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The aborted budget documents set out that the local government equitable share would increase by 5.2% over the medium term, from R99.5bn in 2024/25 to R115.7bn in 2027/28, while conditional grants would increase by just 2.9% over the medium term, from R53.9bn in 2024/25 to R56.7bn in 2027/28.
This increase would be of a similar proportion to the proposed increase in funding to provinces and national departments and barely keeps up with inflation. But given that municipalities only managed to spend less than 75% of their grant money in the last financial cycle, one could ask whether it will matter if conditional grants in particular are not increased.
Of course municipalities would like to see their equitable share funding going up by more than 5.2%, but given the abuse of this grant — it is supposed to be earmarked for free basic services to the poor, but is often used in poorly run municipalities for salaries and other purposes — there is probably also a measure of reticence in the National Treasury to increase the grant.
While those hoping for an increase of national funds to the sector will be disappointed, if the finance minister can’t get agreement on more funding through increased taxation or borrowing, there is a possibility that we may see these figures being cut when the minister makes his speech on Wednesday.
SA’s municipalities hardly engender a sense of confidence in their abilities. Eskom chair Mteto Nyati has warned that runaway municipal debt is destabilising the utility and risks delaying the unbundling of its distribution unit, potentially putting into question the viability of the distribution arm. Municipalities owed Eskom a staggering R109.4bn in January, a jump in unpaid electricity bills of more than an 18 times since 2015, when they owed just less than R5bn.
The government’s programmatic response to this crisis is the Eskom municipal debt-relief support programme, where municipalities can apply for a portion of their Eskom debt to be written off if they promise to start paying their creditors regularly and tighten up their operations. But the finance minister has expressed concern that some municipalities have continued to default on their Eskom payments even after receiving debt relief.
This is problematic — a large number of municipalities are still refusing to change the behaviour which led them to having hefty Eskom debt in the first place, even after seeing part of their Eskom debt written off. It’s not only their Eskom bills that municipalities are refusing to pay — water boards are now owed R23.7bn by municipalities and are faced with the same intransigence from the sector as Eskom.
Now it is becoming clear that retirement fund arrears in the sector are also ballooning out of control, putting a vast number of municipal workers’ retirement funds at risk. According to data published by the Financial Services Conduct Authority (FSCA), 149 of the country’s 257 municipalities (58%) were in arrears with their retirement contributions at the end of 2023. These unpaid contributions are estimated at R1.4bn across 10 retirement funds.
FSCA commissioner Unathi Kamlana has expressed concern that in the local government sector one particularly harmful practice contributing to financial mismanagement is the recycling of contributions. This occurs when municipalities divert money intended as retirement contributions and instead use it for operational expenses or to pay salaries.
“This practice not only breaches fiduciary duties but also worsens the financial instability of the municipality as it creates a backlog of unpaid pension obligations that accrue interest and penalties over time,” Kamlana said.
An analysis of data on Municipal IQ’s municipal pension fund index shows a high correlation between municipalities with outstanding pension fund payments and a high score on our risk of debt default index. In addition, we at IQ have found that by and large municipalities that have high levels of debt to Eskom also have high levels of debt to water boards, and have high levels of debt to pension funds.
This means a number of municipalities are living beyond their means, spending more money than they have (as measured in our index) and instead of reducing expenditure are choosing to simply not pay their creditors.
This is not only unsustainable but grossly irresponsible. Such contempt for fiduciary duty would not be tolerated in any other sector, but we now understand that — to add insult to injury — a fifth of all municipalities (47) have accepted the debt forgiveness of the Eskom municipal debt-relief support programme but are refusing to start paying Eskom and other creditors — a condition of the programme. What action has been taken against these municipalities? None as yet!
The problem for the budget is that when municipalities are poorly run, collect low levels of revenue, have high salary bills caused by bloated staff complements and refuse to pay their creditors, they put the national fiscus under strain. There is less tax revenue from residents paying their municipal bills, there is more demand on scarce money in the national fiscus from local government, and there is an increasing demand for the National Treasury to use money from the fiscus to pay the enormous municipal debt to Eskom and the water boards, a debt that will soon destabilise the entire country if left unchecked.
Given the pressure on the Treasury to decrease expenditure and not increase taxes, it is hard to see local government as deserving of an increase in its share of the national fiscus. Put simply, there isn’t a lot of money to go round, and given how poorly they behave municipalities are not a deserving recipient of the little money there is.
•Allan, a former special adviser to a previous local government minister, is MD of data and intelligence organisation Municipal IQ.
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