Regulation Act Municipalities unable to levy surcharges in Eskom supply areas Municipalities unable to exercise credit control in Eskom supply areas Terms and conditions of the license issued by NERSA to ESKOM to reticulate electricity which license does not make provision for a SDA

Structural issues Legacy issues in the reticulation of electricity and how these can be resolved Mechanisms to address the current arrangements for electricity reticulation Role of ESKOM and municipalities in the provision of street lighting Installation of pre-paid meters by municipalities to address collection, and grant to assist municipalities  

Systemic issues Systemic issues: ESKOM credit control mechanisms for municipal bulk accounts to align with municipal credit control by-laws and cycles (15 days payment period, and prime plus 5%) Historical debt owed to municipalities Reconciliation of municipal debt to ESKOM Notified maximum demand and related penalties Unsustainable payment agreements between ESKOM and municipalities in arrears

Municipal Constitutional Authority

Constitutional authority 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). Executive authority encompasses the authority to implement national, provincial and municipal laws, as well as the right to administer the daily running and management of an electricity service. The object is to ensure the provision of services in a sustainable manner Implementation of a municipality's function is facilitated by national legislation, in particular the Systems Act.

Executive Authority: Municipal Systems Act The Municipal Systems Act Act 32 of 2000 aims to ensure sustainable service provision by providing the core principles, mechanisms and processes through which a service should be provided A municipality is rendered a service authority by the Act, which is defined as "the power of a municipality to regulate the provision of a municipal service by a service provider. Municipalities may render a municipal service (such as electricity reticulation) through an internal or external mechanism 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 Users of services should be treated equitably in the application of tariffs

Electricity Regulation Act Section 28, recognizes municipalities as service authorities and having first right to refusal Section 28, also recognizes the requirement for an SDA with service providers in service authority area as per the MSA

:This current dispensation is subversive of: the right of municipalities to administer the trading and distribution of electricity (electricity reticulation) within the Eskom supply area, municipality’s right to govern, on its own initiative, local government affairs of its community; an object of local government, namely to ensure that provision of services to communities a done in a sustainable manner; Municipal credit control action in Eskom Areas of Electricity Supply the implicit constitutional power of the municipalities to charge fees for an electricity service; and the municipality’s constitutionally entrenched fiscal power to impose surcharges on fees for electricity reticulation services rendered on behalf of the municipality. This is negatively impacting on municipalities’ revenue collection and needs to be urgently addressed

Credit control undermined

Accountability triangle Governance relationships broken down in Eskom supply areas Council Municipality 2 Accountability triangle Accountability service delivery 4 Accountability for services Citizens voice, needs, legal rights Service oversight and regulation 1 3 5 Citizens /consumer (Community) Services provision Service provider Payment for services (or subsidised by ES) 6

Governance through authority function (1) Citizens have a ‘political’ voice with politicians (councillors) to express their needs and preferences. This voice shapes policy and priorities to respond to citizen needs (2) Politicians are accountable to the citizens who vote them into office and who can be voted out again if they do not address citizens aspirations. (3) The municipality exercises an oversight and regulatory role over the service provider. It can select another service provider if the service provider does not perform according to its obligations or fails in its accountability relationship with the municipality. (4) The service provider accounts to the municipality (as the authority) through a performance agreement (internal mechanism) or service delivery agreement (external mechanism) for the provision of efficient and sustainable services. (5) The service provider provides services to customers and can withhold (disconnect) certain services if a citizen does not fulfil his/her payment obligation. (6) Citizens as customers also have ‘consumer/client power’ (through paying for services) over the service provider to ensure that the service provider delivers good, quality services. The sets of relationships provide mechanisms through which all stakeholders can articulate their interests, exercise their legal rights, meet their obligations, and mediate their differences. Once one set of relationships is broken, the entire triangle is broken and it is difficult if not impossible to achieve accountability and sustainable services provision

SALGA engagement on the service authority issue Several IGR engagements have been initiated by SALGA with NERSA, Eskom, COGTA, NT, DPE and DOE over the past 5 years and beyond – No mutual agreement to this end NERSA and Eskom do not recognize section 156 of the Constitution municipalities as Electricity Reticulation Service Authorities NERSA and Eskom do not recognize s28 of the Electricity Regulation Act which requires compliance & gives effect to S76a and b of the MSA (SDA) 2016, the Minister of COGTA and NERSA leadership agreed on SDA matter Implementation of this agreement did not come into effect due to officials disagreement and strong opposing views – Minister’s instruction not recognized. Eskom and SALGA Work group met on 06 December 2016 – no agreement was reached and both parties acknowledged that the legal route may need to be pursued to get clarity on the issue

SALGA engagement on the service authority issue An Inter-Ministerial Task Team on Eskom debt and the Constitutional matters relating to electricity reticulation has been established comprising Ministers of COGTA, Finance Ministers, Minister of Public Enterprises, and SALGA Presidency, chaired by Minister of COGTA A Technical Task Team (COGTA, NT, SALGA, DPE, Eskom) has also been established to address the various issues and make recommendations to the IMTT Technical Task Team is yet to come up with a set of recommendations

ESKOM DEBT Escalating debt and dis-connections Eskom credit control policy including prime plus 5% after 15 days Notified maximum demand (NMD) and related penalties

