Eskom debt relief extended to municipalities

National Treasury is rolling out an ambitious plan to rid struggling municipalities of their ever-growing debt to Eskom, but only if they adhere to strict conditions to permanently change problematic behaviour at council and consumer level.

If successful, the plan – set out in a circular to municipalities dated 31 March – will deal with Eskom’s outstanding municipal debtors, who collectively owe the power utility R56 billion.

Read: Eskom to get a massive R254bn in debt relief

Leveraging the R254 billion debt relief to Eskom announced in February, National Treasury will require Eskom to write off one third of the principal debt, interest and penalties of every participating municipality accumulated up to the end of February 2023 per year over a three year period.

A municipality must stick to strict conditions for 12 consecutive months to qualify for the one third write-off that year.

Eskom’s cooperation is one of the conditions of the R254 billion loan to be converted to government equity.

Defaulting municipalities that fail to apply for the debt write-off will see National Treasury taking over their electricity business and National Energy Regulator (Nersa) revoking their distribution licence and awarding it to someone else.

Spiralling situation

Moneyweb recently reported – in Failed, broken municipalities with R79bn debt pile paint Treasury into a corner – that by the end of December 2022, the debt owed to Eskom by around 100 municipalities totalled R56.3 billion.

Just 15 months prior, at the end of September 2021, the figure stood at R40.9 billion.

That’s an increase of nearly 40% in little over a year. The situation is at breaking point.

Some municipalities are so deep in debt they will never get out of it without intervention. Maluti-a-Phofung based in Harrismith in the Free state is Eskom’s biggest municipal debtor. It owes the utility R7.2 billion.

Earlier efforts

Despite various political, administrative and legal approaches, no sustainable solution to the municipal debt problem has been found.

This included a relaxing of Eskom’s collections policy to extend the due date for payments from 15 to 30 days from invoice, and reducing the interest rate from prime plus 5% to prime plus 2%, according to National Treasury. The rate at which arrear municipal debtors is growing is spiralling.

In its circular National Treasury emphasises that municipalities must set cost-reflective tariffs for the services they render. If necessary, this can be phased in over a few years.

Like Eskom, municipalities will be required to increasingly install smart prepaid meters. National Treasury will soon launch a transversal (centrally facilitated) tender for such meters to set the norms and prices.

Conditions

Municipalities must apply for participation in the scheme before May every year.

If they qualify, they will immediately start enjoying the benefits. Any existing payment plan with Eskom will be suspended and the municipality will no longer have to pay arrear debt, interest, or penalties. Eskom will further suspend any litigation against them.

If the municipality complies for 12 consecutive months, Eskom, in consultation with National Treasury, will write off a third of its debt. Once written off, the debt remains written off.

Conditions include the regular payment of the current Eskom bill, the adoption of a realistic and funded budget, disconnection of defaulting consumers’ water and electricity supply, and a collection rate of at least 80%.

Treasury says there is a popular misconception that municipalities are not allowed to cut water supply, but this is incorrect.

In the case of registered indigents, municipalities are required to maintain supply to the level of free basic services. The 80% payment rate is below the benchmark of 95%, but many municipalities collect far less.

National and the relevant provincial treasuries will provide close oversight – and if a municipality falls foul of the conditions, they lose their benefits and the Eskom collection policy kicks in once again.

The municipality may reapply, but the clock for the 12-month compliance period will then start running from scratch.

Once in the programme, a municipality will not be allowed to enter into any loan agreements.

It must also sign an undertaking to apply to Nersa for the revocation of its electricity licence if it is non-compliant.

Write-off ‘inevitable’, clarification required

MC Botha, an attorney with special knowledge of the electricity supply industry, says the debt write-off linked to the required payment regime is an inevitable outcome.

“Someone has to pay for the party over the last decade and it was always going to be the taxpayer. It is however, under the circumstances, a positive, necessary step to support Eskom [while] simultaneously helping bankrupt municipalities,” he says.

“I however believe that the sanction for non-payment should be sterner and be more closely linked to ‘re-assigning the license of persistent defaulters’, whatever this may mean.”

Botha is asking for clarification of exactly what Treasury means by “re-assigning the license of persistent defaulters”, in view of the order in Maluti-a-Phofung and the pending judgment in Emfuleni.

“If it is intended that Eskom or third party providers can take over the distribution function, it may be good news as the public will not be beholden to a municipal service delivery function that is unable to provide the service,” says Botha.

“Time will tell and it is by no means certain whether, how and when this intervention will be introduced.

“Whether the intervention is effective will depend on the nature of such ‘re-assignment’.”