Home South African Eskom’s three-fold strategy to recover municipal debt

Eskom’s three-fold strategy to recover municipal debt

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Eskom will use this strategy to ensure all municipal current accounts were paid, arrear debt was settled and the risk of future default was managed.

Image: supplied

DURBAN – Eskom will use a three-fold strategy to ensure all municipal current accounts are paid, arrear debt settled and the risk of future default managed.

Eskom’s spokesperson Sikonathi Mantshantsha said the utility was focused on extensive stakeholder engagements via various intergovernmental platforms and actively partnered with its stakeholders to improve revenue collection within municipalities and offered payment arrangements to make repayments easier.

“However, when all avenues to afford the municipality to pay had been exhausted and failed, Eskom has no other option but to effect the contractual conditions for non-payment, such as to interrupt the electricity supply or even terminate the supply if required.”

Mantshantsha said the disconnection of the electricity of supply was always a last resort. 

Eskom said it had also begun issuing summons for debt owed and would pursue all legal means to collect what was due to ensure that the consumers of South Africa had a reliable and sustainable electricity supply because, “We will fail South Africa if we fail to ensure the financial sustainability of Eskom.” 

The utility said that some 95 municipalities out of the country’s 278 owed it R1 million or more as at the end of May this year. 

Mantshantsha said the non-payment by municipalities placed extreme pressure on the liquidity of the utility.

“This means that Eskom does not have sufficient cash-flow to settle its financial obligations to its suppliers, lenders and cannot cover the operational costs to sustainably provide electricity to South Africa. As at the end of May 2020, municipalities owed Eskom R30 billion in arrear debt payments. The Top 20 owing municipalities accounted for 80% of this debt,” said Mantshantsha.

Eskom was currently seen as negatively impacting South Africa’s economic growth as it continued to implement load shedding. It also had a debt burden of about R450bn. On Sunday, the utility announced that it would continue to implement stage 2 load shedding on Monday as it would continue to experience supply constraints due to the much colder weather increasing the demand for electricity.

Eskom said these non-payment of debts by municipalities may also lead to electricity consumers paying higher tariffs in future. 

The provinces that had the highest debt of defaulting municipalities were the Free State which owed R11.8bn, followed by Mpumalanga with R8.7bn. The Western Cape was the province with the best payment record of municipalities with its own R36 million in arrears. 

University of Johannesburg College of Business and Economics’ Public and Environmental Economics Research Centre (PEERC) deputy director Jugal Mahabir said the issue of debt owed to Eskom (and Water Boards, for that matter) by municipalities had been a perennial issue and one that has been going on for at least the past three years (if not more).

“The fact that it remains an issue illustrates the deep lying financial issues at the municipal level and the lack of progress with the interventions from national and provincial governments to address the issue. When this initially became a concern, a task team was established to deal with this issue. Recommendations were made to parliament on the issue but I am unsure of the way forward and implementation of the recommendations,” said Mahabir.  

He added that the Auditor General reiterated the financial mismanagement and fundamental issues within municipal budgets annually that it was not surprising that municipalities were unable to meet their financial obligations.

Mahabir said that there were municipalities that received qualified (or adverse and disclaimer) audits every year and were thus bound to run into such issues.

“National Treasury’s state of municipal finance reports also confirm that there are many municipalities that have Unfunded budgets and are at serious financial risk. Such issues are the results of years of financial mismanagement.” 

While Eskom said that municipalities often indicated that non-payment by residents and businesses in the municipality resulted in reduced municipality revenues which affected their ability to pay creditors, Mahabir said the issue was quite complex and attributed it to among other things municipal revenue management and credit control being a major issue as the Section 71 reports submitted to municipalities showed that municipalities were owed over R165 billion by municipal customers (households, business, organs of state etc) at the end of the 2018/19 municipal financial year.

“For example, according to the third quarter financial submission for the 2019/20 municipal financial year as per section 71 of MFMA, over 80% of debt owed to municipalities is 90 days and older. If customers do not pay within 30 days and such debt carries over to three months, then the municipality cannot meet Eskom’s obligation within the required time. The failure in the municipal revenue value chain and credit control is a complex issue.” 

“Another fundamental issue is the long term poor financial planning and the impact of electricity price increases on municipal budgets. Related to the point above, many municipal tariffs are not cost reflective i.e. the final price charged to consumers does not appropriately take into consideration the costs of providing services.

“This could result in tariffs being charged that are not sufficient to cover costs and thus pay Eskom for buy bulk electricity. While this poor practice of tariff setting would not have being an issue when electricity prices were lower about 15 years ago, the larger increases over the past 10 years or so would have exposed this poor tariff setting practice.

“Related to the above point, municipalities were expected to absorb a lot of the Eskom tariff increases in order to protect their communities from exorbitant increases. Many municipalities did not appropriately handle this due to poor tariff management and financial planning,” said Mahabir.

He then added that the financial turmoil that Eskom found itself in was well covered and the impact of Eskom’s inability to finance its capital expenditures and, more importantly, its maintenance of existing and old infrastructure would have a devastating impact on consumers and the economy.

“Given an already constrained generating capacity, Eskom being unable to recover the cost electricity that is produced from municipalities will contribute to the financial stress the utility finds itself in. It is paramount for this issue to be resolved in order to contribute to sorting out a greater and fundamental financial issue at Eskom. Eskom has already resorted to disconnecting defaulting municipalities, which, in addition to load shedding, will have a negative impact on communities in defaulting municipalities.”

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