Eskom debt payments by municipalities: IMTT progress report; Local Economic Development

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Cooperative Governance and Traditional Affairs

06 June 2018
Chairperson: Mr M Mdakane (ANC)
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Meeting Summary

The Department of Cooperative Governance briefed the Committee on the new sixth pillar of Back to Basics (B2B): Local Economic Development (LED) and gave a progress report from the Inter-Ministerial Task Team (IMTT) on the payment of debt to Eskom by municipalities.

The Department reported that the 2018 Framework for LED sought to mobilise stakeholders around a common national agenda aimed at stimulating local economies through a territorial approach to development challenges which emphasised the importance of the unique characteristics of localities. Among the key challenges noted in the review were the meaning of LED; poor intergovernmental relations on LED; capacity constraints; funding for LED; poor investment in economic information as economic profiles for areas were non-existent.

Members said it appeared as if B2B LED was generally about keeping people busy rather than about the real empowerment of communities and people. Members said that if the LED was to succeed the Department had to establish development initiatives. The Department’s thinking was not big enough and the quality of the planning was an issue. Members asked what the outcomes of the IMTT meetings were. Members urged to see results but there was no implementation happening. Members said that all informal shops in Johannesburg were owned by foreigners. What was government doing when foreigners were taking over the country. Members said LED was not going to happen. Were there plans to address the challenges?
What measures were in place to improve the financial situation of municipalities? Members asked where successes could be seen and what was the Department going to do differently. Members said that the Department needed to crystallise the challenges and the solutions to it.

The Department gave an update on the work of the IMTT on the Constitutional, systemic and structural challenges in electricity reticulation as well as speaking to municipal debt to ESKOM. The IMTT’s scope was further extended to include bulk water related debt. A President's Coordinating Council (PCC) meeting
resolved that the Ministers of Energy, Public Enterprises, Finance, COGTA and Executives of SALGA and Eskom should meet to find lasting solutions to these issues. On the Constitutional issue, the IMTT had decided to establish an advisory panel to provide advice and legal clarity on the constitutional authority for electricity reticulation. The Department spoke to the structural issues of public lighting, areas of supply and Geographic Information System (GIS) mapping by NERSA. The Department moved on to speak to systemic challenges which included:
Eskom credit control mechanisms for municipal bulk accounts were not aligned to the Municipal Finance Management Act (MFMA) and the Public Finance Management Act (PFMA)
The need to rationalise municipal tariffs.
Notified Maximum Demand (NMD)
and related penalties.
Reconciliation of municipal debt to Eskom.
The historical debt owed to and by municipalities.
The unsustainability of current payment agreements between Eskom and municipalities

Municipal debt has been increasing at an alarming rate and stood at approximately R13.5b at the end of March 2018. The top 10 municipalities contribute 70% or R9.5b of the total debt.

The Department’s interventions to support municipalities were engagements to re-negotiate payment agreements. The Department had provided capacity to supported municipalities with their NERSA tariff applications to address tariff deficiencies. On the water debt, DWS and the Department were identifying disputed abstraction points at municipalities and were working with municipalities to reconcile the debt owed and together with the Department were assisting municipalities with water tariff deficiencies. The Department would continue to support the 42 prioritised municipalities in a simplified two -year revenue plan project. The Department emphasized that regardless of the steps taken by the Department to ensure payment by municipalities, the obligation rested with municipalities to pay but that it was also about having functional, viable municipalities able to pay all their debts, not just Eskom’s.

Members asked how the matter would be resolved for municipalities who had nothing, like rural municipalities who would not be able to pay a cent because 90% of the municipalities was indigent. Members wanted the Department to give regular updates on the Eskom – SALGA matter as well as on the work of the IMTT to get a sense of where the work was going. Members asked how long the NERSA program to collect information would take as this would affect the revenue of municipalities. Members asked the Department how they saw local government in the next five years shaping up as it seemed that municipalities were not doing well.
 

Meeting report

Briefing on Local Economic Development (LED)
Mr Kanyiso Walaza, Senior Manager: LED, Department of Cooperative Governance (DCOG), briefed the Committee on Local Economic Development (LED), on the outcomes of the National LED Conference 2017, on the revised national LED Framework, and on current initiatives.

