Make or break for South Africa’s most important city

The City of Johannesburg’s (CoJ) approval of a R3.8 billion loan towards servicing and upgrading electrical infrastructure could potentially solve the City’s energy crisis, provided the money is spent wisely.

The loan, equivalent to approximately €200 million, comes courtesy of the German state-owned development bank Kreditanstalt für Wiederaufbau (KfW), and was approved by the CoJ Council on 28 May.

Forming a significant part of the CoJ’s financial turnaround strategy, the loan seeks to partially address the City’s R40 billion electricity infrastructure backlog.

In an interview with eNCA, energy expert Chris Yelland cautiously welcomed the terms of the loan amidst the array of financial woes that have plagued the CoJ in recent years.

“It is very significant, bearing in mind the deep financial problems the City of Johannesburg finds itself in, to be able to raise loans at very favourable interest rates and on very favourable terms,” Yelland said.

“Of course, the interest ticks up every month, but repayments only have to start in 2031, which gives a little bit of breathing space to the City of Johannesburg to use this money effectively.”

As per the loan agreement, the CoJ will pay off the loan over a period of 15 years starting in 2031, at a fixed interest rate of 8.56% per annum.

The loan is also rand-denominated and is not secured by any CoJ assets or revenue streams as collateral, effectively eliminating foreign currency exchange risk.

According to Yelland, this shows a strong commitment from Germany and other EU member states towards assisting South Africa in securing financial and energy stability.

However, he stressed that the money will still need to be paid back, and said it is vital that it is spent where it needs to be, such as on infrastructure which will directly benefit revenue collection.

“This is a long-term loan, and in terms of financial good practice, long-term debt is used to finance long-term assets,” Yelland said. “So this loan is not for the purpose of paying salaries or operational costs.”

“It’s looking at critical infrastructure that can make a significant difference to the revenue stream of the City of Johannesburg. So it needs to be spent carefully on critical infrastructure like smart metering and ICT.”

ActionSA opposed to the loan

Whilst Yelland and parties such as the Democratic Alliance have cautiously accepted the KfW loan on the basis of the CoJ’s urgent need to stabilise its energy, others such as ActionSA said they stand firmly against it.

In a statement released 26 May, ActionSA President Herman Mashaba said the loan will not fix Johannesburg’s energy crisis, but will just put its residents further into unpayable debt.

Mashaba, who is also ActionSA’s candidate for the mayorship of Johannesburg, said the approval of the loan reflected desperation on the part of the ANC.

“Of concern is the strange arrangement to approve this loan when Council hasn’t been presented with audited financial statements from the 2024/2025 year,” Mashaba said.

“By law, financials should be submitted to Council by the end of January and approved by end of February. This informs planning and consideration for the new financial year.”

Mashaba pointed to issues flagged by the National Treasury and the Auditor-General with regard to the City’s declining financial sustainability.

These included the CoJ’s R6.8 billion debt which it owes to Eskom, as well as its R10.3 billion wage agreement with the South African Municipal Workers Union (SAMWU), among others.

Eskom recently threatened to cut power to parts of the CoJ over the former, before a deal was reached between the two parties to settle the outstanding debt.

Meanwhile, Finance Minister Enoch Godongwana said he would pull the CoJ’s funding if the SAMWU wage deal went ahead, describing it as unfunded and unaffordable.

Mashaba said the CoJ choosing to take on a foreign-funded loan agreement risks exacerbating this existing financial strain, with residents suffering the most at the end of the day.

“Official records from Council state that the City Manager is ‘authorised to negotiate and effect changes to the proposed loan agreement, should it be required to protect the City’s interests’,” Mashaba explained.

“It is inevitable that the City will negotiate from a position of weakness as it is already insolvent. Residents of Joburg deserve a competent administration, not endless borrowing.”