After the Bell: The Free State is in a real state and pensioners are paying the price

If you read the Eskom annual report, there is always a short section of the plus-minus 100-page document that deals with nonpayment by municipalities. This is bulk electricity bought by municipalities and then sold on to residents of the municipal area at a profit. Often, this is an important money spinner for the local municipality and can make up about a quarter of its total income. 

One way to increase the profit for the municipality is to sell the electricity at a retail level but just kinda omit to pay Eskom. Or, residents just get so infuriated with the municipality for one reason or another that they don’t pay their electricity bills, which makes it impossible for the municipality to pay Eskom. Or they just assume that the municipality will not cut them off, so they take a chance. Or, after a succession of huge electricity price increases, they just can’t afford to pay.     

Whatever the reason, this is, as we know, a huge problem for Eskom. According to the 2023 Eskom annual report, the total outstanding debt owed to the utility by municipalities was R58.5-billion (including interest), a thumping hike from the R44.8-billion owed the previous year. 

But as it happens, it’s not so much a national problem as a regional one. The top 20 defaulting municipalities accounted for about 78% of total arrear municipal debt and the big winners here are the Free State municipalities, which are responsible for 32% of the total owed.

It also turns out that 149 of South Africa’s 257 municipalities are in arrears in paying over the pension fund contributions of their employees. I am not making this up. In more than half of South African municipalities, the municipal officials are just not bothering to hand over both the state contribution and the employee contribution to the employees pension fund. 

This is pretty incredible for two reasons. First, failure to do so is in itself a criminal offence, which attracts a R10-million fine for the municipal officials involved. But, you know, this is South Africa where the law is a guide, not a stipulation. Only three cases are currently being investigated under the appropriate section of the Pension Funds Act. It is unconscionable: just imagine someone retiring and suddenly being told there is not enough money in their pension funds to receive their due savings. They are supposed to be notified by the fund, but often they just don’t get the notification and if they do get it, they don’t always understand the ramifications or the reasons, FSCA officials tell me.

Second reason: the vast majority of municipalities in South Africa are largely dependent on national government grants to function. The national government grants to municipalities incorporate the pension payments. 

In other words, the municipal officials concerned are effectively diverting pension payments to current expenditure. Why would they do that? Well, for several possible reasons. There are cases where there is a dispute between the pension fund and the municipal employees. There are cases where municipal officials are just incompetent. And there are cases where the municipality overcommits itself financially and runs out of cash. And then there is active theft of funds, often dressed up as a “tender”, which leaves the municipality short of cash.



Incredibly, nobody has done an actual study of the specific reasons that these payments are not being made. The only reason we know this is taking place is because the Financial Sector Conduct Authority collects information from pension funds and one of the regular problems that funds report is that employers are not paying over their pension deductions. 

In the case of the private sector, the reason is often pretty obvious: when the business fails, or starts to fail, the immediate demand on the cash pile is to meet the salary bill. Pension payments can wait, hopefully things will get better, and the business will catch up. 

But in the case of municipalities we have a different kettle of fish. The incentive for municipalities is to satisfy the immediate needs of the voters, so there is always pressure to spend. 

But is it that simple? Not really, because here is the interesting thing. Guess which province is the biggest offender when it comes to municipalities not paying over pension deductions? The Free State. Obvs. But it’s not just the biggest offender. Every single Free State municipal authority, bar one, is not paying pension payments to at least one of its pension funds (some municipalities have several funds, often arising from when pension funds were separate from provident funds). 

Not only this, but the Free State has by far the highest total accumulated arrears: R840-million. This is more than half the total national arrears and four times greater than our second-place defaulter, the North West municipalities which have a total accumulated arrears of just under R200-million.  



The age analysis of the arrears demonstrates how much of a recent problem this has become. This is not just municipalities missing out on the end of the month for a week or so. Over the past four years, 172 municipalities fell into arrears, suggesting the Covid crisis might have played a big role in putting pressure on municipal income. Before that, the problem was sporadic.

But in the absence of actual data, how do we understand why the problem is most acute in the Free State? Well, I have two theories here. First, smaller municipalities are struggling the most, which sort of makes sense. You can see that from the national profile and the fact that the total outstanding is not that huge. Small municipalities are the ones with the largest challenge developing and keeping skilled managers, and by skilled manager I mean someone who is honest, has a bit of common sense, and can operate a spreadsheet.

My second theory is that the Free State government is very corrupt and that’s very obvious at the top. Hello, Ace Magashule. But with corruption at the top, there is little holding back smaller institutions from cooking the books. Especially in rural towns, with small budgets that nobody looks at very carefully. 

A fish, as they say, rots from the head. If the provincial government is corrupt, municipalities within the province swim in the same direction. DM