FRAME WORK OF THE PRESENTATION

DEPARTMENT OF COOPERATIVE GOVERNANCE AND TRADITIONAL AFFAIRSBRIEFING THE PORTFOLIO COMMITTEE BY THE MINISTER ON THE REASONS FOR WITHHOLDING EQUITABLE SHARE ALLOCATIONS FROM MUNICIPALITIES 12 MAY 2015Strategic Planning Workshop

FRAME WORK OF THE PRESENTATION • Background • Introduction • Objectives of this process • Legislative And Regulatory Oversight Over The Performance Of Municipal Functions • Process undertaken with municipalities • Engagements with affected municipalities • General observations from the engagements • Future issues of policy for discussion emerging • Progress to date • Challenges • Immediate Actions

BACKGROUND • The Minister of Finance raised concerns regarding municipal debt escalation to Eskom and Water Boards. The trend for municipalities owing Eskom and Water Boards is mainly in three provinces (Free State, North West and Mpumalanga). • The Minister of Finance alerted the two Ministers that National Treasury would be considering implementing section 216 (2) of the constitution with the view of getting the affected municipalities to sign payment agreements with Eskom and water boards. • On 31 March 2015, National Treasury released a press statement about the decision to withhold equitable share to municipalities due to persistent and material breach of financial obligations by municipalities. • National Treasury indicated that it would, with effect from 20 March 2015, withheld the transfer of equitable share to 60 municipalities due to failure to honour their financial commitments in general and to pay Eskom and other creditors in line with section 65 (2) of the Municipal Finance Management Act, 2003 (MFMA, Act No. 56 of 2003).

INTRODUCTION • Load shedding • Establishment of the war room • Challenges of ESKOM in meeting the electricity demand • Recommendations from the war room • Debt owed to Eskom by municipalities • Debt owed to municipalities by Government • Municipalities not honouring payment agreements • Need to address the culture of non-payment by municipalities which may be transferred to households

OBJECTIVE OF THIS PROCESS • To understand why municipalities are unable to pay creditors on time and conform to the 30 day MFMA requirement • Section 65(2)(e) of the Municipal Finance Management Act, 2003 (MFMA, Act No. 56 of 2003) • To address the culture of non–payment by municipalities • Not paying creditors liquidity problem budget problem leadership problem • It must be noted that non-payment to the entities affects the investor confidence and in Eskom’s case, this impacts on the balance sheet and ultimately on the credit rating of the institution • In addition, non-payment of creditors by municipalities affects the economy and in particular the viability of SMME • It is intended that the practice applied to municipalities around the withholding of the equitable share will be instituted across all spheres of government

INTRO: LOCAL GOVERNMENT HAS VERY SPECIFIC SERVICE DELIVERY RESPONSIBILITIES Storm water Traffic and parking Building regulations Municipal public transport Water (potable) Electricity reticulation Sanitation Refuse removal Cemeteries Fire fighting Municipal health services Municipal planning Municipal roads

Debt owed to Eskom by municipalities as at December 2014 by province

Debt owed to Eskom by municipalities as at December 2014

Debt owed to the water boards by municipalities as at December 2014 by water board

Debt owed to the water boards by municipalities as at December 2014 –Top Ten

Debts owed by NATIONAL DEPARTMENTS to municipalities per province as at 31 December 2014

Debts owed by PROVINCIAL DEPARTMENTS to municipalities per province as at 31 December 2014

PROCESS UNDERTAKEN TO ENCOURAGE PAYMENTS BY MUNICIPALITIES • National Treasury has been engaging with municipalities on the issue of non-payment of creditors over several years through various forums. • Municipalities have repeatedly agreed to pay amounts they owe, but in many cases this commitment has not been honoured. • On 6 March 2015 National Treasury issued a correspondence to municipalities encouraging them to: • settle their current accounts with Eskom and Water Boards; • to confirm repayment arrangements with Eskom and Water Boards; and • to ensure that their political leadership is aware of the municipality’s circumstances by requesting a Council resolution in support of the repayment arrangement. • Subsequently, MFMA Budget Circulars 75 Section 5.5 issued by National Treasury on the 9 March 2015 included the following: • The deadline for this request was 13 March 2015. In addition, the municipalities were required to request assistance with a financial recovery plan; and • Once the municipality meets with National Treasury, the three requirements above plus a full list of creditors is requested. This list must be arranged in order of priority. • Non-payment of Eskom and water boards as creditors • Section 65(2)(e) of the Municipal Finance Management Act, 2003 (MFMA, Act No. 56 of 2003) clearly states that “The accounting officer of a municipality is responsible for the management of the expenditure of the municipality” and “that all money owing by the municipality be paid within 30 days of receiving the relevant invoice or statement, unless prescribed otherwise for certain categories of expenditure”. • It has become a common trend between certain municipalities that outstanding debt to Eskom and the water boards is not prioritised for payment. Municipalities are cautioned that if they do not immediately settle the current accounts of Eskom and the water boards, the March 2015 tranche of the Equitable Share will be withheld. In addition, the payment arrangements to address arrear amounts must be concluded by relevant municipalities, implemented and effected in the budget. • Furthermore, going forward municipalities will be closely monitored and those found to be averting payment to Eskom and the water boards will be deemed as contravening the MFMA and consequently section 216(2) of the Constitution will be imposed. • Municipalities are also reminded of the Municipal Regulations on Financial Misconduct Procedures and Criminal Proceedings, which the Minister of Finance promulgated on 31 May 2014. Failure by the Accounting Officer to comply with the requirements of section 65(2)(e) of the MFMA is an act of financial misconduct as defined in section 171 of the MFMA and municipalities is obliged to deal with such breach in terms of the regulations mentioned above.

