Rescuing the unrescuable — Why SA’s municipal insolvency regime needs surgery

They are technically insolvent: balance sheets that do not balance, cash flows that do not flow, and obligations that far outstrip revenue. Unlike private companies, they do not disappear. They simply decay, while citizens absorb the cost. The anatomy of collapse Technical insolvency in a municipality is a slow-motion catastrophe. The causes are well documented: unfunded budgets adopted as political theatre, revenue collection rates barely clearing 70%, electricity and water distribution losses swallowing half of what is produced, and debt compounding faster than any grant can cover. Add vacancy rates in senior management that leave institutions headless, and the result is a hollow shell that processes payroll but little else. The Parliamentary Budget Office found that of 39 municipalities under Section 139 intervention between 2020/21 and 2022/23, only six showed good progress in implementing their Financial Recovery Plans. Nine showed no progress at all. Emalahleni has been under a mandatory Financial Recovery Plan since 2018 without improvement. Makana has had four interventions since 2014. Each time, the administrator departs, the council reasserts itself, and the decay resumes. The private sector parallel In the private sector, a company that cannot meet its debts faces a stark choice: restructure or die. SA’s Companies Act provides for business rescue, introduced in 2011 to shift from liquidation to rehabilitation. Academic studies and Companies and Intellectual Property Commission data place the success rate at between 12% and 18%. When it succeeds, it preserves jobs and economic value. When it fails, the company is liquidated, and the market absorbs the loss. The critical difference is that failure in the private sector has a definitive endpoint. Liquidation clears the decks. In the municipal sphere, there is no such endpoint. A municipality cannot be liquidated. Its obligations – to provide water, sanitation, roads and safety – are constitutionally entrenched. Its creditors include pensioners, small businesses and state entities like Eskom that cannot walk away. The municipality persists, technically insolvent but legally immortal, accumulating debt and destroying trust. A toolkit without tools SA’s municipal recovery framework is built on the Municipal Finance Management Act and Section 139 of the Constitution. Yet it is structurally flawed. It is reactive: provinces invoke Section 139 only when municipalities are already in crisis. It is politically contaminated: administrators are appointed, but councils are not always dissolved, creating two centres of power that undermine each other. Monitoring is weak, and there are no consequences for failure. There is no equivalent of liquidation, no mechanism to dissolve the entity and reconstitute it on a solvent footing. The World Bank’s comparative analysis places SA in a hybrid category – administrative intervention followed by limited judicial involvement. Contrast this with Hungary, where the Municipal Debt Adjustment Law of 1996 places courts and financial trustees at the centre, or the United States, where Chapter 9 of the Bankruptcy Code provides a structured, court-supervised mechanism for municipal debt adjustment. First World alternatives The US offers the most instructive comparison. Chapter 9, enacted during the Great Depression, allows municipalities to restructure debt under court protection. When invoked, as in Detroit’s 2013 bankruptcy, the results are dramatic: $7-billion in costs cut, pension obligations restructured, and a plan of adjustment that allowed reinvestment. The United Kingdom takes a different approach. Local authorities cannot technically go bankrupt. If a chief financial officer determines that expenditure will exceed resources, a Section 114 notice is issued, freezing all non-essential spending. Commissioners may be appointed, and council tax rises may be authorised beyond normal limits. Birmingham, Woking, Thurrock and Slough have all issued Section 114 notices in recent years. The system is harsh but clear, forcing immediate fiscal adjustment. What these frameworks share is clarity, enforceability, and consequences. They do not permit a municipality to drift in permanent technical insolvency, subsidised by bailouts while governance remains unchanged. A radical prescriptionIf SA is serious about rescuing its municipalities, it must move beyond polite administrative intervention and embrace enforced rehabilitation. First, introduce a statutory moratorium on creditor enforcement actions for municipalities under Section 139(5) intervention – without it, administrators work with one hand tied behind their backs while creditors dismantle the patient. Second, Financial Recovery Plans court-supervised and binding, with contempt consequences for non-compliance. Third, empower administrators to restructure operations without political interference, including the power to retrench where organisational structures are unaffordable. Fourth, establish an independent Municipal Recovery Authority to accredit practitioners and monitor interventions. Fifth, create a clear exit mechanism: if a municipality cannot be rehabilitated within three years, the law should provide for the dissolution of the council and reconstitution on a revised basis. Sixth, consider a limited form of municipal bankruptcy for debt restructuring, allowing courts to impose haircuts on creditors and discharge unsustainable obligations. Technical insolvency in South African municipalities is not a financial problem. It is a governance crisis masquerading as a balance sheet problem. The current intervention regime treats the symptoms while leaving the disease untouched. The disease is political: the capture of municipal institutions by factions that prioritise patronage over service delivery, and the absence of consequences for failure. Business rescueBusiness rescue in the private sector fails two-thirds of the time, but when it succeeds, it does so because the practitioner has power, the creditors have discipline, and the law provides a definitive endpoint. Municipal intervention in SA fails because the administrator lacks power, the creditors have no discipline, and the law provides no endpoint. The municipality simply waits for the next grant, the next administrator, the next election. First-world governments do not tolerate this. They intervene early, they enforce adjustment, and they provide consequences for non-compliance. SA must do the same. The alternative is not merely more failed municipalities. It is the erosion of the constitutional project itself, as citizens lose faith in the capacity of the state to deliver the most basic services. The time for gentle administrative nudges is over. What is required is surgical intervention, with a binding recovery plan, a statutory moratorium, and the political will to let failed councils face the consequences of their failure. Only then can technically insolvent municipalities become solvent – and remain so. DM