WITHHOLDING OF EQUITABLE SHARE TO MUNICIPALITIES

1. WITHHOLDING OF EQUITABLE SHARE TO MUNICIPALITIES Portfolio Committee on Cooperative Governance and Traditional Affairs 12 May 2015

2. CONTENTS • PURPOSE • BACKGROUND • SALGA VIEW ON THE MATTER • CONCLUSION • WAY FORWARD

3. PURPOSE • Share our observations around the withholding of the equitable share to 59 municipalities • Share our assessment of the impact that this withholding of the equitable share has had on municipalities • SALGAs response to this issue • Provide recommendations on the way forward

4. BACKGROUND • An email was sent by NT at 6.47pm on Friday 6th March to about 60 municipalities requiring them to comply with certain measures dealing with their debts to Eskom and Water Boards. • The deadline for this compliance was stated to be the next Friday 13th March failing which NT would withhold the ES allocation due on 22 March • Very little time was allowed for internal municipal discussion as a special council meeting needs at least 7 days’ notice • SALGA wrote to the Minister of Finance on 09 March requesting that this action be held in abeyance until a meeting is held between the Minister and SALGA to find amicable and sustainable solutions to the matter • Until to date such a meeting has not been held and a letter of reminder about the request was sent to NT on 17 April • Another letter was also sent to the President requesting his intervention on the matter before SALGA could formally lodge an IGR dispute

5. THE WITHHOLDING OF THE ES BY NT • On 30 March SALGA was advised by the affected municipalities that it did not receive the ES allocation and that they were battling to pay staff salaries, other creditors and to render general services • A bilateral was held between SALGA and NT officials on 1 April to seek an urgent resolution and get clarity on the matter • A special SALGA NEC was convened on 02 April to deliberate and resolve on the matter • Amongst the resolutions taken by the NEC on the matter were the following: • SALGA to obtain a legal opinion on the constitutionality of the action by NT as it viewed the actions of NT as unconstitutional • Advise the affected municipalities to not bind themselves with unsustainable commitments • Write to the Minister of Finance requesting an urgent meeting; to the President to request his intervention; and to the Deputy President for SALGA to be represented in all structures dealing with the energy crisis issue • Continue to engage NT and CoGTA so that viable and sustainable solutions are found to the management of creditors (not just Eskom and Water Boards) and debtors by municipalities

6. THE WITHHOLDING OF THE ES BY NT • NEC Resolutions continued: • Caution against the imposition of conditions on the ES and thus making it a conditional grant • Acknowledge Eskom as a strategic partner and continue to work with the company based on the active partnering agreement entered into between SALGA and ESKOM in October 2014 • Urge municipalities not to take independent legal action outside the NEC framework • Call upon NT to take a balanced approach on the matter, e.g. equally demanding of National and Provincial governments to honour their debts to municipalities • Urge municipalities to aggressively initiate a concerted credit control drive

7. THE WITHHOLDING OF THE ES BY NT • SALGA is concerned about the lack of consultation before this action was taken as it has dire implications on how we collectively support local government • Despite the B2B programme and action plans being implemented in municipalities, drastic action was taken, without prior dedicated support and interventions, as contemplated in Section 154 of the Constitution and Section 34 of the MFMA • SALGA noted that some of the municipalities were unjustly penalized based on incorrect information by NT • SALGA raised a concern about the ability of affected municipalities to function without the allocation and where they are getting the funds to meet their obligations (over drafts; use of grant funding, etc.) • SALGA is concerned that municipalities might have entered into non-sustainable agreements just to receive the ES

8. THE WITHHOLDING OF THE ES BY NT • SALGA requested to be included in the task team that deals with this matter and expressed a desire to participate in the War Room so that we can be part of the solution • It was noted that a number of the affected municipalities have received consistent negative audit findings, have recently or still are under section 139 interventions or have been generally experiencing challenges of one kind or another, including being targeted for dedicated support in terms of B2B • The B2B task teams for these municipalities should have been allowed to address the challenges before drastic action was taken • We should have collectively been proactive in holistically dealing with these challenges including management of creditors, budget and revenue in general

