SA Municipal Debt to Eskom Hits R94bn, Treasury Launches New Reform Measures

“The DAA pathway is intended to stabilise cash flows, improve payment discipline and create a bridge to longer-term structural reforms,” Treasury said.

South Africa’s municipalities are facing mounting financial pressure, with debt owed to the power utility Eskom ballooning to R94 billion by the end of March 2025—a sharp increase from the R55 billion recorded in the previous cycle. Despite the introduction of a municipal debt relief programme in 2023, a significant number of municipalities remain in default, underscoring deep-seated governance and operational challenges at local government level.

These revelations form part of the 2025 Medium Term Budget Policy Statement (MTBPS) released by National Treasury, which also outlines a series of urgent reforms and interim interventions to stabilize municipal finances, improve utility governance, and restore essential infrastructure delivery.

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Eskom Debt Relief Measures Falling Short

According to Treasury, while 24 municipalities have qualified for a one-third write-off on their Eskom debt by making 12 consecutive payments, and 21 municipalities are maintaining regular payments, 47 municipalities remain in default as of May 2025.

This widespread default is attributed to:

• Weak revenue collection systems

• Excessive electricity and water losses, largely due to poor infrastructure maintenance

• Inadequate credit control mechanisms

“These failures threaten the sustainability of municipal services and the stability of the broader electricity supply chain,” Treasury stated.

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New Interventions: Distribution Agency Agreements (DAAs)

To address the escalating crisis, government will roll out Distribution Agency Agreements (DAAs) for struggling municipalities. Under these agreements:

• Eskom will temporarily take over electricity distribution services in municipalities

• It will support the implementation of cost-reflective tariffs and reduce technical and commercial losses

• Eskom will assist with revenue collection, enabling municipalities to stabilise cash flows

During this period, affected municipalities will be required to:

• Choose appropriate long-term service delivery mechanisms

• Gradually implement cost-reflective pricing models

• Limit rebates and close loopholes that undermine revenue

“The DAA pathway is intended to stabilise cash flows, improve payment discipline and create a bridge to longer-term structural reforms,” Treasury said. However, it warned that stronger measures may follow if municipalities continue to fail.

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Refocusing Municipal Infrastructure Grant (MIG) Spending

Alongside the Eskom debt interventions, Treasury has introduced reforms to the Municipal Infrastructure Grant (MIG) to curb underspending, capacity constraints, and mismanagement of funds—issues that have long plagued service delivery.

Key changes include:

1. Split Delivery Model

• Municipalities with proven delivery capability will continue to receive direct MIG allocations

• Those with persistent governance and delivery failures will shift to indirect funding, with delivery managed by entities such as the:

  • Municipal Infrastructure Support Agent (MISA)

  • Development Bank of South Africa (DBSA)

This model will be backed by time-bound capability restoration plans, aimed at returning municipalities to direct funding arrangements.

2. Performance-Based Incentives

• Municipalities that deliver on time, within budget, and with fit-for-purpose infrastructure will be eligible for incentives

• Projects must also demonstrate climate resilience, funded maintenance plans, and cost efficiency

The reforms will include amendments to conditional grant frameworks, scheduled for tabling in the 2026 Division of Revenue Bill, with pilot implementation set for 2026/27.

“This approach balances the need for urgent service delivery with the goal of building sustainable, capable local government institutions,” said Treasury.

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Utility Reform Programme Targets Struggling Municipalities

In a separate but related initiative, National Treasury announced the launch of a Municipal Utility Reform Programme to stabilise the operations of municipal utilities—specifically water and electricity services.

Set to launch in Mbombela, Govan Mbeki, Lekwa, and eMalahleni, the pilot will be supported by a results-based concessional loan of up to US$400 million from the African Development Bank (AfDB) and donor partners.

Key objectives include:

• Reducing technical and commercial losses

• Introducing cost-reflective tariffs while protecting vulnerable households

• Ring-fencing utility revenues for reinvestment

• Improving infrastructure maintenance, asset management, and financial reporting

• Enhancing governance and institutional performance

“Lessons from the pilot will inform a broader rollout to municipalities in other provinces facing severe service delivery failures,” Treasury confirmed.

The programme will also be aligned with broader grant reforms, with funding linked to independently verified performance milestones to safeguard fiscal sustainability.

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A Growing Fiscal Risk and a Call for Urgent Action

The growing municipal debt to Eskom is becoming a significant fiscal risk, potentially undermining Eskom’s financial health and placing strain on national government’s ability to guarantee uninterrupted electricity supply.

Treasury has reiterated that municipalities must:

• Direct existing grants like MIG to rehabilitate critical revenue-generating infrastructure, especially water and electricity

• Adhere to pro-poor policies, ensuring that tariff adjustments remain within national affordability thresholds

• Ring-fence electricity revenues to prevent misallocation and promote service sustainability

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Structural Reforms or Stronger Sanctions Ahead

The MTBPS paints a sobering picture of municipal fiscal mismanagement, but also signals a clear shift toward enforceable reforms, performance-linked funding, and temporary state intervention to safeguard public utility services.

With the combined rollout of DAAs, grant reforms, and the municipal utility reform programme, government is intensifying efforts to stabilise local government finances, restore infrastructure delivery, and prevent further collapse of basic services.

If successfully implemented, these reforms may finally begin to reverse the deteriorating state of service delivery across South Africa’s municipalities—and rescue a mounting crisis in the country’s power utility sector.