South Africa's Bold Move: 70 Municipalities Granted Eskom Debt Bailouts Under Rigorous Conditions

The South African government has moved decisively to address the chronic non-payment issues plaguing the national power utility, Eskom, by granting bailouts to 70 municipalities submerged in debt to the utility. This move was uncovered in Finance Minister Enoch Godongwana's Medium Term Budget Policy Statement (MTBPS) delivered in November of the previous year, and has seen significant strides by January 2024.

Eskom, the state-owned power entity pivotal to South Africa's energy supply, reported an alarming R58.5 billion in municipal debt as of October 2023. This figure has seen a steep rise of R13.7 billion, while payment rates from municipalities declined to a concerning 76%. Acknowledging this growing challenge, the government introduced a relief strategy to write off the municipal debt in its entirety by March 2023, split over three annual tranches.

The criteria set forth for availing of this relief are uncompromising- municipalities must adhere to stringent credit control measures, pay their monthly dues to Eskom without fail, and vigorously pursue revenue collection improvements. By December 2023, nearly the entire mound of debt was appealed for under this scheme, with applications totaling R56.7 billion. Seventy out of the 72 petitions had been approved by January 2024, with R55.2 billion set to be expunged.

This policy, however, has not been without its detractors. Maarten Ackerman, a chief economist at Citadel, has cautioned against the potential hazards this presents. He suggests it could set a negative precedent for other state-owned enterprises (SOEs) currently struggling under the weight of debt and perpetuate a culture of poor financial discipline.

In line with this, the Finance Minister has taken a stern approach towards bailouts for SOEs. A tight leash has been kept on Eskom's bailout conditions, as vividly demonstrated when Eskom recently lost a portion of its initially allocated debt relief due to failure to complete the sale of the Eskom Finance Company – an express stipulation of the relief agreement. This fiscal discipline exemplifies the government's firm stand on only extending aid under a strict criterion, set to echo in the municipal relief conditions.

Despite the austere stance, the government remains supportive. By the end of 2023, Transnet, another pivotal SOE, was provided with a R47 billion guarantee to fulfill its borrowing requirements, tethered to a comprehensive turnaround plan.

The unveiling of this debt relief venture presents a cautious balancing act for the South African administration. While the bailouts are envisaged to assuage the distress faced by both Eskom and the indebted municipalities, they simultaneously reinforce a message that fiscal accountability and operational efficiencies are non-negotiable. It remains to be seen whether this approach will foster a culture of sustainability within South Africa's SOEs or promote a reliance on state intervention as a panacea for financial woes.