He said the Presidential Local Government Summit of April 2017 had resolved to add a sixth pillar, focusing on LED to guide the second phase implementation of Back-to-Basics (B2B). It aimed to stimulate local economies and improve the planning capability at municipal level. In November 2017 the Department and the Department of Small Business Development convened an inaugural national LED Conference whose objective was to reflect on the state of LED at local government level. An outcome of the conference was the launch of the Economic Development Council of South Africa, which intended to professionalise LED and ensure that all LED officials were registered. One of the principles adopted in the framework was that LED would be a state-led, private-sector driven, community-based development. The key priority areas listed by the conference were ensuring the centrality of LED in the implementation of the B2B program and the Integrated Urban Development Framework (IUDF) to manage rapid urbanisation and effect spatial transformation to stimulate local economies. It also sought to articulate the role of local government in radical socio-economic transformation, addressing inhibitors like red tape, increasing the collaboration between researchers and policy makers in the design of program to address migration challenges as there was a feeling that local traders were being pushed out of local economies by foreign owned businesses, and to explore the establishment of a LED Fund.

The Revised LED Framework
Mr Walaza said DCOG and the Department of Science and Technology (DST) has finalised the reviewing of the 2006 National Framework for LED. The 2018 Framework sought to mobilise stakeholders around a common national agenda aimed at stimulating local economies through a territorial approach to development challenges which emphasised the importance of the unique characteristics of localities.

Among the key challenges noted in the review were the meaning of LED; poor intergovernmental relations on LED; capacity constraints; funding for LED; poor investment in economic information as economic profiles for areas were non-existent.

LED maintained the approach of the White-Paper on Local Government that local government was not directly responsible for creating jobs, its responsibility was to create an enabling environment. Municipalities had to lead LED and therefore needed a clear vision and strategic agenda. He then spoke to the core pillars of LED and to the strategic pillars of LED framework support.

Current initiatives
Mr Walaza said the Department had established an Inter-Ministerial Task Team (IMTT) on LED composed of the Ministers of Tourism, Small Business Development; Economic Development; Science and Technology; Trade and Industry; Mineral Resources and Rural Development and Agrarian Reform and also a technical Task Team comprising the Director-Generals of those departments.

M Walaza said the revised LED Framework put in place implementation support mechanisms and had suggested monitoring and evaluation systems. Municipal B2B support plans included ongoing reporting on LED which would be used to enhance support to municipalities in distress. He added the caveat however that Local Government had to take active steps to create an enabling environment and the latter began with having a functional municipality.

Discussion
The Chairperson said he thought the B2B LED was generally about keeping people busy. There was a difference between empowerment of communities and people and keeping them busy. EPWP and cooperatives were about keeping them busy. LED was about the real empowerment of people. He did not think that just keeping people busy was the correct way to go about it.

Mr A Masondo (ANC) said that if the LED was to succeed the Department had to establish development initiatives. The Department’s thinking was not big enough. He said another issue was the quality of the planning. There was no plan on how results would be obtained. He asked where the BCom (LED) graduates were in action. He did not see any coherent activity in the townships. He asked what the outcomes of the IMTT meetings were. He urged to see results because overall very little appeared to be happening. The Committee was expecting to hear about pilot projects and what the Department had learnt from their successes and failures. Far more was required than what was in the presentation.

Ms B Maluleke (ANC) said there were good policies and plans but there was no implementation. On the issue of foreign informal traders, she was not xenophobic but all shops in Johannesburg were owned by foreigners. What was government doing when foreigners were taking over the country. She said LED was not going to happen. Were there plans to address the challenges?

Mr J Dube (ANC) said municipalities in rural areas were in bad shape and towns were in a state of collapse. Municipality revenue collecting officials were doing nothing. What measures were in place to improve the financial situation of municipalities? He said the presentation talked of things that needed to be done rather than solutions.

Mr Walaza said that the presentation had been at a high level as per the brief but that he could pull the information the members were looking for, including what was being done in townships and towns.

On the issue of foreign traders, he said the issue had been grappled with for four years. The Constitution said that if a foreigner was in South Africa they had to be able to earn a living because South Africa did not have refugee camps. The question then was how to support South Africans because the foreigners drove locals out of the economy by establishing a number of competing shops close by. A task team had been established on the issue and was looking at regulating the space. In other countries it was not a free for all as happens in South Africa. The traders were not regulated by municipalities and this had to change. The municipalities had to know all economic activity and regulate and license all traders.

On township economic development, he said that the Department’s activities were project driven, meaning that they existed for two years and then stopped. He also said one could not talk of revitalisation because there never had been a township economy in the first place. One had to identify what structures there were and what legislation made it difficult to trade in townships. BBBEE could assist township development if extra points were awarded for business in townships.

On small town regeneration, he said that the biggest challenge was infrastructure and the revised national LED framework was a plan to address these challenges. IMTT helped to pull departments together and revitalised industrial parks had been opened up.

Mr Walaza said Community Work Programme (CWP) and EPWP participants had acknowledged that they had developed no skills while on the program and the Department was working on getting them skilled. One key issue was to look at cooperatives, but people were looking at cooperatives only because funding was available, so the model needed to be relooked at.

