Liquidate municipalities to pay ESKOM & water boards – Paul Nel
Financial Compliance expert Paul Nel of Prisma says the solution to collecting the R92 billion owed to ESKOM by municipalities and the billions owed to Water boards is to liquidate dysfunctional municipalities in terms of the Municipal Finance Management Act after all the intervention processes of provincial and National Treasury have failed. "…it's more of a business rescue. It's not the same as what we understand on the liquidation with the private sector or any other business or private person where all the assets are sold. Not with a municipality. It is only the non-essential assets that must be sold and the full amount of that should be provided for full settlement for all its obligations, which is basically ESKOM and Water Boards." Nel says, in terms of the MFMA, a court order could also be obtained to get rid of the whole council as well as of all officials that are not adding value to the municipality. "…the big advantage of such a drastic step is that you will have a Metro or municipality with a clean sheet with no obligations." Nel also provides figures on how ESKOM has overcharged the consumer since 2009, and gives his take on the reasons behind the continued high tariff increases. He was one of those who made a presentation to The National Energy Regulator of South Africa (NERSA) on the proposed 66% tariff hikes over the next three years.
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Extended transcript of the interview ___STEADY_PAYWALL___
Chris Steyn (00:01.77)
The National Energy Regulator of South Africa has wrapped up its public hearings on the proposed 66% tariff hikes over the next three years. One of those who made presentations was Paul Nel of Prisma. Welcome Paul.
Paul (00:20.664)
Hallo, Chris. Thank you.
Chris Steyn (00:23.872)
Paul, in a previous interview, you calculated how much ESKOM has overcharged the consumer since 2009. Please recap those figures for us.
Paul (00:36.174)
Sure, I've done that because just to put everything into perspective, the objectives of NERSA and of the Constitution is efficiency and effectiveness with electricity.
Just to give a very quick overview of how effective ESKOM was, I've calculated the revenue over and above CPI, which amount to 1.375 trillion rand. The borrowing value that increased since that period was 3.73.25 billion rand, and the value obtained from the taxpayer, the equity amount was 242 billion for the period ending, that's a 15-year period ending March 2023. So in total, this is very close to two trillion rand that ESKOM have obtained for this new build. And I've obtained that information in 2007 or 2008, it might be in nine also, but I think it was 2008 annual report that the directors report were how they are going to fund that new build power stations, coal power stations. And in that period, they said that borrowing and loans, well, borrowing and loans would be 100 billion rand and the increases in tariffs would be 50 billion rand.
So we are sitting here with two trillion rand in additional funds. And of course, RIPE, this renewable energy, has also come into the picture, which is also very, very expensive. Yeah, that is in short. And to measure the efficiency on this whole two trillion rand of ESKOM, I've taken the electricity sales,
Paul (02:59.876)
and it's graphs also over the whole 15-year period. They were selling 224,785 gigawatt hours at the peak in 2012. And it all the way went down to 188,401 gigawatt hours. So we can ask as a public with righ what did they do with a two trillion rand. And that's why I thought I must present and also give more specifics on the losses, etcetera.
Chris Steyn (03:42.784)
Now, Eskom is currently sitting, well, it's owed 92 billion by municipalities. In your presentation, what solution did you propose?
Paul (03:58.404)
This dysfunction of municipalities is a huge problem. Municipalities and I have also give the largest five municipalities liquidity. And that's a problem. These municipalities were also run…
Paul (04:26.52)
…very inefficiently; as all of us know there's no services – and at the moment municipalities are bankrupt most of them they are illiquid. Of the five municipalities I've measured what is the net asset value with other words what is the value they have to pay the creditors and in terms of National Treasury regulations and the Municipal Finance Management Act, creditors must be paid within 30 days.
Now what we've got here I've taken Tshwane, Ekuruleni, eThekwini, Cape Town and Johannesburg from small to large. And Tshwane in 24 can't pay the creditors. Their current liabilities are 8.448 billion rand more than their current assets, with other words, the cash. So they can't pay. Ekhuruleni in 2024, and I must say this is the unaudited financial statements I've worked on in 2024, the previous years were not unaudited, were 3.03 billion rand they have a shortfall.
And eThekwini is positive, also 4.5 billion, 4.6 billion. Cape Town is positive with 7.3 billion, so they can pay their current liabilities.
