Despite expenditure on infrastructure such as Eskom's transmission lines, roads and rail transport, failures persist. Photo: Delwyn Verasamy/M&G
Through its plan to write off debt owed to Eskom, the treasury not only hopes to relieve the over-burdened power utility but also to correct poor revenue management by municipalities.
Last month, the treasury published a circular outlining the conditions it will impose on municipalities wanting to have their historical debt to Eskom written off. Among other things, municipalities are required to demonstrate their efforts to get their finances in order by improving revenue collection and budgeting.
The Eskom municipal debt relief programme will force a change in the behaviour of local government leaders and officials by restoring financial management best practices, said Sadesh Ramjathan, the director of treasury’s local government budget analysis unit, during a presentation on Wednesday.
The treasury signalled its intention to find a way to clear this municipal debt in February, when Finance Minister Enoch Godongwana announced the government’s proposal to take over R254 billion of Eskom’s staggering R423 billion debt, which has hamstrung the power utility’s ability to maintain its ageing coal fleet, a predicament that has fed into the country’s 15-year energy crisis.
Restoring Eskom’s financial stability will go a long way towards addressing the energy crisis, which is expected to cost the economy R375 billion in 2023. But without addressing the mounting municipal debt to the utility, this could all be for nought.
“Outstanding municipal debt, which has grown to R56.3 billion as at 31 December 2022, up from R44.8 billion in March 2022,” an annexure to the February budget noted, “is a systemic challenge to the electricity industry as a whole.”
According to the treasury’s circular on the municipal debt relief programme, local government revenue generation and collection problems have existed for a long time, constituting “a complex national problem”.
“Often it is a combination of prolonged financial management failures in conjunction with changing/deteriorating economic circumstances that lead to a municipality’s inability to pay its creditors. However, at the core of the problem is improper leadership behaviour within municipalities,” the circular notes.
“Most defaulting municipalities are not generating adequate funding from their operations to sustain their operations. Faced with substandard and/ or the absence of reliable municipal services and perceptions of public money waste, the paying public further deteriorated. There are also inefficiencies in municipalities and Eskom that further aggravate the problem.”
In 2021, the Bureau for Economic Research (BER) analysed this very problem, showing how the failure of municipalities to properly manage their revenue has added to the country’s economic woes.
Low debt recovery from households has serious consequences for Eskom and the water boards, which need to continue delivering electricity and water despite non-payment, the BER noted. “This emphasises the need to strengthen municipalities’ revenue position, without which they won’t be able to borrow funds for investing in infrastructure.”
Neglected and subsequently decaying municipal infrastructure has hampered the ability of local governments to deliver services to households and to businesses, further discouraging investment in the economy.
Just on Wednesday, poultry producer Astral Foods — which has a large processing plant in the beleaguered Lekwa local municipality in Mpumalanga — alerted investors that it expects its headline earnings per share and earnings per share to drop by between 87% and 92% for the six months to ending March 2023.
In 2018, Astral approached the Pretoria high court in an effort to get the national government to intervene in the municipality, citing its abysmal record for delivering services. By 2021, Lekwa had racked up north of a billion rand in debt to Eskom.
The municipal debt spiral poses a material risk to Eskom, the treasury noted in a presentation on Wednesday. The government’s numerous efforts to arrest this debt spiral have not achieved the desired results and there has been no visible improvements, the presentation said.
So how will the treasury’s plan to write-off the Eskom municipal debt work?
First off, municipalities will have to apply to be included in the debt relief programme. In doing so, they are signing up to comply with the 14 conditions set out by the treasury.
Eskom cannot write off any debt unless the treasury is satisfied that the municipality has met all 14 conditions for 12 consecutive months, after which the utility will clear a third of its debt. The programme will run for three years.
If a municipality fails to comply with the conditions, the benefits of the relief cease. The municipality will have to immediately start repaying its Eskom arrears, interest and penalties and the power utility may resume any legal proceedings relating to the recovery of the debt.
The conditions imposed by the treasury set out to strengthen financial measures that ought to already be in place at municipalities. These conditions include municipalities demonstrating that they have paid their Eskom current accounts each month, aligning spending to realistic revenue projections and having cost-reflective tariffs.
Municipalities must also demonstrate that they are cutting off or restricting services to customers who fail to pay their water or electricity bills, unless the defaulter is already registered as an indigent consumer.
Municipalities will also have to maintain a minimum average quarterly collection, collecting 80% of their revenue during the first year of the programme, 85% during the second year and 95% during the third. Where they are not able to immediately achieve these averages, municipalities will have to demonstrate why they are not able to do so.
Provincial treasuries will have to closely monitor municipalities to ensure they comply with the conditions, certifying their compliance each month.
A municipality that benefits from the relief is not allowed to borrow during the three-year period. The municipality will also have to ring-fence all electricity, water and sanitation revenue in a separate account to its primary bank account. That revenue must be used to first pay its Eskom current account and then its bulk water account. Only then can the money be used for other purposes.