General observations from the engagements The following general observations about the causes of municipalities’ failure to pay their creditors have emerged from the engagements between these municipalities and National Treasury: • Poor leadership and weak financial management led to mismanagement of finances which in turn allowed the debt to escalate; • Weak tariff setting ability in municipalities contributed to tariffs being set that are not fully cost reflective; • Poor revenue management has meant that payments due creditors far exceed revenue collected; • Past repayment arrangement were not affordable and realistic (not cash backed) and in many cases were signed merely for compliance; • Absence of Service Level Agreements between municipalities and their bulk services providers (Eskom and Water boards); • Many municipalities do not have proper SLA’s in place or there are weak institutional arrangements between DMs and LMs; • High levels of water and electricity losses which have reduced municipalities revenues dramatically; • High operating costs and in particular, above normal staff costs; • Municipalities not holding municipal licenses in their service areas which has negative consequences for revenue collection; and • Municipalities are found to be over stating the debtors figures and under stating their creditors figures. This exercise also revealed that the creditors amounts far exceed the equitable tranche due.

FUTURE ISSUES OF POLICY FOR DISCUSSION National Treasury and COGTA is concerned about some of the practices Eskom is using in its billing of municipalities and these will be discussed with Eskom after this process is concluded. These include: • Eskom’s requirement for a 15 day payment period for the current account which contradicts the 30 days payment rule as per the MFMA; • The escalating interest charged on arrear debt as a result of Eskom’s policy to impose an interest rate of prime plus five per cent on defaulting customers; and • Penalties charged as a result of municipalities exceeding their notified maximum demand.

COGTA ‘s VIEW ON THE ACTIONS BY NT • While COGTA agreed with the principles and objectives of withholding equitable share to municipalities, it would have been better if the two departments had met and briefed the political principals. • Due to the fact that the two departments did not discuss the matter before withholding of equitable share, National Treasury withheld funds to municipalities that were not supposed to be affected due to the fact that they do not have powers and functions to reticulate water and electricity. • The equitable share to these municipalities has nothing to do with water and electricity since the equitable share for water and sanitation goes to the district. However, National Treasury indicated that the intention to withhold equitable share was aimed at addressing a number of financial management contraventions over and above municipalities’ in ability to pay creditors. • The second challenge observed by COGTA was a situation where equitable share for a municipality was withheld, but the challenges at municipalities need National and provincial government’s attention. This are situations where municipal debt arose due to confusion of powers and functions problems.

COGTA ‘s VIEW ON THE ACTIONS BY NT • The point in case is the Dr Ruth Mompati districts (Water Services Authority) which has entered into a service level agreement with local municipalities as water service providers and the Sedibeng Water Board as a water service provider in other areas. The relationship between the district, local municipality and the Water Board is too casual which is the main cause for debt escalation. • While the withholding of equitable share might have affected municipalities administratively, COGTA observed during the meetings with individual municipalities that the intervention will go a long way in ensuring the debts to bulk service providers is reduced while the current accounts would be honoured. • The intervention is also ensuring that municipalities do attend to the basics that are not in place to ensure cost recovery and accountability regarding the revenue from the provision of services. • As stated above, the meeting with municipalities calls for national and provincial government to urgently attend to service delivery failures that that are caused by policy issues that are not attended to. The following section provides a quick summary of the issues that need urgent attention of National and Provincial government that needs to be addressed as part of the Back to Basics approach.

OBSERVATION • The tariffs being charged by municipalities are not the same across the different municipalities whereas all licensed municipalities are being charged the same tariff by Eskom. • Some municipalities are charging a lower tariff for the supply of electricity than what they are being charged by Eskom thereby setting themselves up for the accrual of debt. • All the four municipalities have inefficient billing systems where in some instances billing is based on an average rate of consumption of electricity. • The electricity supply infrastructure such as transformers and meters in some of the municipalities are so old that they need to be replaced.