I haven't gone into depth how efficient these municipalities were with the maintenance, because if they don't do the maintenance, they can also have additional funds. But previous analysis of this indicated that maintenance are not up to standard. 8% of property, plant equipment and investment properties – and they are all very much below that. And Johannesburg, the largest city, nearly 10 billion rand have a shortfall to pay the creditors. So we are sitting here with municipalities that can't…
Paul (06:51.192)
provide services. And I must say, I just want to be very short, ESKOM of course need to be paid and they take for instance Ekurhuleni and now they want to start with Johannesburg is to stop the power for the whole municipality. That is against, in my opinion, against the Municipal Finance Management Act and the Municipal Systems Act, which are very clear in their definition. They've got the same definition for municipality that the legal entity of a municipality existing of politicians and officials and of course a community, and they are very clear in saying that the community must not be penalised for the actions of the municipality. And what we have seen is that we are all penalised significantly through that.
So there's other solutions which I believe we have to focus on to fix the municipalities as well as to have more efficient price increases both at municipalities and of course ESKOM. And if you want me to go into more depth on the solutions, I'll do this with pleasure because this was not, yes, this was not previously done at any municipality so far. And the Municipal Finance Management Act is very clear in terms of…
Paul (08:46.41)
I think it is sections 153 and 155, but I must make sure that a municipality that is dysfunctional over a period, and of course we can easily confirm that with analysing these financial statements and see what the services are and are they measuring against the Treasury norms and standards, by the way, that must be enforced in terms of the Constitution, Section 216.
So the solution for municipalities is not what is currently happening. Currently, ESKOM is stopping the power and then the big business within that municipality get arrangements and attorneys get rich to buy their electricity directly from ESKOM. Of course to have this payment, but is a disservice, such actions is doing to the ratepayers and the consumers of a municipality. Because a municipality must sell their electricity at a profit and those profits, normally it's around 10% or 15% or should be around that prices. These profits should be subsidising the assessment rate services like your roads and your fire brigades and the parks and all the services, the drainage of water, etc.
So the more large companies are directly contracted with ESKOM, then the worse the situation will become with the municipalities. And of course, the municipalities are not angels, they steal the money just as solidly as ESKOM. So we need a total, total new solution.
And you know, the MFMA provide that solution and that is to liquidate these municipalities after…
Paul (11:11.172)
all the intervention processes of provincial and national treasury were not successful, which would be very easy to confirm within the financial statements. And you know, to liquidate the municipalities, it's more business rescue. It's not the same as what we understand on the liquidation with the private sector or any other business or private person where all the assets is sold. Not with a municipality. It is only the non-essential assets that must be sold and the full amount of that should be provided for full settlement for all its obligations, which is basically ESKOM and Water Boards.
And perhaps I should just add here these 90 billion rand or it's much more now that is owed to ESKOM and there's also many billions owed to Rand Water. This money has been impaired in terms of financial statement standards. So we have already paid for this losses on this impaired money. But the situation cannot go forward like this.
So what the Act is stating is that you not only pay all the obligations, you get also a court order in terms of the MFMA to get rid of the whole council as well as of all officials that are not adding value to the municipality. And of course, this would be a new process to get new officials, but you know the… and of course, new councillors. But the big advantage of such a drastic step is that you will have a Metro or municipality…
Paul (13:35.01)
with a clean sheet with no obligations.
And we have learned now to monitor these municipality's budgets and their IDP and also to ensure that it has in fact been spent as stated with the financial statements. And that I believe is the only way to get municipalities working again and also to take, ensure that is another thing, to ensure that increases are limited with CPI. That is part of the Treasury norms and standards. That municipalities increases should be limited to CPI for obvious reasons. If you don't limit it to that, everyone is not getting increases above CPI.
We are not all working for the government and for ESKOM. So we can't afford these electricity anymore. And of course, it's such a disservice for investment in this country. There's no services, we chase away investment and I believe this is the solution for dysfunctional municipalities.
Chris Steyn (14:55.136)
Paul, how do you see the future of power production in South Africa?
Paul (15:02.262)
This is very difficult, you know, perhaps I should say that currently all effort is in this RIPE program, the Renewable Energy Independent Power Producer Procurement Programme, RIPE as they call it, that is very, very expensive and also unreliable.
And I've made an analysis from the ESKOM's financial statements over the past six years, from 2018 to 2023, from the audited financial statements as well as from the integrated reports and the losses they made on these you can say solar and wind power stations is the following…
Paul (16:24.884)
Okay, what I've done is over this six-year period, I've seen what the price or the sales of ESKOM's electricity is and what the primary costs are. Unfortunately I don't have more than the primary costs and that is the first suggestion that they ESKOM provide information on not only, well they don't provide information on gross losses per type of power producing or generation like coal fire stations and nuclear and imported electricity as well as this RIPE electricity and the very expensive open-cycle gas turbines.
