The South African Local Government Association (SALGA) acknowledges with concern the debt spiral that both Eskom and municipalities currently face. Municipalities owe Eskom R56.3 billion as of 31 December 2022, whilst municipalities were owed R306 Billion as of 31 December 2022. The debt represents structural and systemic challenges within the electricity industry which requires a long-lasting solution.
SALGA therefore welcomes National Treasury’s proposal to provide debt relief to municipalities, which SALGA has advocated for in intergovernmental relations (IGR) structures, including National Treasury, the Department of Co-operative Governance, Eskom, the Department of Mineral Resources and Energy, and Department of Public Enterprises amongst others. Within these IGR structures, SALGA has also proposed solutions to address the underlying structural and systemic challenges within the electricity distribution which contribute to the debt spiral.
The Municipal Debt Relief Circular for the 2023/24 Medium Term Revenue and Expenditure Framework (MTREF) published by National Treasury on the 31 March 2023 in terms of the Municipal Finance Management Act (MFMA) is part of a National Treasury package designed to resolve Eskom’s financial and debt crisis. The Circular aims to present a solution to nonpayment for electricity consumption by defaulting municipalities, and in parallel, address the consumer culture of not paying for services. Without universally restoring debt collection, the debt will immediately start accumulating anew.
The Circular spells out the conditions and processes to be followed by municipalities to qualify for the debt relief which aim to restore financial best practice and improve revenue collection. The conditions include measures to install prepaid meters, to update indigent registers, adoption of funded budgets, ring-fencing revenue from water and electricity, and exercising credit control mechanisms amongst others. These measures, if successfully implemented could also free up revenue for those municipalities owing Eskom, to maintain their current bulk accounts, pay other creditor current accounts and provide a reliable basic level of services.
SALGA welcomes the overall National Treasury debt relief package. With some modifications and additional solutions, we believe that the package will certainly contribute to improved performance and prevent debt build-up. However, municipalities must be afforded sufficient time to meet the conditions, many of which are onerous. The structures, systems and processes that need to be put in place to comply with the conditions will range from three to five years. We therefore propose that the timeframe of one year as per the Circular be increased to realistic time-frames per condition to satisfy the prerequisites, since some conditions can be achieved relatively quickly whilst others will take much longer. For example, implementation of pre-paid meters requires at least a three-year time-frame considering that capital projects of this nature require finance, project plans, supply chain management including contracting, and implementation. Municipalities also need to invest time in educating communities about prepaid meters and to gain acceptance, before they are rolled out.
The structures, systems and processes that need to be put in place to comply with the conditions will range from three to five years. We therefore propose that the timeframe of one year as per the Circular be increased to realistic time-frames per condition to satisfy the prerequisites, since some conditions can be achieved relatively quickly whilst others will take much longer. For example, implementation of pre-paid meters requires at least a three-year time-frame considering that capital projects of this nature require finance, project plans, supply chain management including contracting, and implementation. Municipalities also need to invest time in educating communities about prepaid meters and to gain acceptance, before they are rolled out.
Another condition requires municipalities to develop cost reflective tariffs which entails developing reliable data sets, updating the asset register as well as cost of supply studies, all of which takes time. Updating the indigent register is another time-consuming exercise which involves extensive engagement with communities and ensuring that all those that qualify for free basic services are properly registered with the municipality. SALGA acknowledges the importance of these various conditions but appeals for more time to enable municipalities to prepare themselves appropriately.
SALGA appreciates that National Treasury is limiting the interest on overdue bulk accounts to prime plus 2% at 30 days – as opposed to prime plus 5% at 15 days, which was agreed upon in IGR engagements some years ago but never implemented. It is practices such as this high interest charged on overdue accounts and penalties that have contributed to the high debt.
Given that some of the conditions are extremely onerous, SALGA proposes that extensive support be made available from national and provincial government to municipalities. In this regard support plans should be developed for each municipality applying for debt relief, which plans outline the support and resources required as well as timelines to achieve each condition. Such support includes updating indigent registers, establishing good billing and revenue management systems, ensuring the necessary mechanisms to implement credit control measures, and cost of supply studies amongst others. A tool to address affordability is also imperative as unaffordable tariffs will not improve revenue collection.
Thus, we propose that Provincial Treasury’s role should be expanded beyond monitoring compliance to also providing and leveraging support for municipalities. We support conditions such as adopting a funded budget and believe that the write-off of the high debt due to Eskom, will enable municipalities to table a funded budget.
The Circular should also take into consideration the enormous impact loadshedding has on municipal revenue and expenditure and the resultant challenges municipalities will face in tabling a funded budget. In this regard we propose that the municipal conditional grant system allow for more flexible conditions whereby municipalities can repair infrastructure damaged or vandalized as a result of loadshedding and develop new infrastructure that will mitigate the negative impacts of load shedding.
SALGA does not support the voluntary revocation by municipalities of their distribution licensee if they are unable to meet the debt relief conditions. Municipalities have a constitutional obligation in terms of Part B of Schedule 4 of the Constitution to provide electricity and gas reticulation.
The Municipal Systems Act (MSA) provides for a detailed process that must be followed when considering alternative delivery mechanisms, and an application to voluntarily revoke their distribution license effectively pre-empts the prescripts of the Municipal Systems Act.
These prescripts are specially designed to ensure sustainable service provision, irrespective of the entity that provides the service. A better condition is for municipalities to undertake a review of its electricity distribution delivery mechanism in terms of the MSA, including a feasibility study for the provision of the service through an external mechanism.
SALGA proposes that municipalities be assisted to develop incentives for customers to pay, such as debt relief if current accounts are kept up to date, and to deal with users of services who can no longer be traced.
Finally, we believe the debt relief should be extended to water debt, including the Water Trading Entity and water boards. The water sector faces similar financial sustainability challenges as the electricity sector which require urgent resolution. If successfully implemented, the Circular conditions, together with SALGA proposals, will not only improve financial management, and revenue collection but can also improve overall sustainability of municipal services and finances.
Overall sustainability requires political and administrative leadership at all government levels to drive the various elements of the relief package. This leadership also needs to educate and encourage communities to pay for the services they receive and to protect municipal staff when they undertake their work, including meter reading, maintenance, and credit control.
SALGA looks forward to engaging with National Treasury and other stakeholders over the details of the conditions for the municipal debt relief and how best these can be achieved.
