1. DEBT AND CONSTITUTIONAL ISSUES 2 May 2017

2. 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

3. 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

4. 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  

5. 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

6. Municipal Constitutional Authority

7. 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.

8. 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

9. 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

10. :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

11. Credit control undermined

12. 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

13. 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

14. 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

15. 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

16. 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

17. Of the top 20 defaulters, 12 are on the B2B so-called dysfunctional list
PROVINCE
MUNICIPALITY
OVERDUE DEBT AS PER ESKOM at 31 OCT 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

18. 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

19. 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

20. 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

21. Interest and penalties
Penalty on exceeding NMD
The penalty of R 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

22. 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

23. 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

24. 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

25. Thank you