South African municipalities in a R119 billion hole

South African municipalities owe bulk suppliers R118.7 billion, which affects service delivery in the country and has significant implications for the fiscus.

This was revealed in a Parliamentary response from Finance Minister Enoch Godongwana, who said R90 billion of this debt is owed to Eskom.

He responded to a question from DA MP Wendy Alexander, who asked the minister about the updated total outstanding debt municipalities owe and the steps the National Treasury is taking to address this problem.

The minister explained that, as of 30 September 2024, municipalities owe bulk suppliers R118.7 billion in arrears. 

Of the R90 billion owed Eskom, R74 billion is owed collectively by the 71 municipalities on the debt relief programme – R58.5 billion of this constitutes municipal relief debt. 

He said that, therefore, municipal debt relief participants’ debt has increased by R15.5 billion since 31 March 2023. 

Notably, most of this increase relates to the top 14 Eskom defaulters, which include some of South Africa’s largest metros.

Concerningly, R16.06 billion of the R90 billion owed to Eskom is from municipalities not on debt relief. 

To address this, the minister said the National Treasury has implemented several measures to help South African municipalities address financial challenges and improve fiscal management.

This includes implementing early warning systems, which help municipalities identify financial problems early and support municipalities in resolving them.

In addition, the National Treasury has implemented support initiatives to assist municipalities in promoting realistic and credible budgets.

Through the Municipal Finance Improvement Programme (MFIP), it also wants to enhance revenue management and tariff policies and build financial management capacity.

To keep municipalities accountable, the government has also set up benchmark engagements to assess municipal budgets before adoption.

It has also established mid-year performance assessments to evaluate financial and service delivery outcomes, allowing for adjustments.

Municipalities with unfunded budgets are also required to create and implement credible funding plans that are monitored quarterly.

Municipalities in serious trouble are referred to provincial executives, with national intervention only as a last resort.

Service delivery impact

The financial deterioration of municipalities has severely impacted the delivery of essential services in South Africa, particularly water and electricity. 

Like South Africa’s power plants and transport networks, the country’s water supply systems have deteriorated due to inadequate maintenance, a lack of planning for population growth, mismanagement, corruption and political infighting. 

In October, Rand Water – the country’s largest bulk supplier that provides water to Gauteng’s cities – warned that taps may soon run dry if municipalities don’t act on its recommendations to fix leaks and conserve water. 

The Department of Water and Sanitation recently warned that two of South Africa’s seven water boards are facing bankruptcy due to mounting municipal debts.

The issue stems from water boards being funded solely by municipal payments for water services rather than by the national government.

When municipalities fail to pay – which many do – the water boards face financial collapse.

The mismanagement of water infrastructure in South Africa has left areas in the country without water for months, with major cities like Johannesburg particularly vulnerable.

Water Minister Pemmy Majodina, in a recent press briefing, made clear that the root cause of water shortages in Joburg is the collapse of its infrastructure. 

She explained that there is enough water in the province’s dams, with the Vaal Damn being able to be topped up by other storage facilities in Gauteng. 

However, Johannesburg’s water infrastructure has deteriorated to the point where nearly half of all water is lost before it reaches the end user. 

“What we are going through in Gauteng is self-inflicted pain by municipalities, where they did not do what is necessary to adequately maintain their infrastructure,” Majodina said. 

“The system is very vulnerable to disruptions caused by failing infrastructure or spikes in demand.” 

When it comes to electricity provision, municipalities’ poor financial health has led to signficant implications for their citizens and Eskom.

Earlier this year, Eskom said it had to ask for a 36% increase in electricity prices, partly because the government was unable to rein in delinquent municipalities.

“This is unsustainable,” Eskom CFO Calib Cassim said at the time. “Government needs to address this.”

In a more recent briefing to the portfolio committee on Energy and Electricity, Eskom CEO Dan Marokane said that if this matter is not resolved, it will put even more pressure on the tariff increase quantum the utility will need to request.

In addition, he warned it would undo the positive impact of National Treasury’s debt relief programme has had on Eskom’s finances, particularly its debt.

The government granted Eskom a R254 billion debt-relief package last year to help the utility strengthen its financial position and repair and upgrade power plants.

While these efforts have paid off in allowing Eskom to focus on addressing its electricity production shortfalls, the utility’s finances will not improve unless the issue of municipal debt is resolved.

Eskom’s sales have steadily declined over the past decade, putting pressure on the utility to raise prices to ensure its revenue growth can cover increased operating costs. 

This can result in a death spiral for the utility, where its high prices force more and more customers to find alternative energy sources.