Eskom has warned that unpaid municipal bills and an inadequate tariff trajectory would create a funding gap of more than R550bn within five years, a dual shock that threatens to swamp cash flows, scuttle plans to commercialise the power utility’s distribution arm and roll back the gains it notched up this year.
The utility warned that municipal arrears could top R329bn by 2030, while the National Energy Regulator of SA’s latest decision on tariff increases — the so-called multiyear price determination — would leave it with a shortfall of about R250bn.
The two-headed problem has cast a pall over Eskom’s earnings report, which shows the company turned a profit for the first time since 2017 as tariff increases, a tax rebate and savings on diesel costs saw its ebitda margin (the proportion of revenue converted into core profit) almost double to 30% in the 12 months to end-March.
The company delivered profit before tax of R24bn as a combination of reduced reliance on costly diesel-fired open-cycle gas turbines and improved coal-fired plant availability trimmed the diesel bill by R16bn.
The performance prompted the management to pledge more than R320bn in capital expenditure over the next five years, a sum that could reshape investment flows in the SA energy sector.
Municipal headache persists
Still, much of the shine rests on a one-off SA Revenue Service fuel levy rebate. Strip that out and Eskom’s “normalised” profit shrinks to almost R12bn, a healthy number but one vulnerable to collection shortfalls at municipalities, Eskom’s biggest customers.
“As it is, the path of municipal debt growth, unless it is stymied, is going to undo the positive impact of the National Treasury debt relief package,” CEO Dan Marokane said in an interview.
Municipal arrears rose to R95bn from R75bn, and at that pace the more than R230bn relief package would be dwarfed within the decade and swamp Eskom’s cash flows, CFO Calib Cassim said. Eskom had reclassified almost R12bn in billed revenue as doubtful, a R3bn increase from a year earlier, Cassim added.
“This is a systemic challenge that requires an intergovernmental approach. Unless we can find a sustainable solution to this issue, municipal arrears debt is estimated to grow to over R300bn by [the 2030 financial year],” Cassim said.
“Simply put, we cannot carry the financial burden posed by municipalities any longer without placing Eskom’s broader financial sustainability and operations at serious risk.”
The scale of the arrears, which could top R135bn in 2026, has already made a stand-alone, creditworthy distribution company impossible without a radical change in municipal debt payment behaviour or substantial government intervention.
As it is, the path of municipal debt growth, unless it is stymied, is going to undo the positive impact of the National Treasury debt relief package.
— CEO Dan Marokane
The break-up of Eskom into three divisions, including the distribution unit, is the cornerstone of President Cyril Ramaphosa’s energy reforms, which have opened a floodgate of private sector capital in power generation.
“We have operationalised the National Transmission Company as a stand-alone legal entity, [as] a part of the [Eskom] unbundling process,” Marokane said.
“The next phase is to unbundle the distribution, and we are unable to proceed with that unless we can meet the solvency liquidity test, and part of the problem has to do with the unsustainable levels of municipal debt,” he added.
To try to tame the swelling municipal arrears, which have surged 18-fold since 2015 when unpaid bills amounted to R5bn, Eskom has been pushing the so-called distribution agency agreements with municipalities. Under the agreements, the company would partner with municipalities to run distribution functions, stabilise billing systems and lock in collections.
Marokane described the agreements — some of which have been signed by municipalities in Limpopo and the Free State — as pragmatic and necessary.
“It essentially retards the growth in municipal debt by improving revenue collection with us working closely with them,” he said. “We are hoping that as we do this, we can get ourselves back into a position where we can start estimating as to when the unbundling of the distribution business will happen.”
Tariff gap
Earlier this year, Nersa approved an average tariff hike of about 8% over the next three years, well short of the average 19% hike Eskom had asked for, leaving the utility with a revenue shortfall of about R250bn.
“This outcome prevents the migration to an adequate tariff path, constraining liquidity and our ability to invest in sustaining and expanding our infrastructure, and delivering on our strategic objectives,” Eskom says in its annual report.
The shortfall, which Eskom describes as “effectively counteracting the benefit of the government’s debt relief package”, heaps pressure on Marokane to make good on extracting about R50bn of cumulative savings through a mix of cost cuts, revenue improvements and productivity gains.
“We have the recipe to sustain this. We had to get practical results on the board as soon as possible by keeping the lights on,” said Marokane. “And now we’re beginning to focus internally on aspects, including cost compression programmes, to ensure that … the business can be sustainable even at single-digit tariff increases.”
Political will
Confronting both problems threatening to reverse Eskom’s recovery requires political courage. For its part, the Treasury rolled out a multiyear municipal debt relief package, which provided fiscal support and conditional write-offs. But the programme has failed, judging by the swelling unpaid bills.
“We have only written off R500m of debt from municipalities that were compliant. There’s about R3bn that’s waiting in terms of permission to be written off,” Cassim said.
Just nine of the 71 municipalities subject to the debt relief conditions have met the rules the Treasury set to qualify for the write-off.
Mzila Mthenjane, CEO of the Minerals Council SA, framed the solution to Eskom’s problems as a mix of political leadership, commercial discipline and hard decisions — with effective service delivery as the linchpin that restores willingness to pay.
“To get Eskom back into a financially sound position, municipal debt has to be addressed for the benefit of the economy,” Mthenjane said.
“How do we do that? I think it requires a combination of political leadership, commercial rationale and making some very difficult decisions. Service delivery is key.
“If services are delivered effectively and efficiently, people will be able to pay, and local government will have the revenue to service the debt.”
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