Feature Article: Municipalities add to Eskom’s financial woes

If all the municipalities that Eskom supplies with bulk electricity paid their accounts on time, Eskom, apparently, would not have quite the same currently reported cash headaches. Even relatively small municipalities owe vast sums of money.

An Eskom notice in the Harrismith Chronicle of 4 July 2014, informed electricity users in the Maluti Phofung Local Municipality area that if the municipality did not settle its debt of R228 680 478.13, the electricity supply would be terminated. According to a letter from local resident, Ben Deysel, published in the same edition of the paper, the problem of non-payment is of long duration.

The Eastern Free State towns and municipal areas that would be plunged into darkness should the electricity supply be disconnected are Harrismith, Kestell, Phuthaditjhaba, Qwa Qwa, Tshiame, Thseseng and Witsieshoek. A shocking consequence of this saga, if the residents and businesses in this municipal area were to have their electricity cut off, is that the electricity users who had dutifully paid their electricity bills would be the victims of the punishment being doled out because of poor management by the municipality. Of course, the municipality may be having difficulty in paying for its electricity purchases because of non-payment by its customers. If that is the case, the problem lies in its management of the situation, a matter that should have been resolved before it threatened the supply of electricity to the customers who do pay.    

Deysel, who is also the national chairman of the AHI, reported that, since 1 April, he had met on three occasions with Eskom senior management. They had told him that the total owing by Free State municipalities amounted to more than R1-billion. According to Eskom’s notice to electricity users, part of the Maluti Phofong overdue account had been outstanding for more than 90 days. In the event that payment is not made, the date for termination of service is 4 August 2014. Mr Deysel has appealed to Minister Pravin Gordhan to intervene in the matter.

All municipalities, of course, are not guilty of non-payment. If they were, Eskom would not be able to function at all because municipalities account for approximately 40% of electricity sales revenue and 60% of the customer base, with Eskom taking up the remainder.

Apart from non-payment, another problem lurking in the electricity distribution industry is the lack of maintenance and upgrading of the distribution grids. In 2012, the estimated cost to municipalities of catching up on the backlog in the maintenance and upgrading of their grids amounted to R35-billion, a figure that, no doubt, has escalated since then.

Municipalities have been accused of utilising the profits on their retailing of electricity for other purposes instead of investing enough in maintaining and improving their grids. As we can see from the Maluti Phofong experience, some municipalities, on occasion, have utilised all the proceeds of their electricity sales for other purposes and have failed to pay Eskom.

Electricity supply and distribution is a growing headache for government. For the most rapid relief, government, both central and local, could allow private sector funding, generation capacity, and distribution grid upgrading and maintenance to take over many of the functions in the supply of electricity.       

At local government level, this could be done on the basis of contracts for maintenance, refurbishing and extension of networks. The network owners could sell the networks on conditions that have the same consequences, with a right of repurchase at the end of a term, or any other workable permutation. The fundamental objective would be for a contractor to take the financial and operating burden off the shoulders of the current network owner (a local authority) for a return on the investment.

Retailers of electricity could pay fees for the delivery of electricity to consumers as is done in New Zealand. Retailers pay fees for the use of networks for delivery of electricity, the charges being determined according to meter readings. Currently, the retailers would purchase electricity from Eskom but if competitive generating companies were to enter the market, there would also be competition in supply. The establishment of retail markets in electricity is an essential feature of a competitive market in which prices are determined by the buyers and sellers rather than by an administrative authority.

The furore in the Maluti Phofung Local Municipal area is but a symptom of a wider problem in the electricity industry in South Africa, the constant danger that other areas will be plunged into darkness. Not because of non-payment, but because of the electricity generation deficit of an estimated 5 000 megawatts, the additional supply necessary to remove the constraints on the economy caused by the electricity shortage. And even more capacity is necessary to allow the economy to grow at its full potential.

To solve these problems, government must let in the private sector.

Author Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation. 

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