1. 12 MAY 2015 DEPARTMENT OF COOPERATIVE GOVERNANCE AND TRADITIONAL AFFAIRS BRIEFING THE PORTFOLIO COMMITTEE BY THE MINISTER ON THE REASONS FOR WITHHOLDING EQUITABLE SHARE ALLOCATIONS FROM MUNICIPALITIES 12 MAY 2015 Strategic Planning Workshop

2. FRAME WORK OF THE PRESENTATION 1.Background 2.Introduction 3.Objectives of this process 4.Legislative And Regulatory Oversight Over The Performance Of Municipal Functions 5.Process undertaken with municipalities 6.Engagements with affected municipalities 7.General observations from the engagements 8.Future issues of policy for discussion emerging 9.Progress to date 10.Challenges 11.Immediate Actions 2

3. BACKGROUND 1.The Minister of Finance raised concerns regarding municipal debt escalation to Eskom and Water Boards. The trend for municipalities owing Eskom and Water Boards is mainly in three provinces (Free State, North West and Mpumalanga). 2.The Minister of Finance alerted the two Ministers that National Treasury would be considering implementing section 216 (2) of the constitution with the view of getting the affected municipalities to sign payment agreements with Eskom and water boards. 3.On 31 March 2015, National Treasury released a press statement about the decision to withhold equitable share to municipalities due to persistent and material breach of financial obligations by municipalities. 4.National Treasury indicated that it would, with effect from 20 March 2015, withheld the transfer of equitable share to 60 municipalities due to failure to honour their financial commitments in general and to pay Eskom and other creditors in line with section 65 (2) of the Municipal Finance Management Act, 2003 (MFMA, Act No. 56 of 2003). 3

4. INTRODUCTION 1.Load shedding 2.Establishment of the war room 3.Challenges of ESKOM in meeting the electricity demand 4.Recommendations from the war room 5.Debt owed to Eskom by municipalities 6.Debt owed to municipalities by Government 7.Municipalities not honouring payment agreements 8.Need to address the culture of non-payment by municipalities which may be transferred to households 4

5. OBJECTIVE OF THIS PROCESS 1.To understand why municipalities are unable to pay creditors on time and conform to the 30 day MFMA requirement –Section 65(2)(e) of the Municipal Finance Management Act, 2003 (MFMA, Act No. 56 of 2003) 2.To address the culture of non–payment by municipalities 3.Not paying creditors liquidity problem budget problem leadership problem 4.It must be noted that non-payment to the entities affects the investor confidence and in Eskom’s case, this impacts on the balance sheet and ultimately on the credit rating of the institution –In addition, non-payment of creditors by municipalities affects the economy and in particular the viability of SMME 5.It is intended that the practice applied to municipalities around the withholding of the equitable share will be instituted across all spheres of government 5

6. INTRO : LOCAL GOVERNMENT HAS VERY SPECIFIC SERVICE DELIVERY RESPONSIBILITIES 6 Section 152 of the Constitution to provide democratic and accountable government for local communities to ensure the provision of services to communities in a sustainable manner to promote social and economic development to promote a safe and healthy environment to encourage the involvement of communities and community organisations in the matters of local government Objects of local government Section 153 of the Constitution A municipality must - Structure and manage its administration and budgeting and planning processes to give priority to the basic needs of the community, and to promote the social and economic development of the community, and Participate in national and provincial development programmes Developmental duties of municipalities Priority functions of municipalities Water (potable) Electricity reticulation Sanitation Refuse removal Cemeteries Fire fighting Municipal health services Municipal planning Municipal roads Storm water Traffic and parking Building regulations Municipal public transport

7. Debt owed to Eskom by municipalities as at December 2014 by province 7

8. 8 Debt owed to Eskom by municipalities as at December 2014

9. 9 Debt owed to the water boards by municipalities as at December 2014 by water board

10. 10 Debt owed to the water boards by municipalities as at December 2014 –Top Ten

11. 11 Debts owed by NATIONAL DEPARTMENTS to municipalities per province as at 31 December 2014

12. 12 Debts owed by PROVINCIAL DEPARTMENTS to municipalities per province as at 31 December 2014