9. THE WITHHOLDING OF THE ES BY NT • SALGA is concerned about the effect of this on the poor and vulnerable, as the ES finances Free Basic Services • The preferential treatment of two creditors may negatively affect other creditors • Some institutional challenges with respect to water and electricity: reticulation: • In some instances, the district is the water service authority, but the local has been appointed as the water service provider – Water Boards wrongly billing the local municipality • Bulk service agreements not in place with Water Boards and ESKOM • Where ESKOM reticulates electricity, no SDAs are in place as required by the Systems Act, impacting on the relationship between ESKOM and municipalities • ESKOM reluctant to assist with credit control in areas where it reticulates • ESKOM charging extremely high interest, prime plus 5% • Maximum demand notifications of municipalities too low, leading to constant penalties payable and reluctance by ESKOM to increase same

10. THE WITHHOLDING OF THE ES BY NT • SALGA has raised an issue about the capping of municipal debts to creditors and have called upon NT to devise a monitoring instrument for this as part of the s71 reports • We have also noted the issue of the underlying challenges such as • Budget management • Cash flow issues • Revenue streams • Cross subsidization of services • Tariffs setting • Governance issues, etc. • No indication has been given on the scenario where ESKOM refuses to accept the offer of the municipality and how this will affect the payment of the equitable share.

11. THE WITHHOLDING OF THE ES BY NT • SALGA has been part of all the interactions between NT and the affected municipalities. • During these we have noted that: • Impacted municipalities are struggling to meet their CURRENT account payments to ESKOM, Water Boards • This is affecting the ability of these municipalities to settle their other creditors with the result that negotiations have to be undertaken with these other creditors so that part payments or payment arrangements are reached • That the longer the equitable share is withheld the anecdotal feedback from municipalities is that there will be an impact on operations and service delivery which is dependent on the equitable share funding • Urgent holistic support measures are necessary to arrest the situation and deal with the root causes of the problem • The withholding of the ES remains a contentious and an unsustainable instrument

12. CONCLUSION • Though the meetings with NT have been constructive and amicable, most municipalities expressed reservations in terms of protocols followed • Email did not come from the DG of NT • Political leadership of municipalities were summoned by NT officials • Municipalities are sometimes not charging cost reflective tariffs for electricity (affordability considerations) • Water/Electricity losses are extremely high with the result that even with 100% collection rates some municipalities will never break even on their water and electricity sales. • Many municipalities are willing to enter into payment agreements with ESKOM that are affordable to the municipality but ESKOM requires the municipalities to pay in shorter timeframes which are not affordable.

13. WAY FORWARD • Municipalities have to attend to the following critical aspects internally: • Tariffs need to be cost reflective and take into account losses – SALGA is currently in the process of developing a model for determining cost of services • The losses need to be kept at acceptable levels and budgeted for • NERSA tariff adjustment submissions need to be performed accurately and in a timely manner • Billing needs to be done accurately and consistent – SALGA is currently doing research on Billing systems and the results will be used to assist municipalities to improve its billing practices • Debt collection and Credit control policies and by-laws need to be in place and be implemented • Contractual arrangements with Water Boards and ESKOM needs to be formalised.

14. WAY FORWARD External actions required to address challenges: • In order to assist municipalities and to ensure SDAs with ESKOM are entered into where ESKOM reticulates electricity, NERSA must require the signing of a SDA in terms of the Systems Act as part of the distribution licence conditions of ESKOM • The structural aspects of electricity reticulation needs to be addressed, in order to give effect to the Constitutional provisions • NERSA tariff adjustments need to be interrogated between SALGA, NT, CoGTA, NERSA and ESKOM • The external factors of unemployment, poverty and inequality affecting municipalities needs to be addressed • The financial viability and the funding model for municipalities as institutions for local governance needs to be addressed

15. WAY FORWARD • External actions required to address challenges: (Cont.) • In order to address the energy challenges in the country without negatively impacting on the sustainability of municipalities, it is recommended that SALGA be included as a member of the IMC and the War Room • That national and provincial departments commit to urgently pay all outstanding debts to municipalities in order to ensure equity in the treatment of all three spheres of government • The SALGA concerns and recommendations on this matter will also be addressed during the Winter Budget Forum to be held on the 8th of June

16. THANK YOU