Eskom municipal takeover may expand to 30 municipalities

If National Treasury gets its way, Eskom will be appointed as an agent to run the electricity function of at least 30 municipalities in terms of an amended Distribution Agency Agreement (DAA).

This is according to presentations to a joint sitting of the parliamentary portfolio committees for Electricity and Energy along with Cooperative Governance and Traditional Affairs (Cogta).

It is not clear whether Eskom has the required capacity or how such a huge increase in its distribution activities will be funded – but municipal arrear debt to Eskom now amounts to R114 billion, which poses an existential threat to the utility.

Request for more information about DAA implementation

The joint sitting followed a request by DA parliamentary spokesperson on electricity and energy Kevin Mileham for more information about the DAAs that have so far been implemented in three municipalities.

The committee received presentations from Eskom, the departments of Electricity and Energy and Cogta, National Treasury and the South African Local Government Association (Salga).

Treasury indicated that of the 13 municipalities it wrote to earlier, warning they would be kicked out of the National Treasury debt relief programme unless they enter a DAA, 10 have adopted a council resolution to pave the way in that direction, two are still considering the matter and one has declared a dispute.

The latter presumably refers to the Dr Beyers Naudè Local Municipality based in Graaff-Reinet, which has launched a court challenge in this regard.

Take the carrot or get the stick …

These municipalities have consistently failed to adhere to the conditions of the debt relief programme, which could have seen Eskom write off their arrear debt over a period of three years. The conditions include paying their current account on time and in full.

They have been given until 1 September to submit a signed DAA or face expulsion from the programme.

If they don’t, National Treasury says the following may happen:

• Eskom resumes credit control, including attachment of the main municipal bank account;
• Eskom may charge interest at prime +2.5% on all new debt;
• No new allocations from National Treasury for the installation of smart meters;
• National Treasury may withhold funds from the municipality; and
• National Treasury will stop all other support to that municipality.

If they ultimately all enter into a DAA, and together with the current three DAAs, this will bring the total number of municipalities where Eskom takes over to 16.

Municipalities increase to 30

National Treasury indicated that it is targeting a further 14 municipalities for DAAs, which could increase the total to 30.

Responding to a question whether Eskom has the capacity to perform these functions in so many municipalities, the utility said it does and has appointed additional staff on short-term contracts. No further detail was given and nothing was said about the funding for it.

Of the current DAAs, two – those with Maluti-a-Phofung based in Harrismith and Emfuleni based in Vanderbijlpark – were the result of court orders.

In the case of the third, Merafong based in Carletonville, the municipality entered the DAA voluntarily, but it seems it did so without following the prescribed legal process. The contract is currently the subject of a court challenge by AfriForum.

Investigations whether municipalities can deliver

Nhlanhla Ngidi, head of electricity and energy at Salga, said the court challenge supports Salga’s position that the DAA must be legally compliant.

This entails an investigation into whether the municipality has the capacity to deliver the service itself. If not, it must invite outside parties to tender for the delivery of the service.

Eskom can throw its hat in the ring, but will have to compete on an even footing with other bidders.

The process also provides for public consultation on the matter.

Ngidi described the DAA as a “knee-jerk reaction” that does not address the root causes of the sky-high municipal arrears. He pointed out that municipalities lost a lot of revenue, first due to lower sales during the Covid-19 pandemic and then due to load shedding.

He said that according to Salga research, the cost of damage to municipal infrastructure due to load shedding alone amounts to R30 billion – and municipalities did not get any support to mitigate the impact of these events.

Inability to pay Eskom

Ngidi added that the inability of municipalities to make ends meet and pay their Eskom bills has been a subject of discussion since 2015.

In 2018, when the arrear debt was only R9 billion, a panel of experts was appointed at great cost.

They produced a 400-page report with good and sustainable solutions, which are still very relevant.

The key outcome is that the Eskom and municipal electricity distribution model is no longer sustainable and requires reform, Ngidi said.

When load shedding was at its worst, the National Energy Crisis Committee (Necom) acknowledge the need for reform in the distribution industry and developed a roadmap for it – but this has been relegated to the background now with all emphasis on the DAA, he added.

Concern surrounding DAA

Ngidi said at a meeting a week ago, municipalities expressed concern that the DAA “makes Eskom a debt collector that we will never, ever be able to pay in full”.

He said Salga is worried that the September deadline set by National Treasury for the conclusion of the DAAs is too tight but the inter-governmental task team that consists of the parties before the joint sitting, has decided on an expedited compliance process.

Salga is in the process of appointing service providers to assist municipalities with compliance in concluding a DAA, but won’t be able to assist all 13 municipalities that are currently confronted with possible DAAs.

The organisation will also obtain a legal opinion on the matter, since it is concerned that the DAA might undermine the constitutional mandate of municipalities.

‘Easier’ to appoint an organ of state

According to National Treasury, Eskom is the preferred agent to perform the municipal electricity distribution function because of legal provisions that make the appointment of organs of state easier than appointing private companies.

It also said the utility might still consider debt write-offs.

And it pointed out that there is a risk that even with the “DAA solution” current accounts “may not be fully settled” and “some arrear may accrue”.

This article was republished from Moneyweb. Read the original here.