13. PROCESS UNDERTAKEN TO ENCOURAGE PAYMENTS BY MUNICIPALITIES 1.National Treasury has been engaging with municipalities on the issue of non-payment of creditors over several years through various forums. 2.Municipalities have repeatedly agreed to pay amounts they owe, but in many cases this commitment has not been honoured. 3.On 6 March 2015 National Treasury issued a correspondence to municipalities encouraging them to: a.settle their current accounts with Eskom and Water Boards; b.to confirm repayment arrangements with Eskom and Water Boards; and c.to ensure that their political leadership is aware of the municipality’s circumstances by requesting a Council resolution in support of the repayment arrangement. 4.Subsequently, MFMA Budget Circulars 75 Section 5.5 issued by National Treasury on the 9 March 2015 included the following: 5.The deadline for this request was 13 March 2015. In addition, the municipalities were required to request assistance with a financial recovery plan; and 6.Once the municipality meets with National Treasury, the three requirements above plus a full list of creditors is requested. This list must be arranged in order of priority. 13 Non-payment of Eskom and water boards as creditors Section 65(2)(e) of the Municipal Finance Management Act, 2003 (MFMA, Act No. 56 of 2003) clearly states that “The accounting officer of a municipality is responsible for the management of the expenditure of the municipality” and “that all money owing by the municipality be paid within 30 days of receiving the relevant invoice or statement, unless prescribed otherwise for certain categories of expenditure”. It has become a common trend between certain municipalities that outstanding debt to Eskom and the water boards is not prioritised for payment. Municipalities are cautioned that if they do not immediately settle the current accounts of Eskom and the water boards, the March 2015 tranche of the Equitable Share will be withheld. In addition, the payment arrangements to address arrear amounts must be concluded by relevant municipalities, implemented and effected in the budget. Furthermore, going forward municipalities will be closely monitored and those found to be averting payment to Eskom and the water boards will be deemed as contravening the MFMA and consequently section 216(2) of the Constitution will be imposed. Municipalities are also reminded of the Municipal Regulations on Financial Misconduct Procedures and Criminal Proceedings, which the Minister of Finance promulgated on 31 May 2014. Failure by the Accounting Officer to comply with the requirements of section 65(2)(e) of the MFMA is an act of financial misconduct as defined in section 171 of the MFMA and municipalities is obliged to deal with such breach in terms of the regulations mentioned above.

14. General observations from the engagements The following general observations about the causes of municipalities’ failure to pay their creditors have emerged from the engagements between these municipalities and National Treasury: 1.Poor leadership and weak financial management led to mismanagement of finances which in turn allowed the debt to escalate; 2.Weak tariff setting ability in municipalities contributed to tariffs being set that are not fully cost reflective; 3.Poor revenue management has meant that payments due creditors far exceed revenue collected; 4.Past repayment arrangement were not affordable and realistic (not cash backed) and in many cases were signed merely for compliance; 5.Absence of Service Level Agreements between municipalities and their bulk services providers (Eskom and Water boards); 6.Many municipalities do not have proper SLA’s in place or there are weak institutional arrangements between DMs and LMs; 7.High levels of water and electricity losses which have reduced municipalities revenues dramatically; 8.High operating costs and in particular, above normal staff costs; 9.Municipalities not holding municipal licenses in their service areas which has negative consequences for revenue collection; and 10.Municipalities are found to be over stating the debtors figures and under stating their creditors figures. This exercise also revealed that the creditors amounts far exceed the equitable tranche due. 14

15. FUTURE ISSUES OF POLICY FOR DISCUSSION National Treasury and COGTA is concerned about some of the practices Eskom is using in its billing of municipalities and these will be discussed with Eskom after this process is concluded. These include: 1.Eskom’s requirement for a 15 day payment period for the current account which contradicts the 30 days payment rule as per the MFMA; 2.The escalating interest charged on arrear debt as a result of Eskom’s policy to impose an interest rate of prime plus five per cent on defaulting customers; and 3.Penalties charged as a result of municipalities exceeding their notified maximum demand. 15

16. COGTA ‘s VIEW ON THE ACTIONS BY NT 1.While COGTA agreed with the principles and objectives of withholding equitable share to municipalities, it would have been better if the two departments had met and briefed the political principals. 2.Due to the fact that the two departments did not discuss the matter before withholding of equitable share, National Treasury withheld funds to municipalities that were not supposed to be affected due to the fact that they do not have powers and functions to reticulate water and electricity. 3.The equitable share to these municipalities has nothing to do with water and electricity since the equitable share for water and sanitation goes to the district. However, National Treasury indicated that the intention to withhold equitable share was aimed at addressing a number of financial management contraventions over and above municipalities’ in ability to pay creditors. 4.The second challenge observed by COGTA was a situation where equitable share for a municipality was withheld, but the challenges at municipalities need National and provincial government’s attention. This are situations where municipal debt arose due to confusion of powers and functions problems. 16

