Friday, January 21

The same old funding model cannot keep South African cities running or serve residents

Local government, neglected during apartheid in South Africa, was elevated in the 1996 constitution to strengthen democracy and help correct the inequalities of the past. The idea was that by making services (water, electricity and garbage) accessible and affordable, the national government would legitimize itself.

But in 2021, the municipalities of South Africa are in trouble. They are bogged down by service delivery failures, mismanagement, financial mismanagement, billing crises, and power outages. Power outages are due to aging and infrastructure failures, exacerbated by power outages due to Eskom. The The Auditor General has said that almost half of the country’s municipalities are under financial pressure and are likely to get worse.


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South Africa’s constitution assigns three sources of revenue to municipalities to fulfill their mandate: property taxes; surpluses generated by services; and transfers of funds from the national government. Electricity is by far the largest contributor among services, and always has been. But this financing model carries significant risks.

For me Doctor, also published as book, I tracked events to understand the evolution of this revenue stream and the practice behind it. Documents dating from the early 20th century show that the municipal financing model remains virtually unchanged. If it’s deeply ingrained Road dependent the practice is not understood, it will undermine necessary reform, and not for the first time. It will put more pressure on municipal finances and service delivery and ultimately erode the legitimacy of the national government.

South Africa Municipal Funding Model

Since the country was formed in a Union Among the British and Afrikaners in 1910, South African municipalities have had only one true source of income: property taxes. But this has always been insufficient and unpopular. Thus, the British system of generating surpluses from the provision of services provided a solution for local government politicians seeking to please the most influential constituency: landlords. They argued that it encouraged property development.

Municipal electricity departments, however, vehemently opposed cross-subsidies, referring to them as rate relief. For them it was an indirect and unfair tax. And it created the perverse incentive to defer maintenance and capital investment to finance other projects and continue to raise electricity rates to finance the revenue shortfall. In short, the practice was unsustainable.

For more than 20 years, the Association of Municipal Electricity Companies struggled to end or limit surpluses, but finally gave up in 1945, when it became clear that the national government had no intention of financing municipalities or giving them other forms of financing. collect revenue. This strengthened the chosen path of municipal financing.

When democracy finally came to South Africa in 1994, the opportunity to change was lost. Both the outgoing and new governments agreed (for their own reasons) that the local government must be strong. This approach was also supported by the mainstream economic theory that by being closer to citizens, municipalities are better able to understand the needs of the community.

The 1996 Constitution it elevated local government to a sphere of government: an equal partner with protected functions and sources of income. The local government was assigned two exclusive revenue streams: the property tax and the existing practice of reducing fees. The past, once again, decided the future.

The ink on the constitution had barely dried before the national government announced plans to reform the electricity distribution sector (municipalities and the national utility company, Eskom). Key drivers of the reform included attracting new investment, expanding economic ownership, increasing operational efficiency, energy security, and price stabilization. This would ease the distribution burden for the smaller municipalities, with the larger ones participating in the new structure.

More than ten years and several billion rand later, the plan was archived. This was because Eskom, the local and national government could not agree on a structure, and without a constitutional change the deadlock could not be broken. The national government withdrew.

During this time, municipalities continued to depend on income from surplus electricity, but delayed capital investments while awaiting the final result of the reform process. And it turned out that they benefited from a high fee hikes as of 2007 (180% in real terms by 2020), deepening the “rigidity” of the practice.

The tide turned in 2017. High tariffs, environmental imperatives of climate change, self-generation and a decade of low or no economic growth they all took their toll. Revenue stagnation due to declining demand and margin erosion meant that by 2020 surpluses turned into deficits and Johannesburg City Power (with particularly acute mismanagement) had R5.6 billion (US $ 400 million) overdraft.

History matters

Electricity surpluses can come back, as they have in the past. But my research suggests that surplus exploitation has finally reached its economic limits. The thorny questions raised by the Association of Municipal Electricity Companies almost 100 years ago are still relevant:

  • Municipal electricity rates include an indirect tax, so they do not reflect costs.
  • High rates ignore the needs of large and poor households.
  • Inflated rates encourage fuel switching by those who can afford it, putting the cross-subsidy model under further pressure.
  • Cross subsidies compromise prudent accounting practices like depreciation and repayment.
  • The electricity supply must be efficient to stimulate the economy.
  • Surpluses vary annually. Overdependence can lead to financing problems if sales decline.

Ultimately, a century-old roadblock has run out of road. Reform is urgently needed as the deficit in municipal funds cannot simply be supplemented by increased domestic transfers.

From a national policy perspective, contradictory objectives must be addressed: policies that support tariffs that reflect costs on the one hand and cross-subsidies on the other.

When it comes to service delivery, sloppy infrastructure can no longer lay the proverbial golden egg. Municipalities are overloaded and many are overwhelmed. This is compounded by its limited scope for raising revenue. New and appropriate revenue streams are needed, reflecting the reality of the 21st century, such as unsubsidized property taxes, congestion charges, and municipal taxes. Finally, it is questionable whether municipalities should own and operate electricity services.The conversation

Theo Covary, Expert / researcher in energy policy, University of Cape Town

This article is republished from The conversation under a Creative Commons license. Read the Original article.

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