The Chairperson said that while LED, as a pillar, was new, it had been around for years in the Department and in the B2B programme. Given the totality of the problems, he asked where successes could be seen and what was the Department going to do differently.

Mr Masondo said that the Department needed to crystallise the challenges and the solutions to it, pressure should be brought to bear to implement solutions and the initiative should not be project driven. He said there was no mention in the document about entrepreneurs. The Department had to think big and be creative. He said Soweto, with two million people, lacked many things that a city of two million people internationally would have. For example, there was no hotel in Soweto. He said a similar case could be made for Mitchells Plain which also had a large population.

The Chairperson said there was no focus on bakeries or small repair shops. LED could really turn things around. Some of the interventions should be yielding results. He hoped that this sixth pillar would help to address unemployment. He said that by the time of the next government in 2019, things should have started to turn around.

Progress Report from The IMTT On the Payment of Debt to Eskom By Municipalities
Ms Lerato Thwane, Executive Manager: Municipal Revenue, DCOG, gave an update on the work of the IMTT on the Constitutional, systemic and structural challenges in electricity reticulation as well as speaking to municipal debt to ESKOM. She said the IMTT’s scope was further extended to include bulk water related debt.

She said that at an August 2017 President's Coordinating Council (PCC) meeting, a presentation was made on the challenges in electricity reticulation which included constitutional, systemic and structural issues. The PCC resolved that the Ministers of Energy, Public Enterprises, Finance, COGTA and Executives of SALGA and Eskom should meet to find lasting solutions to these issues.

Speaking to the legislative framework, she said municipalities claimed they had the executive authority to administer the reticulation of electricity in its areas, but “executive authority” was not defined in the Constitution. Eskom’s claim was that its NERSA issued license gave it the authority and so Eskom was not bound by municipalities’ claim of executive authority. Municipalities were concerned that their constitutional authority was being undermined by Eskom and they were consequently unable to levy surcharges in Eskom areas of distribution or to exercise credit control in Eskom supply areas. There was a lack of tariff parity between municipal supply areas and Eskom supply areas as well as conflicts over supply areas.

She said there were several structural and systemic issues arising from the current dispensation and these could be attributed to the increase in municipalities’ Eskom debt.

Turning to the work of the IMTT, she said the IMTT had decided to establish an advisory panel to provide advice and legal clarity on the constitutional authority for electricity reticulation. It had met with SALGA and Eskom and would be meeting with other stakeholders before the end of June. She moved on to an update on to the structural issue of public lighting where Eskom maintained that it was a municipalities responsibility. Municipalities complained that even though they installed energy efficient lighting in Eskom areas they were still charged a high flat rate tariff. The Department of Energy (DOE) was reviewing the electricity pricing policy which would provide a policy direction on this matter.

On areas of supply, she said NERSA was implementing a Geographic Information System (GIS) to review and update the list of supply areas of electricity distribution licenses for Municipalities and Eskom as areas of supply were never verified when licences were first issued and she identified a number of other challenges amongst which were overlapping areas of supply; the demarcation of the municipal boundaries by the Demarcation Board had added areas of supply to municipalities but the licences were not updated. Ultimately disputes between Eskom and Municipalities over areas of supply could not be resolved because of the challenges. She added that the GIS mapping by NERSA was 36% complete.

Moving on to systemic challenges, she said they included:
Eskom credit control mechanisms for municipal bulk accounts were not aligned to the Municipal Finance Management Act (MFMA) and the Public Finance Management Act (PFMA)
The need to rationalise municipal tariffs.
Notified Maximum Demand (NMD)
and related penalties.
Reconciliation of municipal debt to Eskom.
The historical debt owed to and by municipalities.
The unsustainability of current payment agreements between Eskom and municipalities

The Eskom board had authorised concessions to these challenges effective from July 2017 which the IMTT had discussed but there were still discrepancies on the level of implementation of these concessions. Eskom said it would provide a detailed report on the implementation status.

She provided an update on the challenge around NMD
Eskom had received a high volume of complaints from customers concerning NMD and NERSA had reviewed the method of calculating the NMD penalty and intended to bring it into effect on 1 July 2018.

Another challenge was that in cases where the NMD is exceeded, Eskom required an upfront payment and municipalities were not allowed to apply for an upgrade of the NMD if they owed Eskom. The Eskom Board was considering more affordable terms for the capital payment and Eskom would provide a response by 30 June 2018.

On the challenge of the reconciliation of municipal debt to Eskom, The IMTT has requested Eskom to unbundle the debt to clearly show the classification of the amounts due to Eskom; to determine the capital, penalties and interest due respectively, as well as the amount legally recoverable by Eskom.

