Johannesburg’s electricity debt crisis – Moneyweb

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JIMMY MOYAHA: Last year, the City of Johannesburg entered into an agreement with Eskom around the outstanding debt that the city had towards Eskom. The agreement resulted in a court order.

That court order has since had to be looked at again, because the City of Joburg has been unable to meet its part of the conditions, and to that effect Eskom last week threatened to cut off the City of Johannesburg.

Enter our Minister of Electricity and Energy, Kgosientsho Ramokgopa, to deal with the situation and see where he can assist.

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There have been ongoing conversations and discussions throughout this week, and today there was an agreement reached between Eskom and City Power on Johannesburg’s case, brokered by our Minister of Electricity and Energy.

He joins me on the line now to see what the agreement is and what we make of it. Minister, lovely having you on the show. Thanks so much for taking the time. This isn’t the first time you’ve become involved in these sorts of disputes in your time as minister of energy and electricity.

This situation may be unique as to where Johannesburg sits at the moment, and perhaps we can start our conversation there. You touched on the fact that Johannesburg is a ‘sovereign problem’ in your briefing this afternoon. What did you mean by that?

DR KGOSIENTSHO RAMOKGOPA: Good evening, Jimmy, and thanks for the invitation. And good evening to the listeners. So, if you come to think of it, Johannesburg is the epicentre of South Africa’s economy and the financial hub – not just of South Africa but of the continent.

So the magnitude of disconnecting, interrupting or reducing the supply to Johannesburg will have a devastating impact on SA’s economy – disproportionate to any action that could be taken against any municipality.

But that doesn’t absolve Joburg from its obligations to pay. So the minimum requirement is that Joburg must keep to the terms of the agreement – that’s the current account.

Just in numbers, the total amount that is owed is [R5.25 billion; R1.58 billion] of that is current.

If a no payment is made between now and 5 June, when a payment of approximately R1.5 billion is expected, you can see you are breaching about R6 billion that Johannesburg owes.

That will also have a significant impact on Eskom, as a going concern because I am sure what the Auditor-General (AG) will say is, ‘Look, the R14.4 billion that municipalities are owing to you is essentially not recoverable’.

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That will undermine Eskom’s claim as a going concern and will have a devastating impact on the South African economy. That’s why we have invested a significant amount of time and energy to intervene.

What’s different between now and the previous agreement? I think the natural question for you to ask is, ‘What confidence we have in the mechanisms that we have announced today?’

What happened the last time was that we were at an arm’s length. We left Joburg and City Power to their own devices to find a way of paying us. But now we’re taking an interest, we are inserting ourselves into that equation.

What do I mean by that?

I want to give City Power the necessary technical support that is required.

Just to give you a sense of one of the lowest-hanging fruits, City Power is experiencing about 30% technical losses; the average in the country is about 10%. The ambition should be about 7% in technical losses.

In rand terms, what does this mean? For every R100 of bulk purchases they can only reticulate about R70. They’ve already lost R30, even before they can collect. So you can see that’s a race to the bottom. Eskom has the expertise. That’s what Eskom does on a daily basis in the areas where they reticulate.

We know that there are issues around incomplete billing. By that what do I mean? There are parts of the city that are not necessarily billed; if they are billed, they are not built correctly.

Eskom does that on a daily basis. There are industrial customers that are on a residential tariff. You start there, by making sure that they are on the right tariff. … people are paying in Johannesburg. That’s the point I want to make.

So people can’t be collateral damage as a result of the inability of a City Power Johannesburg to pay Eskom. The last thing we want is to disrupt people’s lives.

So one of the things we agreed to is that you must ring-fence all the revenue, the revenue that comes from the sale of electricity, so that we have sight of what’s coming through.

What the situation is now is that when you, Jimmy, pay for your electricity consumed, it goes into a central account, and what the City does is to reallocate that money to other spending pressures.

