Taxpayers to bail out municipalities that can’t pay Eskom

On top of taking over R254 billion of Eskom’s debt, taxpayers will also be footing the bill for a separate debt relief programme run by National Treasury to bail out municipalities that can’t pay their electricity bills.

In a presentation on Wednesday (3 May), Treasury outlined its plan to tackle municipal debt by providing monetary relief to qualifying municipalities. This also carries the long-term goal of improving Eskom’s sustainability in terms of its finances.

Rampant non-payment by municipalities for electricity services from Eskom is a material risk to the company’s current debt situation, Treasury said.

As of the end of 2022, South African municipalities owe Eskom R56.3 billion – a figure which is increasing daily. Eskom has flagged municipal debt as one of the key drivers of its finance issues.

Although the government has already said it would provide the embattled power utility with R254 billion in debt relief over the next three years, the Treasury noted that its municipal debt relief plan is separate and provides ‘extraordinary support’ for municipalities.

The National Treasury stressed that municipal debt relief is highly conditional and that municipalities will have to meet certain requirements for the government’s loans to turn to equity.

Specifically, the debt relief strategy requires compliance with 14 strict conditions outlined by the National Treasury. For a municipality to acquire relief, it must formally apply to the National Treasury.

After the municipality meets the conditions, the National Treasury will instruct Eskom to write off a third of the municipality’s arrears – including interest and penalties, it said.

Over three years, Eskom will periodically write off all debt owed to the company by municipalities as of 31 March 2023 (excluding the March 2023 current account). This is, however, only if municipalities consistently comply with the set conditions for a period of 12 consecutive months, as illustrated below:

Under these conditions, there are various initiatives for municipalities to determine cost-reflective tariffs, use water and electricity as collection tools, maintain revenue collection in terms of a minimum average quarterly collection from proper rates and service charges, as well as enforce accountability through consistent monitoring and reporting to the National Treasury.

Furthermore, municipalities are limited from accessing loans following acquiring benefits from the debt relief strategy. If they fail to meet the relief conditions, it would voluntarily apply to Nersa to have its municipality’s electricity licences revoked.

If the municipality fails to comply with all the conditions during the period of the relief, it will result in immediate credit control and debt management from Eskom, where municipalities will have to start paying arrears again.

Eskom could also continue legal proceedings with non-paying municipalities and attach the municipal bank account.

Through the debt relief strategy, new mechanisms are expected to be explored to resolve non-payment, including requesting the National Regulator of South Africa (Nersa) to amend the license conditions of municipalities to facilitate consequence management.

Both Eskom and municipalities are further required to implement a regime of installation of smart pre-paid meters to improve collection; then only, on an individual case-by-case basis, should debt forgiveness be considered for customers within normal credit control processes.

“Some municipalities are financially gridlocked – require radical change towards their insolvent trajectory while being mindful that a persistent culture of financial mismanagement behaviour led to their position,” said the Treasury.

The National Treasury broadly outlined the main municipal inefficiencies facing the country right now, including:

• Indigency levels are set too high
• Bloated non-core organisational structures
• Tariffs do not recover costs
• Distribution losses
• Unlimited freed basic services
• Not maintaining revenue-generating assets
• Do not know the cost of services
• Organs of state debt

The full document can be seen below:

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