Jonathan Katzenellenbogen: ANC's quandry over massive municipal debt hole

Key topics:ANC fears power cuts before local electionsMunicipal Eskom debt threatens SA economyIllegal connections worsen city power crisis.By Jonathan Katzenellenbogen*.Municipalities across the country owe Eskom a very large and fast-growing amount. The ANC will have to come up with an urgent solution to this vast black hole in the country’s finances ahead of the local government elections.What the ANC is hoping to avoid are power cut-offs in the big cities just ahead of the 4 November local government elections. When the voters do not have power, they will know that load-shedding ended in March 2024 and that power cut-offs are the result of the negligence of ANC-led councils. The responsibility for load-shedding has merely shifted from Eskom to the ANC-led councils. It is still the ANC that is to blame.Bailing out municipalities, or Eskom, would be very costly and that would send the wrong message about the likelihood of future debt write-offs. Allowing Eskom to directly collect revenue would only offer a partial solution.This is not an isolated problem. It is all part of the collapse of municipalities across the country, and that poses a wider risk to the entire economy..Read more:.Eskom wants to cut power to owing municipalities: households may pay the price.Municipal debt to Eskom at about R130 billion at last count has become one of the country’s largest debt service problems. It poses a risk to the Eskom balance sheet, municipal finances, and ultimately could exact considerable fiscal damage.If there is to be no repeat of load-shedding, at least until private power supply increases, Eskom will have to be kept sound. The large arrears to Eskom restrict the utility’s ability to invest and maintain its power stations and the grid.The sheer scale of the debt and its growth is what is alarming. The CEO of Business Leadership South Africa, Busisiwe Mavuso, devoted her weekly letter to the threat to Eskom’s financial stability from municipal debt arrears.Since 2016, this debt has grown from about R6 billion to around R130 billion, a 22-fold increase.Debt arrearsWhile Johannesburg has received a lot of attention over its debt arrears to Eskom of about R5.25 billion, and its current account bill of R1.6 billion, it is not the largest municipal debtor. Emalaheni (formerly Witbank) owes Eskom over R11.4 billion, Matjhabeng in the Free State owes R6.9 billion, and Govan Mbeki in Mpumalanga owes R6.1 billion.Cape Town is the only large SA metro that is current on what it owes Eskom.Eskom is at considerable risk. It only has total provisions that would cover about 42 percent of total municipal debt. If none of the municipal debt arrears are repaid and there are no further bailouts to municipalities to pay Eskom, its balance sheet could be wiped out with further rapid growth.For Eskom, the amount municipalities owe was about 40 percent of its revenue for its financial year ending in March last year. It is eight times larger than Eskom’s operational profit for the same period.The arrears issue stems from the larger problems that cities across the country face. Our municipalities cannot collect what is owed to them by their own residents and businesses. It reflects an economy burdened by heavy debt, low economic growth, and a widespread culture of non-payment on the revenue side, and mismanagement and corruption on spending.All this puts the ANC into a deep quandary.But can the ANC at the national level indefinitely avoid power cut-offs to municipalities in arrears?Repeatedly defaultedLast year, electricity minister Kgosientsho Ramokgopa put pressure on Eskom not to cut off power to Johannesburg. But the city has repeatedly defaulted, and Eskom says it will cut power if there is no resolution by 8 July..Read more:.Eskom’s turnaround at risk from $5 billion municipal debt.The city buys power from mostly Eskom and uses it for its own purposes, such as street lighting. It then sells electricity on to businesses and residential consumers at a profit. That should be an easy source of revenue for municipalities across the country.Instead of repaying Eskom, the revenue is spent on fat salaries and repaying its other creditors to whom it is already in arrears. Then there are the problems of actually ensuring repayment for the power that is sold.Some revenue is lost through its conversion into heat, but most losses are the result of illegal connections, meter tampering, and faulty billing.In the case of Johannesburg, about 30 percent of the power the city buys is lost or unbilled. This is way above the National Energy Regulator of South Africa’s benchmark for lost revenue from these sources.What to actually do about power theft poses another quandary for the ANC. Harsh crackdowns on illegal connections and meter tampering could bring in a lot more revenue. But would an ANC municipality really risk the backlash at the polls from many who do not pay for their power? Yet without a crackdown on a culture of non-payment in its various forms for both power and water, municipal finances are unsustainable.Eskom cannot forgive the debt as it would exact severe harm to its balance sheet and set a bad precedent. The state could come in and effectively bail out municipalities that meet certain performance criteria, something that has been partially done in the past.Special grantsBailing out municipalities with special grants to repay Eskom might be one solution favoured by the ANC. It is easy and straightforward and would allow a pre-local-government-election solution to the problem to ensure that the lights stay on and that the ANC is not punished. But the Treasury would not look favourably on this.Since 2008, Eskom has been bailed out to the extent of about R500 billion, which amounts to a cumulative total of ten percent of GDP, based on the years in which disbursements were made. A bailout to municipalities to repay Eskom would send the wrong message about government finances and might well encourage cities to continue with their profligacy.It would also create the problem of moral hazard as the municipalities in arrears know that the state will in some form bail them out repeatedly. That means the municipalities can continue to use resources which could be used to repay Eskom to splurge on big contracts and salaries.One of Eskom’s remedies is to enter into agreements with problem municipalities to remedy the problem. A part of these deals is for Eskom to take over the collection of what is owed. That means that what is paid goes directly to Eskom rather than a poorly managed municipality.Partial solutionThat would, at least, be a start, but only a partial solution.The ANC has some very difficult choices in dealing with this problem of its own making..Read more:.Eskom’s revenue surge sparks debate over soaring electricity costs.Resolving the load-shedding problem relied on technical solutions; this one will depend political and financial acumen. Handing the collection problem over to Eskom and cracking down on non-payment should help as a first step. But that could cost the ANC in city political support. And any bailouts to municipalities, or Eskom, will look very bad..*Jonathan Katzenellenbogen is a Johannesburg-based freelance journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Katzenellenbogen has also worked on Business Day and as a TV and radio reporter and newsreader. He has a Master's degree in International Relations from the Fletcher School of Law and Diplomacy at Tufts University and an MBA from the MIT Sloan School of Management..This article was first published by Daily Friend and is republished with permission..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox every morning on weekdays. Register here.Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here.

Jonathan Katzenellenbogen: ANC's quandry over massive municipal debt hole

Related Stories

The hollowing out of Eskom: De Ruyter's prophecy becomes reality

Eskom bets on mines and factories to drive green agenda

Peak derangement: Johannesburg aims for smart city future while battling R6.8bn power debt

Jonathan Katzenellenbogen: Fight for Joburg is Treasury v ANC patronage machine