Eskom’s R3.1 trillion headache

Municipal debt owed to Eskom is at unsustainable levels and, at the current trajectory, could reach R3.1 trillion by 2050, which would collapse the utility.

This is according to Electricity Minister Kgosientsho Ramokgopa, who recently held a media briefing on electricity distribution and generation performance.

The minister said Eskom’s generation has performed exceptionally well and been able to meet demand consistently, which is reflected in the fact that South Africa has not had load-shedding for over 100 days.

He said Eskom now faces a far more urgent problem with high municipal debt, which is set to reach astronomical levels within the next few decades.

In 2018, invoiced municipal debt totalled a mere R13.6 billion. At the end of September 2023, it had grown to R70 billion, a 32% increase from the year before. 

Currently, municipalities owe Eskom an estimated R78 billion, with many unable to pay back this debt. 

The minister explained that, at the current trajectory, this debt pile could reach R3.1 trillion by 2050.

“Eskom will collapse, and generation capacity is going to be compromised, so it’s important that we resolve this,” he warned.

This is because Eskom needs these funds to invest in its infrastructure and maintain and upgrade it.

In addition, he said there is “no possibility under the sun” that Eskom will be able to recuperate the R78 billion already owed to the utility.

Ramokgopa has previously also expressed concern about the financial health of many municipalities that owe Eskom billions. 

“The finances of municipalities are very illiquid. Some are insolvent and are not raising sufficient revenue to meet their operational activities,” he said last year.

Ramokgopa lamented the impact non-payment has on Eskom’s operations, as municipalities’ failure to pay inhibits the utility’s ability to invest in maintaining its plants and expanding the grid. 

The minister added that if the debt owed by municipalities remains unaddressed, it will increase exponentially and place an unsustainable burden on Eskom.

Consumers punished

Many municipalities in South Africa are severely cash-strapped and have turned to increasingly high electricity price tariffs to raise more money.

In the most recent media briefing, Ramokgopa said electricity tariffs are increasing exponentially, and people can no longer afford electricity.

He said the rate at which Eskom tariffs and municipal tariffs are increasing is unsustainable, describing it as “an untenable situation”.

“We are getting to a situation where your lower-to-middle class – even your public servants – can no longer afford the cost of electricity in this country,” he said.

“So as we speak now, it’s an affordability question; over a period of time, if you don’t address it, it’s a national security problem. Because people are ‘not going to just fold their arms’.”

“This is a problem that is likely to become acute over a period of time and needs to be addressed urgently.”

While this approach will cushion municipal income statements for now, it will later become counterproductive and have a knock-on effect on municipal revenue. 

As power becomes more expensive and does not keep pace with inflation, fewer households in South Africa will be able to afford it. Ramokgopa referred to this as “energy poverty”.

“More and more households will not have access to electricity. Not because we are not generating – the electricity will be available – but they will not be able to tap into that electricity and meet their household demand as a result of prohibitive pricing,” Ramokgopa said.

The government’s plan

To address the problem of growing municipal debt, the National Treasury introduced support to relieve municipalities of their Eskom debt burden.

During the same media briefing, Eskom CEO Dan Marokane said 72 municipalities had secured spots in this debt relief programme.

“The current level of municipal debt acceleration is unsustainable,” Marokane said.

When this programme was first announced, Finance Minister Enoch Godongwana explained that it would be counterproductive to try to address Eskom’s problems without dealing with chronic municipal non-payment and historical debt owed to the utility. 

However, some experts have warned that writing off municipal debt could set a bad precedent.

Citadel chief economist Maarten Ackerman previously said the government’s plan to write off municipal debt to Eskom sends the wrong message to South Africa’s struggling state-owned enterprises (SOEs).

“Writing off municipal debt is also a serious risk to the market and sets a negative precedent,” he said. 

“The state of our municipal audits and service delivery has been deteriorating, and the grace now extended to our defaulting municipalities also sends the wrong message to other indebted SOEs.” 

However, National Rationalised Specifications Association of South Africa chairman Vally Padayachee has said it is not the municipalities’ fault that they cannot pay these debts.

“It’s the operating model of the municipalities that’s no longer functional,” he said.

“It worked well in the past decades, but it no longer works well and the government has to seriously step in to save the municipalities because they do have a constitutional mandate of service delivery.”