Why municipalities can't hand over power to Eskom

This is according to Eyal Shevel, sector head of corporate and public sector ratings at Global Credit Ratings (GCR), in the wake of Eskom interrupting electricity supply to non-paying municipalities in the North West and Northern Cape in January 2017.

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An important source of income

“Some people have called for delinquent municipalities to lose control of electricity distribution to consumers,” says Shevel, “This would not be workable, however, because the way the municipal sector in SA has been structured. Electricity distribution comprises a crucial part of income for local authorities."

He says electricity revenue in South Africa’s eight metropolitan municipalities and 19 secondary cities accounts for 38% of total revenue, on average. For smaller, more rural municipalities, electricity distribution accounts for a smaller share around 24% revenue on average, but can be well below 20%. Nevertheless, this revenue source is second only to government grants in these locations.

“Controlling the electricity distribution also has another major benefit for local authorities, in that the threat of disconnection can be wielded to ensure payment of all municipal accounts, such as rates and taxes and sewerage.”

“By creating a direct link to Eskom for customers in these smaller municipalities, it would make these local governments almost entirely dependent on the national treasury for income and impair their primary tool for enforcing collections. This is simply unaffordable for our economy,” Shevel says.
It would also place an enormous administrative strain on Eskom, especially at a time when they need to be focusing on power generation and maintenance.

Two options

He says there are two possible solutions to the problem of municipalities defaulting on their debts to Eskom, namely a ring-fenced account and/or a guarantee provided by national government.

With a ring-fenced account, electricity consumers could make payments into the special account. Funds in this account would then be paid to Eskom for the bulk electricity consumed, and only once the debts are settled would the municipality be able to access the margin earned for general purposes.

The ring-fenced account could provide Eskom with the first right to the money it is owed, with the remaining margin paid out to the municipality once the debt is settled.

The second option of a type of government guarantee, Shevel says, may be a more applicable and practical solution for the smaller municipalities. This would see the national treasury pay Eskom directly for a municipality’s debt and then subtract that figure from government grants to the area.

A government guarantee would provide greater confidence in areas that lack the robust financial controls and levels of investment in economic hubs - a solution which is used in Nigeria’s rural states.

“The downside to this solution is that when there is a shortage of funds or money is squandered, it takes available grant funding away from social needs,” says Shevel.

He concludes, “We need to find a mutually beneficial solution to keep the current system of municipal electricity distribution in place but which also offers Eskom protection on their books.”