Treasury wants to punish municipalities into paying their debts. But no payment agreement can make an insolvent council solvent, writes Neil Cole. He argues for three structural reforms.
The latest proposals by the National Treasury to address the escalating municipal debt crisis are both understandable and necessary. Municipalities collectively owe Eskom and the water boards well over R150 billion, threatening not only the financial sustainability of these entities but also the reliability of electricity and water services across the country.
Treasury’s response has been to tighten enforcement: withholding portions of equitable share allocations, requiring municipalities to enter into payment agreements, and using the constitutional powers available under Section 216 to encourage fiscal discipline.
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These are sensible measures. But they are unlikely to solve the problem.
The reason is simple. South Africa does not have a municipal debt problem. It has an incentive problem.
One crisis, many causes
The first mistake is treating municipalities as though they all suffer from the same illness. They do not.
Some municipalities genuinely cannot pay because their local economies have collapsed, unemployment is high, and the rates base is simply insufficient to cover the cost of delivering services.
Others have the financial capacity to pay but choose not to prioritise payments to Eskom or the water boards. Still others collect revenue from residents and businesses, only to divert it towards salaries, operating deficits or unrelated expenditure.
Finally, many municipalities carry debt books that are themselves largely uncollectable, with consumers who have neither the ability nor the willingness to pay.
These are fundamentally different problems requiring fundamentally different solutions.
Treasury’s current approach is well-suited to municipalities that are financially capable but fiscally undisciplined. It is far less effective for municipalities that are structurally insolvent. Withholding equitable share allocations from a municipality already unable to meet its obligations may strengthen fiscal accountability on paper, but in practice, it often accelerates service delivery failures, infrastructure deterioration and public dissatisfaction.
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The uncomfortable reality is that no payment agreement can make an insolvent municipality solvent.
More importantly, the current system contains weak incentives for responsible financial behaviour.
Electricity revenue illustrates the problem perfectly. Electricity sales are generally one of the largest and most reliable municipal revenue sources. Yet many municipalities use these revenues to subsidise unrelated expenditure instead of paying Eskom.
Eskom effectively becomes an involuntary lender, financing municipal operations while carrying an ever-growing debt burden.
This is neither sustainable nor rational.
A better approach would be to fundamentally redesign the incentives governing municipal finances.
Three urgent reforms
The first reform should be the ring-fencing of utility revenues.
Payments collected for electricity and bulk water should flow into protected accounts from which Eskom and the water boards are paid automatically, before municipalities can use the remaining balance for other purposes. Similar arrangements already exist in various forms within public finance systems to protect debt servicing and fiduciary obligations. There is no reason why essential utility payments should not receive the same protection.
Secondly, South Africa should replace repeated bailouts with a once-off debt restructuring linked to measurable reforms. Municipalities should earn debt relief by demonstrating concrete improvements in governance and financial management. Milestones could include reducing electricity losses, installing smart meters, improving revenue collection, producing credible financial statements, and maintaining current accounts with Eskom over a sustained period.
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Debt forgiveness without reform merely postpones the problem. Debt restructuring tied to performance creates incentives for lasting change.
Thirdly, Treasury should reward success instead of focusing almost exclusively on punishment. Municipalities that consistently pay Eskom and water boards, improve audit outcomes and strengthen revenue collection should gain preferential access to infrastructure grants, borrowing support and innovative financing instruments. Good governance should deliver tangible benefits.
At present, municipalities often experience little difference between prudent financial management and poor financial management. That is a design flaw.
South Africa also needs to abandon the one-size-fits-all model of municipal oversight.
Metropolitan municipalities with sophisticated administrations should not be subject to the same interventions as small rural municipalities experiencing long-term demographic and economic decline.
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Some municipalities require tighter enforcement. Others require financial restructuring. Still others require direct administrative intervention and professional management of their utility functions.
Differentiation is not preferential treatment. It is good public policy.
Change behaviour
Perhaps the most significant reform would be to establish professionally managed, ring-fenced municipal utilities in larger municipalities.
Electricity and water services should increasingly be managed as commercially disciplined public utilities with transparent financial statements, independent governance arrangements and clear accountability for operational performance. Municipal councils would continue to determine policy and tariffs, but the day-to-day financial management of utilities would become more insulated from short-term political pressures.
This would not only improve financial sustainability but also make municipalities more attractive destinations for infrastructure investment.
Every municipality unable to maintain its water infrastructure increases future national expenditure. Every bailout creates expectations of another bailout. The cycle perpetuates itself because the incentives remain unchanged.
READ | Financial and Fiscal Commission questions legality of Treasury municipal fund freeze
The debate, therefore, should not be about whether municipalities must pay their debts. They absolutely should. The real question is whether the current institutional framework gives them the incentives and the capability to do so.
If we are serious about resolving municipal debt once and for all, the three reforms mentioned should underpin the next phase of policy.
First, protect electricity and water revenues through automatic ring-fencing and payment mechanisms. Second, restructure historic debt in exchange for verifiable governance and financial reforms. Third, create stronger rewards for municipalities that consistently demonstrate sound financial management.
The municipal debt crisis did not emerge overnight, and it will not disappear through stronger enforcement alone. Fiscal discipline remains essential, but lasting solutions require institutional reform that changes behaviour rather than merely punishes failure.
This is ultimately not about unpaid accounts. It is about designing a system in which the financially responsible choice also becomes the politically and institutionally rewarding one. Until those incentives change, the debt will continue to grow, regardless of how many payment agreements are signed.
- Neil Cole is a public finance and development practitioner.
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