Few municipalities will qualify for Eskom debt write-off – Ratings Afrika

Few, if any, municipalities in default on their Eskom accounts will be able to comply with National Treasury’s recently announced Municipal Debt Relief plan, according to Ratings Afrika.

National Treasury last month announced the new debt relief measures for the 165  municipalities that have defaulted on their Eskom bills and technically qualify for relief. The defaulters amount to just over 60% of the total 257 municipalities in the country.

The total amount municipalities owe Eskom is about R56 billion – a figure that keeps ballooning, despite previous efforts to rein it in.

To qualify for debt relief, municipalities must formally apply and then comply with 14 conditions imposed by National Treasury, including monthly monitoring of compliance and the installation of smart meters by Eskom to reduce the incidence of non-payment.

Link: National Treasury tackles creeping culture of municipal non-payment

Other preconditions for debt relief include setting electricity tariffs at rates reflecting the costs of delivering services, the adoption of funded budgets, wider use of prepaid services to increase upfront cash flows, and measures to address variances between billing systems and the General Valuation Roll.

Uphill battle

This may be a hill too steep for most defaulting municipalities, says senior Ratings Afrika analyst Leon Claassen. This follows the release of Ratings Afrika’s 2022 Municipal Financial Sustainability Index (MFSI), which charts the continued deterioration in the financial health of SA’s municipal sector.

“The problem is the general lack of financial sustainability among the majority of municipalities in SA,” says Claassen. “Many municipalities are unable to pay their creditors in full, based on analysis of their balance sheets. Eskom forms a significant part of these creditors.

Link: SA’s top-run municipalities are Midvaal and Saldanha Bay

“Our view remains that the quality of management is the deciding factor, so we support any effort to improve this. However, we have strong concerns regarding the way that National Treasury is responding to a major opportunity to encourage improvement.

“Our concern is around the strictness of the conditions in order to qualify for the Municipal Debt Relief plan,” Claassen said.

“In practical terms we are of the view that very few, if any, municipalities that currently are in long-term default on their Eskom accounts, would be able to comply with these conditions, either fully or substantially.”

Continuous compliance hurdle

One of the likely stumbling blocks is the rolling 12-month compliance measurement period. Any municipality breaching the conditions of the debt relief plan would have to start again from scratch with a fresh application.

“The result could well be a collapse of the [debt relief] plan, and a possible negative knock-on effect for the debt relief to which Eskom could be entitled,” says Claassen.

Those municipalities that remain compliant qualify to have one-third of their debt written off after 12 months, with a further third written off in the next financial year, and the final third written off after the third year.

Announcing the debt relief plan in May, National Treasury’s local government budget analysis director Sadesh Ramjathan said the intention is to reward improvements in municipalities’ financial behaviour, which should in turn reduce the incidence of non-payment among customers.

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Ratings Afrika suggests greater use of the ‘carrot’ approach, where partial compliance would still make a portion of the annual debt write-off available.

Power to switch off basic services

The debt relief plan dictates that partial payments must be applied first to property rates, then to water, waste water, refuse removal, and lastly to electricity – the idea being to improve collection by giving municipalities the power to throttle or cut off water and electricity to customers until their accounts are settled in full.

“We note that the plan includes a type of waterfall condition to the revenue flows from electricity and water, which seems commendable. And other practicable conditions could also be seen as highly necessary,” adds Claassen.

“Councils and management need to be faced with strong incentives to change tack for the better. Perhaps councillor and management salaries could also be placed at the end of the cash flow waterfall.”

Another aspect of the debt relief plan requires municipalities to ring-fence electricity, sanitation and water revenue into a separate account that must be used to pay Eskom first and then bulk suppliers of services.