Failed, broken municipalities with R79bn debt pile paint Treasury into a corner

By the end of December 2022, the total debt owed by around 100 municipalities to Eskom totalled R56.3 billion. Just 15 months prior, at the end of September 2021, total municipal debt to Eskom was R40.9 billion.

That’s an increase of nearly 40% in little over a year. The situation is at breaking point.

Read: Eskom to get a massive R254bn in debt relief

Eskom funding constraints are well-known and desperately needed maintenance of its generation plant is underfunded because of this growing debt pile.

However, this is not just an Eskom problem. News24 this week reported that struggling municipalities owe water boards across the country a total of R14 billion – nearly R10 billion of which is overdue.

An additional R8.4 billion is owed to the state’s Water Trading Entity out of a total debt of R23 billion, including money owed by water boards to the entity. This was revealed in a briefing to Parliament’s Portfolio Committee on Water and Sanitation on Tuesday.

So that’s a total of R78.7 billion of debt that is owed by municipalities for bulk purchases of electricity and water. It is incredibly likely that this figure is in excess of R80 billion by now.

This is clearly unsustainable.

Contrast this eye-watering total with the National Budget funding free basic services to households over the next year.

According to last month’s budget, government will fund these services in 2023/24 for 11.2 million households at a cost of R70.9 billion.

Slicing the pie

But this money comes from the R96.5 billion in equitable share funding that is transferred to local government.

Each municipality receives a share of this based on a complicated, five-component formula that uses demographic and other data to calculate its portion of funding from the fiscus.

Treasury describes this equitable share as “an unconditional transfer”. In theory, says Treasury, “the equitable share provides funding for municipalities to deliver free basic services to poor households and subsidises the cost of administration and other core services for those municipalities with the least potential to cover these costs from their own revenues”.

But this funding is discretionary. Municipalities can use this funding for whatever they please.

Yet they still have the obligation to deliver free basic services to poor households.

Using this funding for other purposes is a substantial contributor to the debts for bulk purchases of electricity and water of nearly R80 billion.

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The obvious truth is that many (most?) municipalities are using this funding to pay salaries.

Of the 257 municipalities in South Africa, a full 66 have been declared dysfunctional by the Department of Cooperative Governance and Traditional Affairs (Cogta).

On the brink

In September, Treasury cautioned that 151 municipalities are on the brink of collapse. In the 2020/21 budget cycle, a full 106 municipalities – 40% – had adopted unfunded budgets (a violation of the Municipal Finance Management Act).

The core of the problem is non-payment by residents (theft of bulk services via illegal connections is another material contributor to the situation). Treasury has previously highlighted that local governments are owed more than R140 billion for services.

Municipalities simply aren’t managing their debtors.

All of this debt excludes the R5 billion owed to Eskom by Soweto customers, which keeps being written off, along with the interest, as soon it prescribes – in 2019, it was R18 billion! Only one in four Soweto customers is paying for electricity, which further illustrates the point about non-payment.

Until now, broken and broke municipalities have been a very localised issue.

Non-payment means service delivery suffers. Infrastructure continues to crumble, and the actual availability of water, electricity and refuse removal becomes erratic.

Eskom has used load reduction to throttle power to non-paying areas or municipalities. It continues to face court challenges in respect of this policy (in December, the Constitutional Court sided with ratepayers in two municipalities against Eskom).

Residents bear the brunt of the collapse.

Generally, though, municipal salaries somehow get paid.

In the example of the Mafube Local Municipality, where electricity has been privatised for a decade, its average monthly collection rate was 20% (R2.1 million) in 2020/21. The salary bill was R9.1 million.

In that year, 43% of its budgeted revenue, or R111 million, would come from “operational transfers”, in other words equitable share funding. This equates to R9.25 million a month – its wage bill.

The problem is there are now dozens of Mafube Local Municipalities as well as a few metros that are not exactly financial stable either.

The numbers add up quite quickly and suddenly one gets to a point where Eskom is owed R56 billion (surely that’ll be R60 billion by the end of this fiscal/this month?) and water boards and the Water Trading Entity a combined R22 billion.

At this point, the billions become a fundamental risk to the sustainability of these entities.

Eskom is too big to fail (for a while yet, at least), but what happens when water boards start collapsing?

Everyone (including Gauteng Premier Panyaza Lesufi) is looking to Finance Minister Enoch Godongwana and National Treasury to solve this shambles.

Cogta has mostly been sleepwalking through all of this, as one failing municipality after the next is being taken over by Treasury.

Usefully, experienced technocrat Parks Tau has been installed as deputy minister at Cogta, which means this department may actually become more effectual in the near-term.

After years of work, Treasury says it is close to dealing with the mountain of municipal debt.

Buried at the very end of an annexure to February’s budget dealing with Eskom debt relief, it says the “outstanding municipal debt, which has grown to R56.3 billion … is a systemic challenge to the electricity industry as a whole”.

It says it is finalising a proposal to address this, with the key elements under discussion being “a conditional debt write-off, legal and regulatory changes to help Eskom resolve non-payment for services, the continuation of measures to prevent debt build-up (such as installation of prepaid meters), and national government initiatives to improve municipal revenue management”.

At municipalities where Cogta has intervened (under Section 139 of the constitution), already Treasury has put in place measures to ensure that local governments prove they have paid creditors before the release of their equitable share funding.

Perhaps it is time for government to relook the complete absence of conditionality for the equitable share grants?

Conditionality is good. Enforcement of this by Treasury is the only thing that will get broken state-owned entities and municipalities out of this mess. You want your funding transfer? Pay your creditors.

Why has it taken this long?