Eskom bleeds local government coffers dry
By Michael O'Donovan
StatsSA recently released the results of its latest survey of municipal finances.
The routine surveys I conducted are among the largest municipalities.
These municipalities are those that rely heavily on rates and service payments to meet their obligations.
Revenue from the sale of water and electricity to residents and local businesses formed the bulk of their revenue.
However, the cost of buying bulk services from bulk suppliers like Eskom and the water boards has increased dramatically.
The impact of municipal balance sheets is that one-third of the municipalities surveyed now pay more to Eskom for electricity than what they earn from electricity sales.
In these municipalities, local government essentially acts like Eskom vendors that are unable to turn a “profit” i.e. they are now unable to generate operating revenue by reselling off electricity.
In order to pay Eskom, municipalities have to draw on payments for other services and local rates.
The price increases imposed by Eskom (and mandated by NERSA) ensure that, in many municipalities, electricity sales no longer contribute to municipal revenue and ratepayers have to subsidise bulk purchases from Eskom.
Many local governments have responded by improving debt recovery and addressing electricity theft (eg. the pre-paid meter upgrade).
For example, in the latest quarter the City of Johannesburg ( CoJ) managed to reverse the trend of declining revenue from electricity sales.
Revenue in the quarter ending September 2024 was 20% more than the previous quarter.
However, during the same period, CoJ payments to Eskom increased by 50%.
In effect, CoJ then transferred all its revenue from electricity sales plus another R800-million to Eskom.
Most metropolitan municipalities are in a similar situation.
Only Ekurhuleni, Tshwane, and Cape Town have made more from electricity sales than they paid for bulk power purchases.
Cape Town, in contrast to the loss made by CoJ, made a “profit” of R2.4 billion from electricity sales during the quarter.
While the situation concerning water services is not as dire it is heading in the same direction.
In the latest quarter, one-in-four municipalities spent more money on bulk water purchases than what they earned from water sales.
Many more local municipalities will soon pay more to water boards than they earn from water sales.
CoJ, for example, earned R261 million from its bulk water purchases of R2.5-billion.
This ‘profit’ was less than the additional R800 million paid to Eskom have to be drawn from rates or by borrowing money.
The last substantial loan acquired by the City of Johannesburg was made at an annual interest rate of 15%.
This effectively raises the price of future bulk purchases from ESKOM to the annual increase plus interest of 15% on the difference between sales and bulk charges.
There are several reasons for the collapse of municipal revenue from sales. These include maladministration, industrial-scale theft of bulk services and poor pricing practices.
Poor practices include Eskom basing their charges on their cost of providing electricity - allowing them to simply pass inefficiencies onto consumers.
Water Boards compound this by grounding their annual increase on the Eskom increment.
The local government then passes all these increases onto residents without the consideration of affordability.
In recent years residents have responded by reducing consumption of water and power and investing in alternative water and power sources.
The change in consumer behaviour ensures that price increases reduce the sales revenue accruing to municipalities.
Before Eskom was able to annex municipal revenue, reducing electricity charges would have increased (or stabilised) power consumption and increased municipal revenue.
However, the price increases demanded by Eskom can only deepen the financial hole municipalities like Johannesburg find themselves in.
Michael O'Donovan is an independent research analyst.
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