Cash-strapped municipalities have been using money meant for infrastructure and bulk services to pay salaries, leading to administrations bloated with unskilled people and unable to support local economies, a senior Treasury official told MPs in parliament on Thursday.
Treasury head of intergovernmental relations Malijeng Ngqaleni was outlining plans to use write-offs of Eskom debt as a lever to improve municipal financial management.
This came after finance minister Enoch Godongwana reported in his medium term budget on Wednesday that 67 applications for debt relief totalling R56.8bn had been received, accounting for 97% of the total municipal debt owed to Eskom at end-March. Of these, 28 had been approved so far.
The debt is to be written off over three years in annual tranches. Ngqaleni said municipalities must correct their financial and revenue management practices to have a third of their debt cancelled each year — and have to pay Eskom back if they do not do what is required of them.
In his speech on Wednesday, 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 for services rendered.”
The update on the municipal debt relief came after Eskom’s financial results on Tuesday showed total debt owed by municipalities that could not pay their bulk electricity bills rose to R58.5bn at end-March, from R44bn a year earlier.
Eskom accounts for the bulk of the debt that municipalities owe for bulk services. The government undertook this year to address the issue, as part of the R254bn Eskom debt relief package announced in the February budget.
Godongwana said that loans to Eskom under the debt relief package will be changed from interest free to interest bearing to reflect the cost of the arrangement better.
Treasury director-general Duncan Pieterse told MPs the Treasury is discussing the interest rate with Eskom to make sure it will not be detrimental to Eskom’s balance sheet.
Ngqaleni also responded to questions about cuts in the municipal infrastructure grant announced as part of the R21bn of spending cuts the Treasury implemented in 2023 in an effort to close the gap left by a steep shortfall in tax collections.
She said that when municipalities registered underspending on their infrastructure budgets the Treasury often found the money was not in the bank as it was used for salaries.
Municipalities also tended to view revenue for utilities such as water and electricity as general revenue: “What we are seeing is they are using infrastructure to pay the wage bill ... and money from the trading services [for water and electricity] to pay the wage bill, then you see bloated administrations with people who are not skilled.”
“Maybe people in municipalities believe that is part of creating jobs and yet actually that is not the best way of creating jobs because it undermines a municipality’s capacity to run its business in a way that can deliver services that can attract investment,” Ngqaleni said.
Municipalities, especially metros with strong asset bases, should be able to attract investment to fund infrastructure, she said.
But lenders were shying away because of political instability undermining management and led to financial challenges.
Treasury officials reiterated that the extensive spending cuts pencilled into the medium- term fiscal framework will be strategic and targeted. They will include areas of historically poor spending, as well as target entities that are part of the process to reconfigure and restructure the state that a joint Treasury-presidency team is working on.
Ratings agency Moody’s said key elements of SA’s medium-term budget were broadly in line with its expectations.
“But significantly lower revenue forecasts over the next two years together with growing spending pressures from state-owned companies and social-relief grants increase the risk of a more pronounced deterioration in the government’s balance sheet,” Moody’s vice-president Aurelien Mali said. The crisis in SA’s energy and logistics sectors “will also continue to weigh on its economy next year”.
HSBC economist David Faulkner said he remained cautious on the fiscal outlook given spending pressures and financing challenges. “Even with this consolidation trajectory, funding needs are large, averaging almost 8% of GDP ... as the government needs to finance a large budget shortfall of R254bn of Eskom debt relief, and growing redemptions,” he said.
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