South Africa’s treasury has withheld R2-billion from 60 municipalities that owe the electricity parastatal R9-billion.<\/p>\n
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.<\/p>\n
Investors may be happy treasury is taking such decisive action, but there are concerns that this stick won\u2019t work on already dysfunctional municipalities and that South Africa\u2019s poorest will take the hit.<\/p>\n
This, experts say, will probably raise the already high risk of service delivery protests in embattled districts.<\/p>\n
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.<\/p>\n
The withheld funds, totalling R2-billion according to the treasury, takes the form of each municipality\u2019s equitable share \u2013 an allocation intended to assist local government to provide basic services to its poorest households.<\/p>\n
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.<\/p>\n
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.<\/p>\n
Although the treasury has said this decision was not a product of the \u201cwar room\u201d, established to address Eskom\u2019s financial problems, its statement prominently noted the effect nonpayment had on Eskom.<\/p>\n
\u201cThe persistent arrears and failure of municipalities to settle their Eskom payments within 30 days, as is legally required, negatively impacts Eskom\u2019s cash flow thereby compromising the utility\u2019s operations and financial position.\u201d<\/p>\n
As of December 31 2014, municipalities not only owed Eskom R9-billion but also owed water boards a total of R3.6-billion.<\/p>\n
As the treasury indicated in its statement, in early March it told the relevant municipalities of the treasury\u2019s 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.<\/p>\n
But 60 municipalities failed to do so in time. Five have since conformed and saw their allocation released.<\/p>\n
\u201cNational treasury has met six municipalities thus far and is scheduled to meet 18 more,\u201d it said in response to questions this week, noting that it intended to meet all municipalities affected.<\/p>\n
Independent political analyst Nic Borain described the action as \u201csomething of a blunt instrument\u201d.<\/p>\n
But, he said, from a financial market perspective, those who were concerned that government was not holding the line \u201care completely delighted that [Finance Minister Nhlanhla] Nene is showing such strength and such independence\u201d.<\/p>\n
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.<\/p>\n
\u201cIt\u2019s 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\u2019s balance sheet,\u201d he said.<\/p>\n
\u201cThe 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.<\/p>\n
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.\u201d There are concerns that treasury\u2019s attempt to force municipalities to pay could cause further social instability.<\/p>\n
The South African Local Government Association warned the move will \u201cresult in services paralysis\u201d while the Democratic Alliance has voiced concerns about the potential effect the suspended funding may have on service delivery.<\/p>\n
\u201cIt\u2019s obviously going to worsen service delivery protests,\u201d said Borain. \u201cThey are taking the money away and the consequences for this are that the people are going to suffer.\u201d<\/p>\n
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.<\/p>\n
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.<\/p>\n
\u201cThis 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,\u201d he said.<\/p>\n
A payment plan with Eskom was, however, signed on Wednesday. Borain said: \u201cThere are certainly going to be some people in government saying that, \u2018with 2016 elections coming, this is irresponsible of us, we should be finding more mechanisms\u2019. but treasury is saying there aren\u2019t any.\u201d<\/p>\n
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.<\/p>\n
\u201cTreasury 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\u2019s going to penalise people who do pay their bills and unfairly so,\u201d said Mileham.<\/p>\n
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.<\/p>\n
It further called on its member municipalities to immediately implement credit control measures to recover the debt from government departments. \u201cDefaulters must be given due notice to effect payment, failing which their services must be terminated with immediate effect.\u201d<\/p>\n
The association said it was worried about the sustainability of the treasury\u2019s measures \u201cbecause 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?\u201d<\/p>\n
The association said it was seeking a legal opinion on the use of the equitable share, which it said was an \u201cunconditional grant\u201d and to treat it as a condition is \u201ca gross violation of the intergovernmental fiscal relations framework\u201d.<\/p>\n
The Constitution permits the treasury to stop \u201cthe transfer of funds\u201d 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.<\/p>\n
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.<\/p>\n
It also says transfers may not be stopped for more than 120 days.<\/p>\n
\u201cThe action [of withholding the funds] is dire and the sheer numbers represent nothing less than a crisis for local government,\u201d said Karen Heese, an economist at Municipal IQ.<\/p>\n
\u201cBut the municipalities in question were warned and the fact that they couldn\u2019t construct a repayment plan with their creditors suggests a dysfunctionality that means that the equitable share may not have been used to productive ends.\u201d<\/p>\n
Mileham said there were other options available to national government.<\/p>\n
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\u2019s respective provincial MECs to ensure municipalities institute recovery-plans and lend support by sending technical and financial advisors to these municipalities.<\/p>\n
Notably absent from the list is Eskom\u2019s biggest debtor, Soweto, which the utility has long lamented owes almost half the outstanding municipal bill \u2013 estimated at R4-billion, excluding interest, as of September 30 2014.<\/p>\n
Asked whether the debt had been paid, Eskom said the arrear debt balance related to Soweto \u201cremains a major concern\u201d, but that the \u201ctownship betterment and residential revenue management strategy, which includes Soweto\u201d, is intended to improve debt collection among electricity users.<\/p>\n
It includes a \u201cfocused credit management process which, together with disconnections, should assist in recovering outstanding debt\u201d and \u201cdriving all other debt recovery initiatives in a structured approach\u201d.<\/p>\n
Republished with permission from the Mail & Guardian<\/a><\/em><\/p>\n Treasury cuts off municipalities that owe Eskom billions<\/strong><\/a><\/p>\n Eskom in massive trouble<\/a><\/strong><\/p>\n Eskom load shedding update: Monday 30 March<\/a><\/strong><\/p>\nMore on Eskom<\/h3>\n