The South African Local Government Association (Salga) has acknowledged with concern the debt spiral that both State-owned utility Eskom and municipalities currently face.

Municipalities were owed R306-billion as at December 31, 2022, while municipalities, in turn, owe Eskom R56.3-billion.

The debt represents structural and systemic challenges within the electricity industry, which require a long-lasting solution, Salga emphasises.

It has therefore welcomed the National Treasury’s proposal to provide debt relief to municipalities, which Salga has advocated for in intergovernmental relations structures, which include the Treasury, Eskom and the departments of Cooperative Governance and Traditional Affairs, Mineral Resources and Energy and Public Enterprises, among others.

Within these IGR structures, Salga says, it has also proposed solutions to address the underlying structural and systemic challenges within the electricity distribution sector which contribute to the debt spiral.

The Municipal Debt Relief Circular for the 2023/24 Medium Term Revenue and Expenditure Framework published by Treasury on March 31 in terms of the Municipal Finance Management Act is part of a Treasury package designed to resolve Eskom’s financial and debt crisis, Salga outlines.

It adds that the circular presents a solution to nonpayment for electricity consumption by defaulting municipalities, and in parallel, addresses the consumer culture of not paying for services.

Without universally restoring debt collection, the debt will immediately start accumulating anew, Salga avers.

It notes that the circular spells out the conditions and processes to be followed by municipalities to qualify for the debt relief, which aims to restore financial best practice and improve revenue collection.

The conditions include measures to install prepaid meters, update indigent registers, adopt funded budgets, ring-fence revenue from water and electricity and exercise credit control mechanisms, besides others.

“These measures, if successfully implemented, could also free up revenue for those municipalities [that owe] Eskom, to maintain their current bulk accounts, pay other creditor current accounts and provide a reliable basic level of services,” the association highlights.

Salga has also welcomed the overall Treasury debt relief package.

“With some modifications and additional solutions, we believe the package will certainly contribute to improved performance and prevent debt build-up. However, municipalities must be afforded sufficient time to meet the conditions, many of which are onerous,” Salga says.

The structures, systems and processes that need to be put in place to comply with the conditions will range from three to five years, Salga informs. It has, therefore, proposed that the timeframe of one year as per the circular be increased to realistic timeframes per condition to satisfy the prerequisites, as some conditions can be achieved relatively quickly while others will take much longer.

For example, implementation of prepaid meters requires at least a three-year timeframe, considering that capital projects of this nature require finance, project plans, supply chain management including contracting, and implementation, Salga points out.

It adds that municipalities also need to invest time in educating communities about prepaid meters and to gain acceptance before they are rolled out.

Salga has acknowledged the importance of the various conditions but has appealed for more time to enable municipalities to prepare themselves appropriately.

Given that some of the conditions are “extremely onerous,” Salga has proposed that extensive support be made available from national and provincial government to municipalities.

In this regard, it suggests that support plans, which outline the support and resources required as well as timelines to achieve each condition, should be developed for each municipality applying for debt relief.

Salga proposes that Treasury’s role should be expanded beyond monitoring compliance to also providing and leveraging support for municipalities. It supports conditions such as adopting a funded budget and believes that the write-off of the high debt owing to Eskom, will enable municipalities to table a funded budget.

The circular should also take into consideration the enormous impact loadshedding has on municipal revenue and expenditure and the resultant challenges municipalities will face in tabling a funded budget, Salga states.

In this regard, it proposes that the municipal conditional grant system allow for more flexible conditions whereby municipalities can repair infrastructure damaged or vandalised because of loadshedding and develop new infrastructure that will mitigate the negative impacts of loadshedding.

Salga says it does not support the voluntary revocation of municipalities' distribution licences if they are unable to meet the debt relief conditions. Municipalities have a constitutional obligation in terms of Part B of Schedule 4 of the Constitution to provide electricity and gas reticulation.

Salga proposes that municipalities be assisted to develop incentives for customers to pay, such as debt relief if current accounts are kept up to date, and to deal with users of services who can no longer be traced.

Salga adds that the debt relief should be extended to water debt, including the Water Trading Entity and water boards.

Salga says it looks forward to engaging with Treasury and other stakeholders over the details of the conditions for the municipal debt relief and how best these can be achieved.