Watershed judgment on Eskom and municipal debt points the way

4 January 2021

The days of Eskom unlawfully interrupting electricity supply to paying end-users in defaulting municipalities, as a strategy to recover debt from municipal governments, should be over.

This is the situation after a judgment handed down in the Supreme Court of Appeal (SCA) on 29 December 2020, in the appeal brought by Eskom against a judgment of the High Court Pretoria. Eskom appealed the matters of Eskom Holdings SOC Ltd v Resilient Properties (Pty) Ltd and Others and Eskom Holdings SOC Ltd v Sabie Chamber of Commerce and Tourism and Others. Sakeliga joined both appeals as an amicus curiae (friend of the court) in order to persist with what the High Court in Pretoria in 2019 called Sakeliga’s “novel” and “dispositive” arguments.

At stake

The court case – which for shorthand I shall refer to as the Resilient case or Resilient judgment – was important for the following reasons.

First, the widespread nature of Eskom’s electricity interruptions to defaulting municipalities necessitated an urgent and general intervention. It had become common practice for Eskom to use paying end-users as leverage in its attempt to extract payment from defaulting municipalities across the country. It would cut electricity to a town’s paying and non-paying end-users equally and demand that a usually bankrupt and delinquent municipal government settle or arrange for payment of debts. The result was severe debilitation of local industry in towns across the country, creating vicious circles of local economic collapse and further inability to pay Eskom.

Second, several other court cases had been put on hold, awaiting judgment in the Resilient case. In a bid to reverse or prevent Eskom’s municipal debt recovery interruptions, chambers of commerce and others across the country had brought interdict after interdict and other judicial proceedings against Eskom and municipalities. In time, it became clear that the so-called Resilient case was one of the most developed and would likely deliver jurisprudence to be followed in other cases.

Third, the judgment is deeply favourable for both short-term and long-term solutions to the symptoms of state failure, including Eskom’s attempts to recover money from municipal governments. This third point requires further elaboration, and I shall below refer only to two elements thereof.

The judgment

Two important findings in the judgment stand out. First, the court found that Eskom’s decisions to terminate electricity supply to extract payment from defaulting municipalities were irrational. Second, it properly characterised the dispute as an intergovernmental one, laying solving it at the feet of national government.

In his judgment, Judge Xola Petse, Deputy President of the SCA, concluded that Eskom’s decision to interrupt bulk electricity supply to the [Emalahleni Municipality] and [the Thaba Chweu Local Municipality] was used as a leverage to extract payment […] at a time when Eskom knew full well that it would not result in the financially strapped municipalities settling their debt […]. The decision to terminate was accordingly found to be irrational.

The SCA criticized Eskom for its failure to properly manage its snowballing municipal debtors’ book over a period of more than ten years. The SCA went further and also noted its concern against national government for its failure to effectively intervene in failing municipalities for more than a decade. In short, the court noted a failure by government on all levels to ensure proper municipal administration.

The SCA upheld the earlier judgment of the High Court Pretoria which held that organs of state – including Eskom and municipal governments – are required to prove that they have complied with the principles of intergovernmental dispute resolution, before taking legal action against other organs of state. These principles are set out in the Intergovernmental Framework Relations Act.

Eskom had a duty to report its financial disputes with defaulting municipalities to the National Treasury for the latter to mediate the matter. Eskom failed to do this. Moreover, the obligation on government to intervene does not stop at a mere attempt to mediate financial disputes between organs of state. It is the duty of National Treasury and national government in general to actively intervene in cases of state failure, especially in the case of municipalities, responsible as they are for service delivery to paying customers. The SCA judgment serves as a charge against not only the municipalities who have failed their residents, and Eskom who has allowed spiraling municipal debts for more than a decade at the expense of the taxpayer, but specifically National Treasury and the national executive who have failed to ensure proper financial administration in other spheres of government.

Eskom has a monopoly on the supply of electricity to municipalities and paying customers. In South Africa there is no choice between service providers when it comes to electricity. The SCA in its judgment made the state’s constitutional obligations in this regard clear. If the state wants to reserve itself the sole right to supply electricity to the public, then its failure to properly administrate the matter becomes an issue for all branches of government, and not merely an issue for the residents of mismanaged municipalities. Termination and default clauses in electricity supply agreements and settlements concluded between Eskom and defaulting municipalities cannot be summarily enforced in the same way as between private contracting parties. The rights of paying customers as end-users of electricity cannot be ignored. Paying customers should not suffer because of governmental failures. Organs of state might constitute separate institutions, but they are bound by a single constitutional duty towards the public.

Remedies for end-users

Eskom’s need to recover the money owed to it by other organs of state is understandable, but this cannot be achieved with irrational and improper strategies. The Resilient judgment points the way to achieve this rationally and acceptably.

After this judgment, Eskom simply cannot proceed with a recovery strategy which focusses on placing pressure on the local economy and wellbeing of municipal residents. Any attempt to use the residents of municipalities as leverage to induce payment will, in terms of this judgment of the SCA, be deemed irrational. This in our view will include Eskom’s latest attempt to use load reduction to force payment.

The judgment empowers communities to continue to approach the court for an interdict against Eskom, with a simpler burden of argument. Municipal debt is an issue for National Treasury and National Government, who in terms of this judgment are required to play an active role in resolving municipal crises. Courts should no longer be content with merely granting an interdict against Eskom. The scope of the municipal debt crisis requires intervention by National Government in terms of section 139 of the Constitution.

The case forms a building block in Sakeliga’s long-term legal strategy aimed at relieving organs of state of burdens where it is incapable of coping with them, ideally by creating scope for alternative provision from for-profit and not-for-profit private sector initiatives. We shall announce further steps in this regard in the course of 2021. Meanwhile, the judgment offers businesses, chambers of commerce, and others in towns across the country medium-term relief against bulk electricity interruptions.

Statement issued by Piet le Roux, CEO: Sakeliga, 4 January 2021