Fiscal tightrope amid urgent need for SOE reform and municipal debt solutions in SA

As with every annual and medium-term budget, eyes are fixed on whether or not the National Treasury will sink funds into yet another bailout for state-owned enterprises (SOEs), with particular focus on Eskom and Transnet.

Both have seen mismanagement on a larger scale corrode performance to the detriment of the entire country as the key functions of power supply and logistics have fallen apart.

Momentum economist Sanisha Packirisamy says that with more than 700 entities under state ownership, ranking higher than most peer economies, restructuring SOEs presents a clear opportunity for efficiency gains and fiscal savings.  

According to the 2025 OECD Economic Survey for SA, nearly R310-billion has been deployed since the 2008/9 financial year to recapitalise SOEs, equivalent to about 27% of GDP, highlighting the scale of fiscal resources absorbed in sustaining these entities.

“Persistent financial fragility of SOEs has required repeated bailouts, diverting scarce funds from growth-enhancing spending. Local government finances are similarly strained, with debt-to-income ratios in several metros reaching alarming levels, while audit outcomes show that systemic governance weaknesses remain entrenched. Without decisive reform to streamline SOEs, strengthen municipal financial management and enforce performance-linked accountability, fiscal consolidation risks being undermined,” Packirisamy said.  

“Beyond SOEs, large contingent liabilities such as the Road Accident Fund (RAF), together with pressures in local government finances and unfunded policy priorities, continue to weigh on the broader fiscal consolidation and debt-stabilisation agenda,” said Casey Sprake, an economist at Anchor Capital.

SOE risks: too big to fail, too weak to stand alone

In a Bank of America global research report, Tatonga Rusike, a sub-Saharan Africa economist, pointed out that standalone credit profiles showed Eskom at CCC and Transnet at B, clearly demonstrating their vulnerability to default. SOE support was excluded from spending and therefore the main deficit estimate. 

“It is included under financing, which impacts overall borrowings. Budget 2025 currently has an R80-billion allocation to Eskom, and none for Transnet. The R80-billion cash transfer to Eskom will be used to pay R38-billion of debt coming due in April 2026,” he said.

Rusike unpacked it further, pointing out that Eskom’s R230-billion three-year funding support was nearing completion (end of March 2026). 

“Only R10-billion will be outstanding, to be disbursed in 2028/29. As this support comes to an end, Eskom has turned around some of its metrics. Electricity supply has improved, posting a profit for the first time in eight years,” he said.

Read more: Eskom posts first profit in eight years, of R16-billion, as turnaround gains traction

Speaking at a PSG Think Big webinar at that time, Eskom chairperson Mteto Nyati said the parastatal was “done with energy security”.

“The next drive is energy affordability. That is what we are focusing on,” said Nyati. He also addressed competition concerns as private electricity traders enter the market, saying that policy changes were required in order to “level the playing fields”.

Eskom’s ball and chain — municipal debt

While a profit turnaround and reduced power outages are good news, outstanding municipal debt remains Eskom’s bugbear. In September 2025, outstanding municipal debt to the utility stood at more than R100-billion. Eskom’s projections show municipal debt could rise to more than R300-billion by 2030 if repayment rates by municipalities do not improve.

While no further bailouts were announced in this year’s MTBPS, measures to address municipal arrears owed to Eskom were outlined.

The statement says municipal arrears to Eskom rose from R55.3-billion to R94.6-billion in the 12 months to 31 March 2025. This is despite the existence of the municipal debt-relief programme, which has been in place for two-and-a-half years (since March 2023), and the ring-fencing of legacy arrears.

While 24 municipalities have qualified for the first one‑third write‑off after 12 consecutive months of payments, and 21 have generally maintained payments, as of 7 May 2025 47 municipalities remained in default. This is the combined result of weak collections, excessive electricity and water losses due primarily to a lack of maintenance, and inadequate credit control. Measures are being taken to help municipalities raise revenue, including expanding smart prepaid metering.

 How the municipal debt restructuring will work

As an interim measure, endorsed by Finance Minister Enoch Godongwana, defaulting municipalities will transition, where appropriate, to distribution agency agreements. Under these agreements, Eskom will operate municipal electricity services for a defined period, support cost‑reflective tariff setting and loss reduction, and assist with collections. During this period, municipalities will be required to select the most appropriate service delivery mechanism, phase in cost‑reflective tariffs and limit rebates.

Municipalities are expected to focus funding from the municipal infrastructure grant and other relevant grants to rehabilitate existing water and electricity infrastructure, which is the conduit for revenue generation. Additional conditions include strict adherence to pro-poor policies to ensure that local governments are providing the required amounts, doing so within national limits and ring‑fencing electricity revenues.

“The distribution agency agreements pathway is intended to stabilise cash flows, improve payment discipline and create a bridge to longer‑term structural reforms in the local government fiscal framework. The interim measure does not rule out stronger interventions where failures persist,” the Budget documents state.

Road Accident Fund

Read more: Four RAF executives suspended amid probe into R500bn liabilities and spending abuse

Read more: Scopa hears how RAF accounting sleight of hand buried billions in debt and claims

In somewhat of an understatement, the MTBPS notes that with RAF expenditure expected to grow more rapidly than revenue, widening the funding gap, “the RAF’s financial position is expected to deteriorate over the medium term”.  DM