Municipal debt write-off sends the wrong message

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

Ackerman’s comments come in light of Finance Minister Enoch Godongwana’s Medium-Term Budget Policy Statement (MTBPS) on Wednesday, 1 November.

In the MTBPS, Godongwana outlined the dire state many of the country’s municipalities are in. 

The Minister said it would be counterproductive to try and address the problems at Eskom without dealing with chronic municipal non-payment and historical debt owed to the utility. 

Eskom revealed in its annual results last month that municipal debt owed to it, including interest, increased by R13.7 billion to R58.5 billion. 

This problem is compounded by the payment rates from municipalities continuing to decrease to 76%.

To combat this problem, the National Treasury has introduced support to relieve municipalities of the debt they owe to Eskom. 

On application, the debt owed to Eskom up to 31 March 2023 will be written off over three years in equal annual tranches. 

This is provided the municipality complies with set conditions, such as enforcing strict credit controls, enhanced revenue collection, and up-to-date payment of Eskom’s monthly current account. 

By October, 67 municipalities had applied to the National Treasury for debt relief, totalling R56.8 billion or 97% of the total debt municipalities owe to Eskom. 

Twenty-eight applications have been approved so far, and the remainder are being assessed and verified, Godongwana said. 

“The ultimate goal is the profound transformation of these municipalities by empowering them to build financial resilience, amplify their capacity to generate sustainable revenue and rekindle a culture of paying services rendered,” he said.

Ackerman said this sets a bad precedent for the country’s fiscal approach going forward. “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.” 

The Finance Minister took a hard stance on bailouts for SOEs, tightening the conditions on Eskom’s debt-relief package and denying Transnet’s request for a bailout.

However, many experts have been sceptic of whether the Treasury will be able to maintain this hard stance as the SOEs’ performances continue to deteriorate.