On municipalities’ debt, she said that over the past few years, municipal debt has been increasing at an alarming rate. Some of the challenges faced by municipalities in trying to service its debts were:
The “culture’’ of non-payment by consumers
The lack of critical skills people like financial and technical people
The tariff deficiencies in municipalities which results in low revenue generated from electricity business.
Revenue losses as a result of ageing network infrastructure and theft
There was no money in the system to upgrade and maintain ageing infrastructure.

The current arrear debt as at 31 March 2018 was approximately R13.5b, with the top 10 municipalities contributing 70% or R9.5b to the total debt

She moved on to discuss the Department’s interventions to support municipalities. There had been engagements with the municipalities owing the most, which had led to re-negotiated payment agreements. At the end of February 2018, 55 agreements were signed by municipalities but only 32% were being honoured. The Department had provided capacity to supported municipalities with their NERSA tariff application so as to address tariff deficiencies. On the water debt, DWS has initiated a process to identify disputed abstraction points at municipalities and work with municipalities to reconcile the debt owed and together with the Department were assisting municipalities with water tariff deficiencies. The Department continued to monitor the payment arrangements of municipalities and maintained a close working relationship with all stakeholders to ensure that the debt issue was resolved.

The Department would continue to support the 42 prioritised municipalities in a simplified two -year revenue plan project. CoGTA MINMEC had requested provinces to enforce the payment agreements and ensure that municipalities demonstrated a commitment to do their part in this process.

Mr Teboho Motlashuping, Acting DDG: Institutional Development, DCOG, emphasised that regardless of the steps taken by the Department to ensure payment by municipalities, the obligation rested with municipalities to pay. He stressed that it should not be one sided, that municipalities had to pay Eskom. It was about looking at having functional, viable municipalities able to pay all their debts, not just Eskom

Discussion
The Chairperson asked how the matter would be resolved for municipalities who had nothing, like rural municipalities who would not be able to pay a cent because 90% of the municipalities was indigent.

Ms Maluleke asked if prepaid electricity meters could not be installed in townships as was done in Polokwane suburbs as a means for municipalities to collect revenue from electricity sales.

Ms Thwane said that indigent municipalities received the Local Government Equitable Share (LGES). These municipalities did not have the facility to restrict consumers to the free electricity or water and users continued to use above the free amount. Where would funding come from to enable these municipalities to install such infrastructure that would allow them to restrict the use of electricity? This was a fiscal framework issue because it put the onus on municipalities’ own revenue to fund the infrastructure and municipalities did not have money to invest in this.

A second issue was how much it was costing Eskom to provide the service to municipalities as compared to the municipalities own costing. Eskom was billing the municipalities for the capital to install infrastructure in addition to the bulk electricity it sold to municipalities. Thus, municipalities were in the state they were whether they used their own revenue or borrowed funds.

Mr Masondo wanted the Department to give regular updates on the Eskom – SALGA matter as well as on the work of the IMTT to get a sense of where the work was going.

Mr Dube asked how long the NERSA program to collect information would take as this would affect the revenue of municipalities.

Ms Thwane said that that information would only be given at the next meeting of the IMTT.

The Chairperson asked Mr Motlashuping how he saw local government in the next five years shaping up as it seemed that municipalities were not doing well.

Mr Motlashuping said that the issue was how development of local government had been defined in the past which created a number of challenges in the approach that the democratic dispensation sought to achieve. A major issue was the structuring of the concept. For him, it had not worked and reconfiguration of how municipalities were performing would not work. It needed a rethink of the approach of conceptualising local government on, for example the funding model. In the case of non-payment of debt by municipalities, there were some municipalities which would never be able to pay their Eskom debt no matter what the intervention. It needed to be looked at differently.

The second issue was whether lessons were learnt in the reshaping of local government as for example the amalgamation of municipalities, where amalgamations resulted in ideal municipalities becoming dysfunctional. There was a need to relook at what the interventions of government should be in the local government sphere.

The last issue was the manner in which measures were put in place, for example having an organogram and putting people in place and allowing 10-15 years for a good audit to be achieved did not translate into quality service delivery. This needed to be rethought. It should not be a matter of achieving a certain percentage of identified targets, it should be about what the impact of the government interventions was. In the coming five to ten years things might not turn around if the concept of developmental local government was not rethought. He said B2B would make strides. When one looked at government interventions over the years the same five pillars of B2B were in all those interventions. Only the name changed but the approach was the same. In addition, there was a constant change in the political and administrative heads of the Department.

The Chairperson said that unless something was done now, the matters would be the same for the next incoming government. If municipalities were not viable, he could see the situation descend into one where warlords would take over authority in parts of municipalities. He had thought B2B meant a change in content, but it appeared to be only a change in form.

Ms Maluleke said that prepaid electricity meters should be installed as a solution as had been successfully done in the suburbs of Polokwane.

The meeting was adjourned

 

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