Earlier this week, National Treasury hosted a media workshop to run through the finer details of the R56-billion write-off of debt owed by municipalities to Eskom. The move is expected to improve Eskom’s financial standing somewhat, while also bailing out municipalities battling with financial problems.

“Some municipalities are just not generating sufficient cash to sustain their operations,” says Sadesh Ramjathan, director of local government budget analysis at National Treasury. 

“Our observation is that various factors contribute to this dilemma [including] the leadership culture, the culture of consumers not paying for services they consume, inefficiencies, bloated non-core organisational structures, channels that are not cost-effective and misalignment of fragmented internal processes.”

Although as many as about 165 municipalities technically qualify for the programme, Treasury anticipates that those municipalities owing smaller amounts may think twice before applying to be part of this particular debt relief programme. And with good reason.

The programme allows for all debt owed to Eskom as at 31 March 2023, including interest and penalties, to be written off over three years. However, there are 14 terms and conditions municipalities must meet for this to happen. 

Ramjathan says the purpose of the municipal debt relief programme – in addition to making Eskom’s balance sheet more attractive to investors – is to explore new mechanisms to deal with electricity debt; to introduce a smart prepaid solution for cash upfront rather than postpaid for municipalities, and to support municipalities with revenue management and revenue enhancement initiatives.

While the criteria for the debt write-off may seem onerous, municipalities that choose not to participate – and continue to be in arrears – face legal action from Eskom, which will have the right to attach municipal bank accounts to recover monies due.

The terms and conditions

In order to qualify for debt relief, municipalities will have to fulfil the following terms and conditions:

1. All terms and conditions must be met consistently to qualify: If a municipality wants to write off its entire debt as of 31 March this year, it would need to comply with the conditions for 36 consecutive months. However, this will be assessed in 12-month blocks. So, a municipality might meet all the terms and conditions for the year from 1 April 2023 to 1 April 2024, in which case a third of its debt to Eskom will be written off. If the same municipality then fails to meet one condition in June 2024, it will be excluded from the debt relief programme from that point forward. The one-third debt already written off would remain written off, despite the subsequent noncompliance.

2. A written application is required: Participating municipalities have to submit a written application as well as an electronic submission via the GoMuni portal. The applications require motivations from the municipal manager and the chief financial officer, explaining in layman’s terms why the municipality qualifies for the debt relief, and the impact on service delivery and cash flow impact if the application is denied. A signed municipal council resolution in support of the application must be included. Treasury’s revenue policy coordinator, Marli van der Woude, says this is vital because a lot of the challenges are behavioural.

“The municipality needs to have a monitoring plan, so it’s clear internally and also for us as overseers as to how these conditions will be implemented and reported on and also to detect early risks of non-compliance,” she says. 

Treasury has also issued a template council resolution to assist municipalities to fast-track the process and make sure that all the minimum information is included.

3. Municipalities must settle their current Eskom accounts within 30 days of invoice: This applies to all municipalities going forward. However, municipalities that have applied for debt relief will be excluded from the programme if they fall into arrears on current accounts. Proof of payment has to be submitted monthly to Eskom and to National Treasury.

4. Credible budget funding plans: “Municipalities must cut their pants to the size of their cloth. We want to see them budget for revenue that is realistic, and based on the actual collection levels while spending must align to realistic revenue projections,” Van der Woude says. She adds that government is aware of municipalities using provisions such as depreciation of assets to balance the budget and warns that these provisions are often not credible.

5. Cost-reflective tariffs: Treasury has noted that, in some cases, tariffs are not cost-reflective, which means that some tariff increases could be significant. Municipalities are advised to phase these increases in over a few years and to reflect this strategy in their budgets.

6. Consolidated municipal bills: All electricity, water and sanitation revenue that the municipality collects is to be held in a separate bank account. If consumers make partial payments, these are to be allocated first to property rates, then water, wastewater, refuse removal and lastly to electricity. If any consumer owes arrears, then the partial payment is to be applied in the same order of priority to the arrears, and only then to the current monthly bill.

7. Minimum average quarterly collections: Municipalities must achieve a minimum of 80% average quarterly collection of property rates and service charges in the first year; 85% in the second year and 95% in the third year.

8. Alignment between billing and the revenue base: Treasury has developed a property rights reconciliation tool that municipalities need to complete monthly and submit quarterly.

9. Monitoring and reporting: Municipal councils are expected to closely monitor the implementation of the funded budget and actively intervene if progress is slow. Provincial treasuries will also be expected to monitor this.

10. Limitation on borrowing: “Just as in your private life, if your purse is empty and you’ve exhausted all your credit card and borrowing capacity, then you’ve reached the ends of your means and you cannot borrow any more. No bank would allow that; it would not be prudent. Municipalities that receive this relief cannot borrow for a period of three consecutive financial years,” Van der Woude says.

11. Resource management and accounting: Participating municipalities are expected to ring-fence all electricity, water and sanitation revenue the municipality collects in any month, in a sub-account to the primary bank account.

12. Accounting treatment: Municipalities must fully account for and correctly report on the write-off of the Eskom arrear debt.

13. Potential licence loss: If a municipality fails to meet the relief conditions, it has to voluntarily apply to the National Energy Regulator to revoke its licence. BM/DM