17. COGTA ‘s VIEW ON THE ACTIONS BY NT 5.The point in case is the Dr Ruth Mompati districts (Water Services Authority) which has entered into a service level agreement with local municipalities as water service providers and the Sedibeng Water Board as a water service provider in other areas. The relationship between the district, local municipality and the Water Board is too casual which is the main cause for debt escalation. 6.While the withholding of equitable share might have affected municipalities administratively, COGTA observed during the meetings with individual municipalities that the intervention will go a long way in ensuring the debts to bulk service providers is reduced while the current accounts would be honoured. 7.The intervention is also ensuring that municipalities do attend to the basics that are not in place to ensure cost recovery and accountability regarding the revenue from the provision of services. 8.As stated above, the meeting with municipalities calls for national and provincial government to urgently attend to service delivery failures that that are caused by policy issues that are not attended to. The following section provides a quick summary of the issues that need urgent attention of National and Provincial government that needs to be addressed as part of the Back to Basics approach. 17

18. OBSERVATION 1.The tariffs being charged by municipalities are not the same across the different municipalities whereas all licensed municipalities are being charged the same tariff by Eskom. 2.Some municipalities are charging a lower tariff for the supply of electricity than what they are being charged by Eskom thereby setting themselves up for the accrual of debt. 3.All the four municipalities have inefficient billing systems where in some instances billing is based on an average rate of consumption of electricity. 4.The electricity supply infrastructure such as transformers and meters in some of the municipalities are so old that they need to be replaced. 18

19. OBSERVATION 5.Submission of unreliable information by municipalities affect their proper assessment by NERSA for tariff approval (some tariff applications could not be approved due to the fact that the electricity loss – non-revenue electricity is too high). 6.Some Municipalities resort to the use of equitable share transfers to pay for electricity bulk purchases to Eskom. This is problematic since equitable share is meant to deal with poor households while other households should be paying for the services. 7.Municipalities that implemented untampered prepaid meters are able to collect steady revenue as compared to conventional meters. 8.There are consumers in these municipalities that are paying for electricity regularly at the tariff being charged, however due to the fact that municipalities were not passing the payment to Eskom, these consumers may be unfairly affected when Eskom cuts off the electricity supply to municipalities that do not pay their debt. 9.Agreements on the issue of the water boards very vaque 19

20. SOME OF THE CHALLENGES FACED BY MUNICIPALITIES 1.Persistent non-compliance with electricity licence conditions by municipalities 2.No availability of electricity asset data (municipal electricity distribution systems dilapidating) 3.Lack of critical skills in the sector (artisan electricians, electro-mechanicals, as well as electrical engineers) 4.Electricity theft (non-revenue electricity) and cable theft 5.Revenue from electricity sales not ring-fenced for the sustainability of the supply 6.Municipalities not implementing tariffs approved by regulator 7.Tariffs not structured to reflect the cost of providing the service 20

21. ROLE OF NERSA VERSUS MUNICIPAL COUNCIL IN MUNICIPAL ELECTRICITY TARIFF DETERMINATION 1.Since 2011/12 NERSA has issued guidelines for municipal tariffs which require municipalities to submit distribution forms (D-forms) by 30 October a.Municipalities are required to submit their applications to NERSA within the prescribed deadlines. Not all municipalities comply with these deadlines 2.NERSA annually communicates a guide price increase to municipal distributors a.The average benchmark allows for (a) bulk purchases (70%); (b) reasonable energy losses; (c) salaries and wages (10%): (d) repairs and maintenance (6%); (e) capital charges and other costs (4%); and (f) other costs (10%) 3.There is a two-pronged approval process: –A municipal council approves the annual budget of a municipality, which includes all municipal tariff increases –A municipality may not impose a tariff that is not approved by NERSA. A municipality must therefore submit to its Council for approval a municipal electricity tariff that complies with the NERSA approval processes 21

22. IMMEDIATE ACTIONS 22 1.Declare war against electricity loses (technical and non-technical) as well as cable theft 2.Reduce municipal debt to Eskom for bulk electricity supply 3.Manage the Demand Management side of the electricity provision 4.Promote energy efficiency 5.Implement the pre-paid meter in the place of conventional meters

23. IMMEDIATE ACTIONS 23 5.Re-skilling of the electricity units in municipalities 6.Ring-fencing of the electricity business 7.Set cost reflective tariffs that reflects the following cost drivers: a.Bulk purchases cost b.Refurbishment (Maintenance, New Infrastructure) c.Operational costs (Salaries of staff ) 8.Management of Notified maximum demand/ reserve capacity 9.Regular inspection of the network and 10.Monitoring the licence conditions effectively 11.Submit reliable information to NERSA when applying for tariff increases

