Brian Molefe shoots from the hip

2015-04-26 15:00

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A suggestion that Eskom supply electricity directly to all South Africans, bypassing municipalities, would in effect destroy local government and derail service delivery.

Electricity experts, municipalities and the SA Local Government Association on Friday lashed out at new acting CEO Brian Molefe’s idea that Eskom – which is owed R4.6?billion in municipal arrears debt – supply power directly to consumers.

About 40% of Eskom’s power sales go to municipalities, which in turn sell it to residents and businesses.

Income from power sales can amount to anything from 20% to 50% of a municipality’s income.

Many of South Africa’s 278 municipalities are currently in a state of paralysis and dysfunction, and are unable to deliver services and perform their mandated duties.

City Press’ sister paper, Rapport, reported last month that overdue debt to the country’s municipalities was a massive R94?billion by the end of June last year. Most of it was household debt (almost R58?billion), followed by businesses and industries (almost R20?billion), government institutions (R4.5?billion) and “other” debtors (almost R12?billion).

Molefe, who has been appointed to slow Eskom’s ruinous descent, posited the power utility could solve load shedding – which has become a regular feature of South African life – in a year and improve its finances by bypassing municipalities in supplying electricity.

He emphasised the idea was his own and not cleared by Eskom or government.

But Charl Kocks, an analyst at Ratings Afrika, which focuses on municipalities, said the idea was a nonstarter.

Although he understood Molefe’s frustration, Kocks said the idea was not “sustainable” and did not “serve the municipal function well in South Africa”.

“On average, the net margin for electricity sales [that is, electricity revenue minus the purchase cost and costs of running your electricity distribution] is about 8%. For most municipalities in South Africa, this is the source of their largest and most stable income from which they can fund their operations.

“Water is the other item, but with water, while the percentage net margin is higher, the amounts of total income are quite low.

“So municipalities are relying on this margin from electricity sales. If you take that away, then you have a big problem.”

Kocks said without this income, South Africa’s municipalities “won’t be able to provide the services they must provide to the same extent”.

He said it would also affect municipalities’ credit-worthiness, making it “expensive to borrow, or actually not be able to borrow”.

“A municipality will not likely go bankrupt, but it will be unable to meet the expectations of its constituents and may need to go to Treasury for assistance. But Treasury tends to help more on things like capital grants, and is not likely to give a loan to meet current expenditure,” he said.

Energy sector commentator Chris Yelland pointed out that the worst arrears were accrued by Eskom’s direct customers.

Molefe himself conceded that Eskom directly supplies power to residents in Soweto, but the famous “Soweto debt” now amounts to R8?billion.

“Soweto’s problem is bigger than all the municipalities combined,” pointed out Yelland.

“Eskom already has many prepaid customers, but that will not solve the problem. Many places with meters have bad collection records. It’s just nonsensical.”

DA shadow minister for cooperative governance and traditional affairs Kevin Mileham called the idea “ill-conceived and immature”.

The DA is trying to get Cooperative Governance and Traditional Affairs Minister Pravin Gordhan to intervene in offending municipalities by making them ring-fence their electricity revenue so they can pay Eskom.

City of Cape Town’s Executive Deputy Mayor and Mayoral Committee Member for Finance, Ian Neilson, said: “It is once again Eskom trying to capture the entire system so that they can monopolise it?...?We rather need to see Eskom split up into a generator company and a separate transmission system company. Further, it is the constitutional function of local government to distribute electricity.”

Neilson said Cape Town had a 10% levy on electricity sales and said it was “one of the few constitutionally provided tax systems available to local government”.

“It is the closest that local government can get to having a sales tax. If it was abandoned, the money would not be available for the electricity supply system. Rather, if the city were to lose this income, it would have to increase property rates by 16%.

“It is preferable to have a mix of tax sources so that responsibility for paying for city services is spread more broadly among the population.”

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