Pay Eskom, or else

South Africa’s treasury has withheld R2-billion from 60 municipalities that owe the electricity parastatal R9-billion.

The rot at Eskom does not stop there. Instead, it is spreading thick and fast and has seeped into local governments from which the national treasury has withheld R2-billion in funding to force them to pay what they owe the flailing utility.

Investors may be happy treasury is taking such decisive action, but there are concerns that this stick won’t work on already dysfunctional municipalities and that South Africa’s poorest will take the hit.

This, experts say, will probably raise the already high risk of service delivery protests in embattled districts.

In an unprecedented move, treasury has withheld the last of three tranches of funding to 60 municipalities due to have been transferred on March 20. The municipalities collectively owe R9-billion to Eskom.

The withheld funds, totalling R2-billion according to the treasury, takes the form of each municipality’s equitable share – an allocation intended to assist local government to provide basic services to its poorest households.

The municipalities include Mahikeng, Ditsobotla, Tswaing, Phokwane and Matjhabeng, which have had service delivery protests in recent years, raising fears that more protests may follow if the municipalities cut their services.

Financial mismanagement

In a statement last week, the treasury said consistent failure to pay Eskom and water board bills amounts to financial mismanagement and that the equitable share would not be released to each municipality until formal arrangements have been made with these creditors.

Although the treasury has said this decision was not a product of the “war room”, established to address Eskom’s financial problems, its statement prominently noted the effect nonpayment had on Eskom.

“The persistent arrears and failure of municipalities to settle their Eskom payments within 30 days, as is legally required, negatively impacts Eskom’s cash flow thereby compromising the utility’s operations and financial position.”

As of December 31 2014, municipalities not only owed Eskom R9-billion but also owed water boards a total of R3.6-billion.

As the treasury indicated in its statement, in early March it told the relevant municipalities of the treasury’s intention and warned them to obtain council resolution to ensure repayment arrangements were made and that the current account due to Eskom was paid by March 3.

But 60 municipalities failed to do so in time. Five have since conformed and saw their allocation released.

“National treasury has met six municipalities thus far and is scheduled to meet 18 more,” it said in response to questions this week, noting that it intended to meet all municipalities affected.

‘Blunt instrument’

Independent political analyst Nic Borain described the action as “something of a blunt instrument”.

But, he said, from a financial market perspective, those who were concerned that government was not holding the line “are completely delighted that [Finance Minister Nhlanhla] Nene is showing such strength and such independence”.

Peter Attard Montalto, an emerging markets economist at Nomura in London, said the treasury was not withholding money to pay Eskom and others but instead was withholding money until municipalities put in place a restructuring plan to pay these creditors.

“It’s very positive move by national treasury in the signal it sends out to the wider public sector about timely bill payment, which is a key issue holding back SME [small and medium-sized enterprises] development particularly, but also impacting Eskom’s balance sheet,” he said.

“The success of the move, however, in terms of extra money actually repaid to Eskom, especially this year, is in doubt. I can imagine the restructuring plans will be over a long period and some of these municipalities will have difficulty setting them up and then sticking to them.

As such I think [there will be] some extra money for Eskom this fiscal year but probably not material in context of balance sheet hole size.” There are concerns that treasury’s attempt to force municipalities to pay could cause further social instability.

The South African Local Government Association warned the move will “result in services paralysis” while the Democratic Alliance has voiced concerns about the potential effect the suspended funding may have on service delivery.

“It’s obviously going to worsen service delivery protests,” said Borain. “They are taking the money away and the consequences for this are that the people are going to suffer.”

Service delivery protests

A number of the local governments who have had allocations withheld have been hot spots for service delivery protests in recent years. Notably, one of the municipalities that has not been paid its allocation is Madibeng, which encompasses Brits, Hartbeespoort, Mooinooi and part of the settlement of Marikana.

This area has been hit with numerous, often violent, protests. Madibeng spokesperson Sipho Nkosi said the withholding of equitable share has a major effect on the day-to-day running of the municipality.

“This action has pushed the municipality into serious austerity measures where things like overtime have been completely taken away and this also made it difficult for the municipality to pay some of its key service providers on time and provide a sustainable service delivery to its communities,” he said.

A payment plan with Eskom was, however, signed on Wednesday. Borain said: “There are certainly going to be some people in government saying that, ‘with 2016 elections coming, this is irresponsible of us, we should be finding more mechanisms’. but treasury is saying there aren’t any.”

Kevin Mileham, the DA spokesperson on co-operative governance and traditional affairs, said the withheld equitable share made it less likely that the selected municipalities would pay their debts and could adversely affect the delivery of essential services.

“Treasury is doing a great job in forcing accountability. This particular action is short-sighted and is not going to achieve the outcomes it intends. It’s going to penalise people who do pay their bills and unfairly so,” said Mileham.

Government debt

The local government association said that while local municipalities owe Eskom money, R98-billion is owed to municipalities, with R5.4-billion of this by national government and the balance by households and the commercial sector.

It further called on its member municipalities to immediately implement credit control measures to recover the debt from government departments. “Defaulters must be given due notice to effect payment, failing which their services must be terminated with immediate effect.”

The association said it was worried about the sustainability of the treasury’s measures “because municipalities are being compelled to enter into agreements against which they may default again. Is the treasury always going to withhold the equitable share when that happens?”

The association said it was seeking a legal opinion on the use of the equitable share, which it said was an “unconditional grant” and to treat it as a condition is “a gross violation of the intergovernmental fiscal relations framework”.

The Constitution permits the treasury to stop “the transfer of funds” to any organ of state that commits persistent and material breach of their financial obligations. It does not stipulate whether the equitable share can be used or not.

The Constitution says the decision to stop the transfer of funds may be enforced immediately but will lapse retrospectively unless Parliament approves it in a process which must be completed within 30 days of the decision being taken by the treasury.

It also says transfers may not be stopped for more than 120 days.

“The action [of withholding the funds] is dire and the sheer numbers represent nothing less than a crisis for local government,” said Karen Heese, an economist at Municipal IQ.

“But the municipalities in question were warned and the fact that they couldn’t construct a repayment plan with their creditors suggests a dysfunctionality that means that the equitable share may not have been used to productive ends.”

Alternative options

Mileham said there were other options available to national government.

He suggested Minister of Co-operative Governance and Traditional Affairs Pravin Gordhan could invoke an intervention in terms of the Constitution which allows the minister to direct the department’s respective provincial MECs to ensure municipalities institute recovery-plans and lend support by sending technical and financial advisors to these municipalities.

Notably absent from the list is Eskom’s biggest debtor, Soweto, which the utility has long lamented owes almost half the outstanding municipal bill – estimated at R4-billion, excluding interest, as of September 30 2014.

Asked whether the debt had been paid, Eskom said the arrear debt balance related to Soweto “remains a major concern”, but that the “township betterment and residential revenue management strategy, which includes Soweto”, is intended to improve debt collection among electricity users.

It includes a “focused credit management process which, together with disconnections, should assist in recovering outstanding debt” and “driving all other debt recovery initiatives in a structured approach”.

Republished with permission from the Mail & Guardian

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Pay Eskom, or else