for the portfolio committees of provincial and local government & public enterprises
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Programme 726
Financial Implications for Municipalities
Eskom’s view on how to establish the financial impact of restructuring - as input to the EDIH Finance Sectoral
Committee - & related matters
March 2005
For the Portfolio Committees of Provincial and Local Government
& Public Enterprises
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Programme 726
Financial ImplicationsInevitable financial impact on split of current entity
Overall municipality with
zero surplus
Economies of scale at risk:
Shared overheads
Joint purchasing power
Portion of municipality with surplus
++Portion of
municipality with deficit
- -
Services purchased from Municipality
Financial surplus transferred
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Programme 726
Required Financial Analysis
What is the current financial impact? Value of electricity surplus Value of shared overheads (economy of scale) Value of joint purchasing power (economy of scale)
Design cross subsidies to alleviate financial impact Limit surcharge on electricity to maintain low cost Make other service charges cost reflective Create a mechanism to collect charges for payment to
municipalities (including key customers)
Use municipal ringfencing to identify financial impact
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Programme 726
Some Other Implications of REDs for MunicipalitiesSome thoughts by Eskom
Better service Local economic growth from improved service to consumers,
managed electrification & implemented FBE
Credit management - no cut-offs In future, municipalities cannot cut-off electricity to support
payment for other services
Pension & Benefit Funds - loss of members Changes in membership may impact investment portfolios
Proposed RED efficiencies Aggressive cost saving in REDs may cut employment in rural
municipalities
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Programme 726
RED support for National Govt. ObjectivesObjectives from Energy White Paper, including free basic electricity services
Low cost equitable tariffs to all regional consumers
Enhanced regional quality of supply
Electrification & FBE
Regional employee opportunity
Financial viability
RED controls regional tariff strategy & NER price applications
RED identifies entire regional backlog & plans upgrades
RED obtains NER approved tariffs to finance upgrade plans
RED plans & manages projects within Govt. subsidies
RED creates entire regional workforce plan & facilitates secondments to implement entire regional priorities.
RED performs financial planning for entire regional viability
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Programme 726
No impact of REDs on Eskom FBE serviceSource: MD’s Report to DME, January 2005
Municipal contracts Eskom has contracts with 57% of municipalities
Agreements expire every 12 months - complex renewal process Municipalities identified 597 000 customers Eskom verified & configured 462 000 customers
Difficult to identify Eskom customer from municipal data FBE claimed by 227 000 customers in November 2004
Eskom Actions Improve placement of vending stations Automatically issue FBE tokens to qualifying customers Enhance communication Propose a perpetual agreement
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Programme 726
Progress on Implementation: Key issues
Agree s.197 issues & approach with organised labour10. People issues
Provide training, organisation, communication, etc.9. Change management
Provide RED financial competency & infrastructure8. Full financial functions
Convert 187 distributors to RED systems7. RED systems
Secure service contracts with Eskom & municipal parents
6. Inherited parent contracts
Identify backlog. Obtain NER support for revenue requirements & financial resources
5. Capital & operations backlog within viability
Provide effective processes & systems for volumes4. Billing & collection
Support tariff affordability & municipal viability3. Subsidies & municipal levies
Complex contracts worth R100bn - with tax implications2. Transfer schemes
Objective: lowest cost of capital across the ESI & municipalities
1. Valuation, compensation & RED capital structure
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