24. Progress to date By 28 April 2015, 20 of the 59 municipalities complied with the requirements and received their equitable share payments and National Treasury met with 29 municipalities; The process of meeting with each of the affected municipalities to gain a better understanding of the circumstances in each municipality that led to them not paying their creditors and to agree on what steps must be taken for the equitable share funds to be released is continuing; Stakeholders that attend the meetings and contribute support include the Department of Cooperative Governance (DCoG), SALGA and provincial treasuries (PTs); and National Treasury (NT); and 24

25. Recommendation It is recommended that the Portfolio Committee Notes the amount of equitable share held which approximately R2 billion for the 59 municipalities; Notes objective of this process; Notes the timeframe associated with the serious and persistent breach of commitment to honour payments; Notes that off the 59 municipalities, 16 municipalities had their equitable share released after conforming to the requirements; and Notes that off the 59 municipality whose equitable share was withheld 20 are on Eskom’s list for disconnection. 25

26. THANK YOU! 26

27. Annexure A 27

28. LIST OF THE MUNICIPALITIES THAT NATIONAL TREASURY WITH HELD THE EQUITABLE SHARE 28

29. 29 Municipal Code Name of Municipality ESKOM Current ESKOM TotalESKOM Arrear DC38NGAKA, MODIRI MOLEMA DISTRICT MUNIC098 820 EC104MAKANA LOCAL MUNICIPALITY7 274 90364 734 02857 459 125 EC128NXUBA LOCAL MUNICIPALITY2 759 01627 884 79325 125 777 EC143MALETSWAI MUNICIPALITY47 23034 298 60934 251 378 FS161MAFUBE MUNICIPALITY580 77140 286 53639 705 765 FS162KOPANONG MUNICIPALITY2 199 3212 868 461669 140 FS181MASILONYANA MUNICIPALITY2 119 16016 295 51514 176 355 FS182TOKOLOGO LOCAL MUNICIPALITY1 550 7746 995 6655 444 891 FS184MATJHABENG MUNICIPALITY33 957 987543 088 491509 130 504 FS185NALA LOCAL MUNICIPALITY5 496 67679 874 12874 377 451 FS192DIHLABENG MUNICIPALITY9 908 29958 512 20948 603 910 Debts owed by municipalities to Eskom as at 31 December 2014

30. 30 DEBTS OWED BY MUNICIPALITIES TO ESKOM AS AT 31 DECEMBER 2014 Municipal Code Name of Municipality ESKOM Current ESKOM TotalESKOM Arrear FS193NKETOANA LOCAL MUNICIPALITY3 572 96148 011 27344 438 312 FS195PHUMELELA MUNICIPALITY1 417 55226 192 48924 774 937 FS196MANTSOPA LOCAL MUNICIPALITY2 805 67237 613 04134 807 369 FS203NGWATHE LOCAL MUNICIPALITY13 129 047312 569 106299 440 059 FS204METSIMAHOLO LOCAL MUNICIPALITY12 964 97534 089 71221 124 737 FS205MALUTI A PHOFUNG MUNICIPALITY36 098 268599 080 102562 981 834 GT482RANDFONTEIN LOCAL MUNICIPALITY22 876 417104 987 91282 111 495 GT483WESTONARIA LOCAL MUNICIPALITY6 158 50266 025 12159 866 619 LIM334BA-PHALABORWA MUNICIPALITY8 300 7388 814 467513 730 LIM344MAKHADO LOCAL MUNICIPALITY14 440 68727 447 76813 007 081 LIM361THABAZIMBI LOCAL MUNICIPALITY5 179 50997 690 48992 510 980 LIM364MOOKGOPHONG LOCAL MUNICIPALITY3 270 01129 499 57426 229 563 MP302MSUKALIGWA LOCAL MUNICIPALITY13 452 47285 922 04072 469 568

