Municipalities will soon get respite from repaying billions of rand owed to Eskom after a decision by the Treasury to have some of the debt written off over three years.
Municipalities owe Eskom about R57bn. Most of the defaulting municipalities did not generate sufficient funding from their operations to sustain the work they had to perform, leaving them “financially gridlocked”, said Sadesh Ramjathan, director of local government budget analysis at the Treasury.
In a presentation to journalists on Wednesday, Ramjathan said escalating municipal debt posed a risk to the Eskom debt relief package of R254bn announced in February.
When finance minister Enoch Godongwana announced the Eskom debt-relief package on tabling the national budget in February, he said undertaking a debt relief of the magnitude suggested by the Treasury without addressing the risk posed by municipal debt, would be counterproductive.
Eskom interim CFO Martin Buys recently told parliament that debt owed by municipalities stood at more than R58bn and unless there was an intervention it could increase to R66bn-R68bn by end-March 2024.
Some of the factors that had caused the “municipal debt spiral” were a leadership culture in municipalities to not enforce credit control and debt collection, Ramjathan said.
These were aggravated by the bulk tariff increases imposed on municipalities, “which may be justifiable on the side of Eskom, but unaffordable to the municipal consumers”, he said.
Strict conditions
Rising tariffs and poor debt collection have caused a consumer culture of nonpayment, which has compounded the problem. The Treasury’s debt-relief conditions are aimed at addressing some of these root causes of nonpayment.
The plan makes provision for municipalities to have a third of their debt owed to Eskom (as at March 31) written off per year over three years. However, the municipalities would have to adhere to strict conditions attached to the debt relief. Should they fail to meet the conditions, any debt already written off would remain so, but they would not qualify for further debt relief.
If a municipality’s application is approved, for each of the three years of the debt relief, a third of the total owed will be written off only after a municipality has complied with the conditions for 12 consecutive months. It will thus take 36 months for a full debt write-off.
Should a municipality fail to comply with the conditions it would have to immediately start repaying arrears, interest and penalties to Eskom. Eskom would then also resume legal proceedings against nonpaying municipalities, including attaching their bank accounts.
The conditions, published by the Treasury in a Municipal Finance Management Act circular, stipulate that during the debt relief period a municipality will have to maintain its Eskom current account.
Municipalities will be expected to progressively install smart prepaid meters (all new connections must be smart prepaid meters). They also face a three-year restriction on any municipal borrowing, and will be expected to phase in cost-reflective tariffs over a period of three to five years.
Collection
“Our assessment, particularly in the 43 crisis municipalities, showed that many municipalities, particularly smaller ones, do not have tariffs that actually recover what it costs them to provide their services ... Some tariff increases could be significant, so it is very important that a municipality doesn’t introduce a one-off tariff increase, but that this is phased in over a few years, said the Treasury’s Marli van der Woude.
Another condition is for municipalities that benefit from the debt relief is to maintain a minimum average quarterly collection from customers for property rates and services. They will have to achieve an 80% collection from April 1, 85% in 2024 and 95% in the year from April 1 2025.
Strict budgeting and financial reporting conditions will apply to municipalities and provincial treasuries.
By applying for municipal debt relief, a municipality agrees that if it fails to meet the relief conditions it will have to voluntarily apply to the National Energy Regulator of SA to revoke its licence.
Once a municipality has successfully applied for the debt relief, Eskom will have to halt any related legal proceedings and terminate existing payment arrangements.
Municipalities that owed Eskom on March 31 (excluding the March current account) can apply for the debt relief. The Treasury had already received one application, Ramjathan said.
Business Day reported last week that the Minerals Council SA and labour federation Cosatu were concerned that writing off municipalities’ Eskom debt would only lead to more nonpayment.
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