So on this thing, electricity, let's just take the 23, the latest period – after these extensive increases in prices, the price now is one or that period will 137 rand per kilowatt hour ESKOM selling the electricity. But you know, they buy this for around two rand, 198 from RIPE. And the gas, of course, is also much more. Their own open cycle gas turbines were costing them 7.13 rand per kilowatt hour. And their import or the RIPE open-cycle gas turbines are a bit more, 7.55 for that period. And of course, if you sell it against 1.37, it is very large losses and to give you some of the figures on the total losses for the six-year period, I have to make a, or assuming certain aspects because we know, and I've taken three scenarios.
The one is if all the solar and wind…
Paul (18:46.212)
that is procured on RIPE, they are 100% sold. That is not possible. The other one is if 0% is sold of all this import and from the energy from RIPE. And I've also take the middle waste scenario three where 50% of electricity is sold.
And over the six-year period, if everything is sold, that's the most positive on this operation on RIPE. Then the total losses would be 125.1 billion rand over six years for ESKOM. That is if all the bought, solar bought is sold.
I must say I've also taken into consideration the open-cast or open-cycle gas turbines that I presume have been sold because they should be only used when required. So I presume in all three scenarios they are all sold. And the reason these gas turbines should be taken into consideration with solar and wind is that mostly solar especially, is bought when it's not really required. In maximum demand periods in the evening, there is next to zero of this electricity source. Wind, of course, is, you might have electricity during this peak periods, but it's unreliable. There could be days without wind. So, you know, the thing is that using RIPE or renewable energy is you can't reduce your coal power stations and your nuclear things because during peak hours you need that and you can't switch it on and off. That's why this gas turbines have to be used like in Europe where it is so expensive and as I proved to you from this figures it's 125 billion and it's made up that is if all the electricity is sold,
Paul (21:10.806)
it's made of losses for solar and wind of 74.1 billion rand. The IPP open-cycle gas turbines is another 17.4 billion loss for the six years – and then ESKOM's own generation of this open-cycle gas turbines is another 33.6 billion rand. So in total, 125.1 billion if all solar and wind is sold.
If nothing is sold, which can also be applicable, especially when the base power is efficient as it should be. But if nothing is sold, then the losses would be 209.1 billion rand for ESKOM.
And made up of 158 billion for solar and sun and of course IPP and OCGT stayed the same at 17.4 and 33.6 billion. And if 50% of these renewables are sold, the losses would have been 167.1 billion rand.
So the question is why does ESKOM need to increase? I believe this is a major factor. The inefficiencies in procurement and using this loss operations, which is of against our Constitution on procurement where it must be fair and cost efficient as well as with the objectives of NERSA.
And you know, why do ESKOM not publish this in their financial statements. It is important. They should do more because this is the losses just after taking primary costs. We all know that distribution costs is another large factor for this renewable energy and I've read in the media there is another 400 billion rand that ESKOM or energy. They get there…
Paul (23:35.988)
orders from the officials or from the politicians. The Department of Energy and the Electricity Department, not sure whose responsibilities are everything. But the point is, it should be efficient and effective and reliable. And this is the losses we stand. And now they want to spend 400 billion on distribution to sell more of this loss-making operations.
Where are we going to end? And of course, this would be a reason for ESKOM to increase their prices. 36% would still be not sufficient to sell these things at the profit. I believe when they become profitable, nobody will buy any ESKOM power because it would be unaffordable and all businesses would have left us.
As we have seen what happened in Germany, where India and China are doing most of the manufacturing of all these countries making use of this very expensive power and unreliable power. And the UK, I understand, is also following very quickly with Germany. With Germany, we all know that Volkswagen is a first time in their history that they have to close factories within Germany. And I understand there is also cost-reducements busy with Mercedes-Benz. And just recently Bosch, also a large German company, are starting with a restructuring process. So really to follow this loss-making operations is madness.
Chris Steyn (25:32.19)
Thank you. That was Paul Nel, compliance expert Paul Nel speaking to BizNews about the 66% proposed tariff hikes for power. Thank you, Paul, and I'm Chris Steyn for BizNews.
Paul (25:48.59)
Thank you, Chris.
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