31. 31 DEBTS OWED BY MUNICIPALITIES TO ESKOM AS AT 31 DECEMBER 2014 Municipal Code Name of MunicipalityESKOM CurrentESKOM TotalESKOM Arrear MP303MKHONDO LOCAL MUNICIPALITY6 350 05652 442 93546 092 879 MP305LEKWA LOCAL MUNICIPALITY48 076214 528 815214 480 739 MP307GOVAN MBEKI MUNICIPALITY32 560 710206 838 300174 277 590 MP312EMALAHLENI LOCAL MUNICIPALITY59 495 162615 827 096556 331 934 MP314EMAKHAZENI LOCAL MUNICIPALITY3 056 27226 570 44123 514 169 MP322MBOMBELA LOCAL MUNICIPALITY37 830 368152 872 443115 042 075 MP323UMJINDI LOCAL MUNICIPALITY5 334 86116 800 56611 465 705 MP324NKOMAZI LOCAL MUNICIPALITY7 171 30330 960 12423 788 820 MP325BUSHBUCKRIDGE LOCAL MUNICIPALITY1 584 235 0 NC062NAMA KHOI LOCAL MUNICIPALITY3 265 50540 670 10537 404 599 NC064KAMIESBERG LOCAL MUNICIPALITY586 7716 049 6945 462 924 NC067KHAI-MA LOCAL MUNICIPALITY555 5484 200 8663 645 318 NC071UBUNTU LOCAL MUNICIPALITY1 043 3255 177 1784 133 853 NC075RENOSTERBERG LOCAL MUNICIPALITY38 28618 444 93318 406 647 NC076THEMBELIHLE LOCAL MUNICIPALITY1 031 9259 713 1928 681 267 NC077SIYATHEMBA LOCAL MUNICIPALITY1 287 6934 716 3673 428 674 NC078SIYANCUMA LOCAL MUNICIPALITY2 766 41725 981 70223 215 285 NC092DIKGATLONG LOCAL MUNICIPALITY1 771 71112 280 07010 508 359 NC093MAGARENG MUNICIPALITY1 259 3706 764 3235 504 953 NC094PHOKWANE MUNICIPALITY1 854 4091 924 07669 667 NW372MADIBENG LOCAL MUNICIPALITY8 903 71351 220 06442 316 351

32. 32 DEBTS OWED BY MUNICIPALITIES TO ESKOM AS AT 31 DECEMBER 2014 Municip al Code Name of Municipality ESKOM Current ESKOM TotalESKOM Arrear NW374KGETLENGRIVIER LOCAL MUNICIPALITY2 456 67431 932 21529 475 541 NW382TSWAING LOCAL MUNICIPALTY2 629 65735 967 05733 337 400 NW383MAFIKENG LOCAL MUNICIPALITY73 7662 663 3162 589 550 NW384DITSOBOTLA LOCAL MUNICIPALITY7 222 69086 339 23779 116 547 NW392NALEDI LOCAL MUNICIPALITY7 369 054130 898 232123 529 178 NW393MAMUSA LOCAL MUNICIPALITY1 906 15921 075 16419 169 005 NW396LEKWA - TEEMANE3 687 96045 044 22541 356 265 NW401VENTERSDORP LOCAL MUNICIPALITY12 822 00439 375 97926 553 975 NW403CITY OF MATLOSANA LOCAL MUNICIPALITY37 568 247239 317 689201 749 441 NW404MAQUASSI HILLS LOCAL MUNICIPALITY-1 022 34214 367 83215 390 173 WC012CEDERBERG LOCAL MUNICIPALITY4 598 23515 155 80710 557 572

33. 33 DEBTS OWED BY MUNICIPALITIES TO WATER BOARDS AS AT 31 DECEMBER 2014 Municip al Code Name of MunicipalityCurrentTotal Debt Arrear Debt DC29Ilembe District Municipality6 330 83812 642 2616 311 423 DC33Mopani District Municipality9 690 089349 578 770339 888 681 DC38NGAKA, MODIRI MOLEMA DISTRICT MUNIC875 103161 373 690160 498 588 DC39DR Ruth S. Mompati DM5 159 931 38 714 853 FS162KOPANONG MUNICIPALITY3 344 12576 653 28973 309 164 FS184MATJHABENG MUNICIPALITY35 175 1251 012 530 695977 355 570 FS185NALA LOCAL MUNICIPALITY3 395 24878 463 47775 068 229 LIM361THABAZIMBI LOCAL MUNICIPALITY1 900 861 19 846 671 MP322MBOMBELA LOCAL MUNICIPALITY0 7 880 604 MP325BUSHBUCKRIDGE LOCAL MUNICIPALITY18 684 193116 517 22297 833 029 NC062NAMA KHOI LOCAL MUNICIPALITY2 919 66762 327 94859 408 281 NW383MAFIKENG LOCAL MUNICIPALITY6 481 054155 569 985149 088 931 NW384DITSOBOTLA LOCAL MUNICIPALITY609 617 37 230 929 NW404MAQUASSI HILLS LOCAL MUNICIPALITY4 016 66664 218 75860 202 091