The new year was marked by a landmark court judgment against civil rights organisation AfriForum, giving public utility Eskom the right to disconnect eight municipalities, based in the Free State and Northern Cape, which had failed to pay their electricity bills.

In his ruling, Judge Hans Fabricius noted that, since the obligation to supply electricity lay not with Eskom but with municipalities, the utility would be permitted to cut power supply to the defaulting municipalities, even if doing so prejudiced compliant ratepayers.

While this judgment points to Eskom’s constitutional obligation to supply electricity, the case brings to the fore, yet again, the issue of the poor state of municipal finances.

According to Eskom, the debt accumulated by defaulting municipalities increased from R6 billion to R10.2 billion in just eight months last year.

In court, AfriForum argued that instead of cutting power, Eskom should request Treasury to put measures in place to ensure operational efficiencies within municipalities.

AfriForum appears to want Treasury to place the municipalities under administration. However, no amount of administration will solve the problem.

The court judgment alludes to a greater problem that needs to be tackled by local government officials.

It relates to the socioeconomic cost of rendering services, and the conspicuous lack of will and ideas being harnessed when it comes to turning around municipal finances.

The municipal funding model is based on equitable share and other grants received from Treasury, in addition to income generated from ratepayers.

People fork out for their property in the form of levies – as well as for electricity, water and refuse removal – to ensure that their respective municipalities meet their service-delivery obligations.

Of these metered services, electricity is the highest revenue earner, followed by water and refuse removal.

Generally, the surplus generated from electricity is used to cross-subsidise subsidised and nonrevenue-earning services such as cemeteries, parks and streets.

A municipality must put in place a sound tariff policy framework to regulate the determination of prices and annual increases for the services it renders.

Given the funding model that exists at local government level, why are municipalities struggling to keep up with payments for their highest income-generating service?

Without knowing the specific circumstances of each of the eight municipalities, as well as others, whose arrears to Eskom have accumulated exponentially, there are a number of factors which may have led to their indebtedness.

Firstly, let us look at the pricing or tariff of the services rendered to consumers by municipalities.

In many instances, the cost-to-income ratios, and the resultant surplus generated, differ significantly between various tariff bands of electricity, depending on the level of consumption and industry classification of the consumer.

This suggests a noncost-reflective tariff structure, which results in the surplus-making tariff bands cross-subsidising lossmaking tariff bands. So, revenue leakage is concealed as a result of only considering the gross income generated.

Another contributor is the prepaid meter system, originally considered to be an ideal solution for poor electricity revenue collection.

Installing these meters requires capital, which municipalities often do not have.

To resolve the problem, most municipalities enter into vendor financing agreements with private companies.

The company provides capital to purchase and install the meters, in return for a percentage of the electricity purchases metered, over a long-term period.

If designed well, the scheme can work. But depending on the cost of capital, the percentage paid to the financier may exceed the surplus from the sale, leaving the municipality with no option but to pay into, rather than benefit from, the scheme.

Thirdly, large power users negotiate special dispensations with municipalities for their electricity tariffs to be lowered. This provides them with the incentive to reside in that municipality and create jobs.

While these schemes are entered into with the noble intentions of socioeconomic development, they can lead to huge losses for a municipality and are difficult to rescind as doing so may attract legal action from beneficiaries.

Finally, there are operational deficiencies in the collection of revenue from property rates, metering, billing, receipts and debt management processes. Most municipalities struggle in this regard and have outsourced part or all of these operations.

There are many causes for these deficiences, including weak systems, poorly skilled or lazy personnel, poor oversight by management and less than optimal use of technology to manage operations.

The major failing of municipalities in this regard is to view the process of generating, managing and enhancing revenue as components instead of an interlinked value chain.

With a weak people-process-technology regimen, the subversion of credit control processes – such as cut-offs and related activities – by people who understand the weakness in the system, becomes inevitable. This is where most of the losses occur.

The culture of nonpayment is another closely related problem, with its own root causes – as is theft or the illegal connection and usage of services.

All these factors result in municipalities being unable to recover adequate revenue to pay their suppliers.

There are no short cuts to solving these many and varied problems. Expertly crafted, holistic and results-driven revenue management strategies, together with practical and well-managed implementation plans that are unencumbered, are required.

Of course, all initiatives require unwavering political will to set a clear path of financial sustainability for the municipalities.