Between a rock and a dark place: Municipalities battle to keep the lights on in the face of escalating debt

In the space of one week in September, the country’s load shedding status sent any sniff of foreign investors scurrying for cover, and the City of Tshwane narrowly averted being plunged into complete darkness after settling its outstanding debt to Eskom of over R1,6bn. It joined the City of Johannesburg, Ekurhuleni, and a long list of smaller municipalities which continually roll over debt, and default on payment settlement plans until the threat of Doomsday. Pay up, or we throw the big switch.

Just imagine if the lights went out until further notice. There would be continuous traffic chaos, no alternative routes to avoid load shedding. Telecommunications are down. Fuel shortages are days away because the bowsers can’t operate. Areas that rely on pumping stations to provide water run dry. Freezers melt down and farmers can’t get produce to the markets. Riots break out at the supermarkets because all the bottled water and tinned food is depleted. Spaza shops are looted for the little that they have left. Under cover of darkness, law and order break down.

Many municipalities have defaulted on debt agreements and faced no consequences to date, but it is simply not sustainable. Eskom’s total debt, in its 2021 annual report, stood at a massive R392bn, of which municipal debt was R25bn. By July 2022, that debt had escalated to R49.7bn. When news of Tshwane’s default broke out in August, it was not the first time the City had missed payment. Clearly, Eskom was sufficiently rattled that it decided to play tough love, while the municipality protested that others were deeper in debt and not subject to the same threat of being disconnected from the grid. The Tshwane mayoral committee member for Finance, Peter Sutton, dismissed the bullying tactics, citing “cashflow problems and the lack of cash reserves.”

This is a telling statement. According to Treasury guidelines, published in the Auditor General’s annual report on local government, municipalities should have three months’ cash reserves. “Lack of cash reserves” means that the coffers are empty, and that in turn creates a cashflow crisis where bills remain unpaid for months. They are living from hand to mouth. The bullying simply gets passed down the supply chain. Domestic consumers face hard disconnection when they fall into arrears. Small-scale suppliers of goods and services, who are supposed to receive 30% of all government business, are forced against the wall financially.

According to the Auditor General’s latest annual report on local government audit outcomes, 64% of municipal debt is irrecoverable. 64 municipalities – nearly 1 in 4 -- are at risk as Going Concerns. In simple terms, they are spending more than they are generating in income and they have no reserves on which to fall back. The dominant reason for recurring budget deficits is over-estimating revenue collection, and under-collecting in real terms. Many of the same municipalities have been of doubtful good standing for several years in a row, and have failed to take corrective action. Several are under Section 139 administration, a “quick fix” that has in some cases persisted for 5 years and still counting. These delinquents are still submitting doubtful budgets to their respective Provincial Treasuries each year, and are then being propped up by the Department of Co-operative Governance & Traditional Affairs (CoGTA) through various forms of intervention when things don’t go according to a plan that was never going to work in the first place.

Passing a budget is an autonomous legislative function of a council. There is nothing to compel municipalities to prepare their budgets taking into account, among other things, historical levels of debt recovery and the municipality’s ability to implement a turnaround strategy. Provincial Treasuries play an oversight role over the annual budget cycle, but can only advise on content. Likewise, the Auditor General’s office spends a significant amount of time and effort to improve compliance by local municipalities, but it cannot enforce compliance unless it uncovers Material Irregularities bordering on the criminal.

How can municipalities that are in such dire straits be turned around? Changing the structure of the Equitable Share to give local government a larger slice of the cake is not an option until corruption and wasteful expenditure are reigned in. Already, the national fiscus spends more on servicing debt than on any single public service, including basic education, health, and social protection. Raising property rates substantially above the rate of inflation, now sitting at 7.8%, is not in itself going to be sufficient but it would raise a huge backlash among voters.

For those who genuinely cannot afford to pay, the Equitable Share Grant assists municipalities with funding to provide Free Basic Services. For households who can afford to pay but don’t, schools and health facilities that rely on an inept Public Works Department to keep their property rates up to date, and municipalities who repeatedly default, time is up.

By Cameron Brisbane, Independent development consultant and former Executive Director of the Built Environment Support Group