OBSERVATION • Submission of unreliable information by municipalities affect their proper assessment by NERSA for tariff approval (some tariff applications could not be approved due to the fact that the electricity loss – non-revenue electricity is too high). • Some Municipalities resort to the use of equitable share transfers to pay for electricity bulk purchases to Eskom. This is problematic since equitable share is meant to deal with poor households while other households should be paying for the services. • Municipalities that implemented untampered prepaid meters are able to collect steady revenue as compared to conventional meters. • There are consumers in these municipalities that are paying for electricity regularly at the tariff being charged, however due to the fact that municipalities were not passing the payment to Eskom, these consumers may be unfairly affected when Eskom cuts off the electricity supply to municipalities that do not pay their debt. • Agreements on the issue of the water boards very vaque

SOME OF THE CHALLENGES FACED BY MUNICIPALITIES • Persistent non-compliance with electricity licence conditions by municipalities • No availability of electricity asset data (municipal electricity distribution systems dilapidating) • Lack of critical skills in the sector (artisan electricians, electro-mechanicals, as well as electrical engineers) • Electricity theft (non-revenue electricity) and cable theft • Revenue from electricity sales not ring-fenced for the sustainability of the supply • Municipalities not implementing tariffs approved by regulator • Tariffs not structured to reflect the cost of providing the service

ROLE OF NERSA VERSUS MUNICIPAL COUNCIL IN MUNICIPAL ELECTRICITY TARIFF DETERMINATION • Since 2011/12 NERSA has issued guidelines for municipal tariffs which require municipalities to submit distribution forms (D-forms) by 30 October • Municipalities are required to submit their applications to NERSA within the prescribed deadlines. Not all municipalities comply with these deadlines • NERSA annually communicates a guide price increase to municipal distributors • The average benchmark allows for (a) bulk purchases (70%); (b) reasonable energy losses; (c) salaries and wages (10%): (d) repairs and maintenance (6%); (e) capital charges and other costs (4%); and (f) other costs (10%) • There is a two-pronged approval process: • A municipal council approves the annual budget of a municipality, which includes all municipal tariff increases • A municipality may not impose a tariff that is not approved by NERSA. A municipality must therefore submit to its Council for approval a municipal electricity tariff that complies with the NERSA approval processes

IMMEDIATE ACTIONS Declare war against electricity loses (technical and non-technical) as well as cable theft Reduce municipal debt to Eskom for bulk electricity supply Manage the Demand Management side of the electricity provision Promote energy efficiency Implement the pre-paid meter in the place of conventional meters

IMMEDIATE ACTIONS • Re-skilling of the electricity units in municipalities • Ring-fencing of the electricity business • Set cost reflective tariffs that reflects the following cost drivers: • Bulk purchases cost • Refurbishment (Maintenance, New Infrastructure) • Operational costs (Salaries of staff) • Management of Notified maximum demand/ reserve capacity • Regular inspection of the network and • Monitoring the licence conditions effectively • Submit reliable information to NERSA when applying for tariff increases

Progress to date • By 28 April 2015, 20 of the 59 municipalities complied with the requirements and received their equitable share payments and National Treasury met with 29 municipalities; • The process of meeting with each of the affected municipalities to gain a better understanding of the circumstances in each municipality that led to them not paying their creditors and to agree on what steps must be taken for the equitable share funds to be released is continuing; • Stakeholders that attend the meetings and contribute support include the Department of Cooperative Governance (DCoG), SALGA and provincial treasuries (PTs); and National Treasury (NT); and

Recommendation It is recommended that the Portfolio Committee • Notes the amount of equitable share held which approximately R2 billion for the 59 municipalities; • Notes objective of this process; • Notes the timeframe associated with the serious and persistent breach of commitment to honour payments; • Notes that off the 59 municipalities, 16 municipalities had their equitable share released after conforming to the requirements; and • Notes that off the 59 municipality whose equitable share was withheld 20 are on Eskom’s list for disconnection.

THANK YOU!

Annexure A

LIST OF THE MUNICIPALITIES THAT NATIONAL TREASURY WITH HELD THE EQUITABLE SHARE

Debts owed by municipalities to Eskom as at 31 December 2014

DEBTS OWED BY MUNICIPALITIES TO ESKOM AS AT 31 DECEMBER 2014

DEBTS OWED BY MUNICIPALITIES TO WATER BOARDS AS AT 31 DECEMBER 2014

FRAME WORK OF THE PRESENTATION