Of the top 20 defaulters, 12 are on the B2B so-called dysfunctional list PROVINCE MUNICIPALITY OVERDUE DEBT AS PER ESKOM at 31 OCT 2016 R'M TOTAL DEBTORS BALANCE AS PER S71 REPORT R'M CONSUMER DEBTORS BALANCE AS PER S71 REPORT R'M COMMERCIAL DEBTORS BALANCE AS PER S71 REPORT R'M STATE DEBTORS BALANCE AS PER S71 REPORT R'M OTHER DEBTORS BALANCE AS PER S71 REPORT R'M Free State Maluti A Phofung 1 556 882,3 579,6 187,6 67,2 47,9 Mathjabeng 1 085 2 027,5 1 531,5 414,0 47,7 34,3 Mpumalanga Emalahleni 916 2 049,2 1 517,4 201,5 34,7 295,6 Ngwathe 616 602,3 307,7 66,5 26,2 201,9 Govan Mbeki 388 864,1 745,5 79,4 7,7 31,5 Thaba Chweu 360 213,4 - Lekwa 298 578,4 427,4 74,0 10,8 66,2 North West Naledi 213 267,4 185,7 68,0 13,7 Limpopo Thabazimbi 187 235,3 161,0 43,2 8,4 22,7 Ditsobotla 186 271,0 187,1 34,9 49,0 Nala 164 455,7 389,0 43,8 20,0 2,9 Gauteng Mogale 145 1 026,2 505,0 226,8 7,3 287,1 Emfuleni 142 5 239,5 4 418,0 411,8 299,6 110,1 Matlosana 1 812,4 1 502,8 284,8 24,8 Randfontein 140 266,6 230,1 31,9 3,5 1,1 Msukaligwa 139 394,2 276,5 81,6 19,3 16,8 Dihlabeng 120 616,8 527,7 70,0 19,1 Nketoana 119 335,9 250,4 17,1 6,7 61,7 Moqhaka 113 392,8 206,7 21,9 9,6 154,6 Musina 107 39,3 15,3 3,4 9,8 S71 REPORT FIGURES AS AT 30 JUNE 2016

Causal Factors on Eskom Debt Some of the problems are systemic and some are ‘system design’ issues such as Eskom’s credit control Low Revenue Collection Rates – High non payment and theft Municipalities cannot exercise credit control in Eskom Areas – SDA Issues Tariffs not cost reflective Electricity cross-subsidize other municipal services Aging Infrastructure, resulting in high technical losses Critical Skills gaps Poor Financial Management – Cash flow mismanagement, indigent registers not properly managed Eskom interest, prime plus 5, levied after 15 days of invoice Notified Maximum Demand Penalties

Soweto debt In Soweto Eskom faces similar challenges to municipalities, in fact the collection rate is much poorer than the average collection rates in municipal supplied areas As per ESKOM Annual Report as at 31 March 2016 the overdue debt owed to ESKOM (including interest) by Large Users including Municipalities was approximately R6bn while the amount owed by Soweto to ESKOM (excluding interest) was R4,5bn This reflects that while ESKOM advocates that Municipalities must apply credit control policies and processes stringently they themselves are struggling to get this right in one area they directly supply. From a consistency and fairness viewpoint ESKOM needs to treat Municipalities similarly to how the entire Soweto debt is treated

Interest and penalties Penalty on exceeding NMD Interest on overdue account The actual usage amounts to R7.7 million The rest is interest and penalties and VAT thereon – amounting to R1.1 million

Interest and penalties Penalty on exceeding NMD The penalty of R212 313 is charged not only for the one month that the maximum demand was exceeded but as a penalty for a full 12 months (even if the municipality does not exceed demand again – that year) Thus the annual penalty amounts to R2.5 million Eskom will not increase the NMD unless all outstanding debt is paid As a result penalties and interest thereon persist

Impact by Interest charged after 15 Days Naledi Local Municipality was billed R8.9 Million per month on one of its delivery points After 15 days of the bill being issued the R8.9 million becomes overdue and interest is charged at R940,000 The municipality collection rate is 53% which is collected only after 30 days as per the MFMA requirements At 53%, the municipality is unable to break-even to pay the Eskom current account – Interest making things worse. The shortfall is exacerbated by the interest charged on the full amount from the 16th day Consequence is ballooning debt

Unsustainable solutions with negative economic impacts Disconnections are not a sustainable solution to the problem They antagonise paying stakeholders and might have a social unrest outcome They could also collapse the LG system, especially given that electricity is the main revenue source for municipalities The impact of the cuts on business and other social services such as schools and hospitals could result in negative unintended consequences e.g. the case of Madibeng (Brits) where local business is suing the municipality for the cuts The fact that some of these municipalities are financially unviable means that the cuts will not result in the intended payment improvements as they have no revenue sources to meet their obligations even if they were to pledge 100% of their collected revenue, they would still fall short of liquidating their debt We propose a joint due diligence exercise on all these cases so that we can jointly recommend a long term solution to NT and COGTA for the affected municipalities

Recommendations Minister of Public Enterprises to ensure Eskom recognizes municipalities as the constitutional authority to deliver electricity and thus enter into service delivery agreements with municipalities pursuant to a Shareholder compact between the Minister and Eskom Eskom to align their payment conditions to that of the rest of the public sector (i.e payment only after 30 days, and interest at prime) Eskom to review the Notified Maximum Demand (NMD) penalty regime National Treasury to undertake due diligence process to determine the underlying causes of the debt to Eskom, including affordability to be undertaken Eskom to enter into affordable and sustainable payment agreements and to suspend interest once such agreements have been reached Moratorium on disconnections - this is not a long term and sustainable solution – Only causes unnecessary unrest from the public

Thank you