City Power is left high and dry, and therefore it’s not in a position to pay Eskom. So we say pay for your bulk, and invest a bit of that into strengthening, expanding and modernising your reticulation infrastructure.

The remainder you can reinvest back into other spending pressures and support the social wage, among other things, in Johannesburg.

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But this situation is untenable. We really couldn’t stand back and watch. Like I said, it has a huge impact on the South African economy.

JIMMY MOYAHA: Minister, one of the other discussions that came out today was the new distribution-agency agreements which the City of Johannesburg will be entering into, once that process kicks off next week.

Can we look at that and look at the impact that will have going forward?

DR KGOSIENTSHO RAMOKGOPA: The elements of that I just shared.

So the first is that we second competent and highly skilled engineers and technicians to be embedded inside City Power, because there has been significant haemorrhaging of the engineering skills at City Power – that admission they make. So they are really thin on on the skills side.

And then, second, it is to ensure that we were able to, as I mentioned before, examine the entire value chain up to the point of consumption.

I did make the point that we’ll address the technical losses. And once the teams are there they’ll be able to make a determination which areas of the city are experiencing the highest number of technical losses. Target those, if you like, by the Pareto Principle – 20% effort, 80% returns [the 80/20 rule].

They are likely going to be in an industrial area. Why industrial areas? Those are high-load centres. They consume a lot of electricity and then we must make sure that their billing is correct.

Again, you look at the areas of the biggest load centres. That’s where you are likely going to find that the industries that are meant to be on an industrial tariff are [actually] on a residential tariff .

And then, for residential customers, and in fact everyone, roll out the smart meters and ensure that you are able to target those who are not paying. They must be individually targeted, as opposed to a blanket approach that really results in collateral damage.

The most diligent paying customers can’t be carrying the weight of those who are not paying.

And then in that same dispensation you are able to accommodate and look after the indigent households, because once we roll out smart meters we are able to directly subsidise the consumer.

Part of the problem now is that the allocation that is meant to support the indigent households lands in the City in that central account, and it doesn’t find its way to the end consumer because of the spending pressures.

That money is meant to support the end consumer. So with smart meters we are able to preload at the beginning of the month already, where it’s meant to be, at the point of consumption. And … we think that this will improve the ability to collect.

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And ensure, again, you ring fence this income, that It doesn’t go into a central account where the city just sweeps almost every day and then reallocates to other spending pressures.

We have an obligation to look after the infrastructure, but this does not subtract from the city’s right as a sphere of government with original powers to make decisions on how it allocates its income.

They have an obligation to pay for these bulk services – which is what we are calling for. We have found each other. We have agreed there are going to be money flows. The payments must be made because Eskom must be protected.

The Eskom board is where the fiduciary responsibility to ensure that those who owe, pay. Otherwise it’s going to undermine Eskom’s claim as a going concern.

The collective amount of debt owed by municipalities to Eskom has ballooned. It is sitting at R114 billion.

So what comfort do the lenders and the Auditor-General have if you are unable to collect in Johannesburg – the biggest metro in the country?

Therefore your claim to collect in small cities can’t be trusted, therefore the R114 billion can be deemed to be not collectable.

That’s the situation that’s facing us. Once Eskom’s claim as a going concern is undermined, its ability to raise money in the debt capital market, to refinance, to invest in generation infrastructure, is undermined.

Then the entire country is at risk. That’s why I’m saying the Joburg problem is a sovereign problem now.

But Joburg is not absolved from pain. It can’t hide and say, ‘Okay, someone is going to bail us out’. No one will bail them out.

Customers are paying, and that money will be used to pay for the bulk and to reinvest back in protecting the asset, Jimmy.

JIMMY MOYAHA: It is always important to understand the context of these things and the importance with which they filter into our ecosystem.

Thank you so much to the Minister of Electricity and Energy, Dr Kgosientsho Ramokgopa, for joining us to take a look at the agreement he assisted in brokering between Eskom, the City of Joburg, and how it is that they intend to settle their outstanding debt.

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