NERSA MUNICIPAL DETERMINATION ON THE FINANCES OF MUNICIPALITIES

PORTFOLIO COMMITTEE ON ENERGY

Presenter: | National Treasury | 30 July 2013

Layout of presentation

• Overview of municipal service delivery responsibilities• Link between municipal service delivery responsibilities

and the regulation thereof• Relationship between the functional and fiscal

frameworks of local government– Composition of local government fiscal framework– Size of municipal budgets– Municipal electricity revenues, expenditures and surcharges– NT initiatives underway to improve management of municipal

finances

• Proposals for the way forward

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Local Government Service Delivery Responsibilities : Roles of municipalities and

oversight responsibilities of national government

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Local government has very specific service delivery responsibilities

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Water (potable) Electricity reticulationSanitationRefuse removal

CemeteriesFire fightingMunicipal health servicesMunicipal planningMunicipal roads

Storm waterTraffic and parkingBuilding regulations Municipal public transport

Legislative and regulatory oversight over the performance of municipal functions• A municipality has the executive authority to administer matters listed in Part B of

Schedules 4 and 5 of Constitution, including electricity and gas reticulation (s156)

• Various clauses in the Constitution allows for national oversight, monitoring and support of municipalities in performing these functions• A municipality’s performance of its functions listed in Schedules 4B and 5B are subject

to legislation so as to ensure the effective performance of these functions by municipalities (such legislation may not compromise or impede a municipality’s ability or right to exercise its powers and functions)

• Municipal electricity reticulation in defined in Electricity Regulation Act (ERA) as the trading or distribution of electricity and includes services associated therewith

• Various provisions in ERA enables oversight by national government and the electricity regulator (NERSA) over municipal electricity reticulation:

o A municipality must ensure a sustainable electricity service by adhering to norms and standards (s27(f)). The Minister of Energy may prescribe compulsory norms and standards for reticulation services (s35(4)(d))

• Various departments are also responsible for the regulation of municipal service provision generally, including electricity provision, in terms of their legislation (Municipal Systems Act and Municipal Finance Management Act)

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Role of NERSA versus Municipal Council in municipal electricity tariff determination• Since 2011/12 NERSA has issued guidelines for municipal tariffs which require

municipalities to submit distribution forms (D-forms) by 30 October– Municipalities are required to submit their applications to NERSA within the prescribed

deadlines. Not all municipalities comply with these deadlines

• NERSA annually communicates a guide price increase to municipal distributors– The average benchmark allows for (a) bulk purchases (70%); (b) reasonable energy losses; (c)

salaries and wages (10%): (d) repairs and maintenance (6%); (e) capital charges and other costs (4%); and (f) other costs (10%)

• NERSA considers applications from on a case by case basis based on the information submitted via D-forms. Final determinations are communicated to municipalities and also published on NERSA intranet

• There is a two-pronged approval process:– A municipal council approves the annual budget of a municipality, which includes all municipal

tariff increases– A municipality may not impose a tariff that is not approved by NERSA. A municipality must

therefore submit to its Council for approval a municipal electricity tariff that complies with the NERSA approval processes

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Municipal base tariff and surcharge

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Current process

Cost of providing service xxRefurbishment and maintenance, etc xxSurcharge xxTariff payable by xxconsumer as approved byMunicipalityRegulator/Minister

Future process (to be instituted once norms and standards are put in place on municipal surcharges)

Cost of providing service xxRefurbishment andmaintenance, etc xxReasonable rate of return xxBase tariff to be regulated byregulator/Minister xxMaximum surchargerate xx Tariff approved by municipal council xx

Surcharge currently still forms part of tariff approved by Regulator (falls under the 10% “Other Costs”)

Relationship between local government functional (service delivery) and fiscal (revenue and expenditure) frameworks

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Municipal own revenuesTransfers and Grants

Direct transfers

The WHOLE local government fiscal framework is designed to finance municipal service delivery

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Municipal operating

budget

Municipal capital budget

Equitable share & RSC levy

replacement grant

National / provincial operating grants

Operating revenues

Rates and taxes

Sources of capital funding

Service charges

Municipal borrowing

National / provincial infrastructure grants

Surplus / cash-backed

reserves

Indirect transfers

At the heart of local government is managing finances to deliver services

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Revenue lost due to lack of fiscal effort

Revenue forgone

Poor debt management

Low tariffs

Poor billing

“Leakages”

Theft and graft

Inefficient procurement

Under-spending

Bad managementPolicy constraints on fiscal potential

Priority of LG in vertical divisions

Allowed taxes

Assignment of functions

Design of ES Formula

Non-priority wants

Demand for basic services

Demand for other important

services

National and provincial mandates

Rates and taxes

Service charges

Conditional transfers

Rates and taxes

Service charge revenue

Conditional transfers

Non-priority wants

Effective and efficient

expenditure

Community needs and

wants

LG Fiscal Framework

Revenue choices

and collection

Budgeted expenditure

choices

Managing delivery

Actual service delivery

Institutional set up

Basic services

Other important services

Mandates

Non-priority wants

Institutional set up

Basic services

Other services

Mandates

Borrowing

Borrowing

Equitable shareEquitable shareInstitutional set up

How is the local government fiscal framework (LGFF) structured?

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•Free Basic Services (FBS) funded by National Government (NG)

•FBS funded by NG•Above FBS consumption paid by HH (and cross-subsidisation in tariffs)

•BS consumption paid by HH (and cross-subsidisationin tariffs)•HH makes small contribution to munirates for general services that benefit community

•BS consumption and cross-subsidisation paid by HH•HH contributes to muni rates for general services that benefit community

The

LGFF

National Transfers

25%

Local Government Own Revenue

75%

HH in informal settlement

Poor HH in RDP house Employed HH in RDP house with improvements

Middle to upper income HH

Rates and chargesCharges

National Transfers

20%

Local Government Own Revenue

80%

National Transfers 80%

Own Revenue

20%

Composition of the local government fiscal framework in cities with substantial economic activity

Composition of the local government fiscal framework in municipalities with little economic activity

• Own revenues fund services for the non-poor and businesses Reliance on own revenue promotes accountability and responsiveness

• Transfers are intended to fund services to the poor (capital and operational costs) Transfers account for less than 15% of operating budgets for most metros and more that

75% for rural municipalities Transfers account for a much higher proportion of capital budgets in all municipalities Municipalities with little economic activity (rural municipalities) are much more transfer

dependent

Municipal operating revenue

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.2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

R million

Outcome Estimate Medium-term estimates 2006/07 - 2009/10

2009/10 - 2012/13

Operating Revenue

Property rates 18 737 21 451 22 305 26 294 30 702 32 599 35 186 12.0% 10.2%

Property rates - penalties & collection charges

– – – – 579 606 637 - -

Service charges 45 553 49 968 58 286 72 255 91 191 102 703 120 679 16.6% 18.6%

Service charges - electricity revenue 58 978 68 916 84 172 - -

Service charges - water revenue 17 676 18 633 20 223 - -

Service charges - sanitation revenue 7 334 7 719 8 407 - -

Service charges - refuse revenue 4 747 5 042 5 542 - -

Service charges - other revenue 2 456 2 393 2 334 - -

Rental of facilities and equipment 1 635 1 443 1 510 - -

Interest earned - external investments 3 217 3 998 4 504 2 829 1 927 1 927 2 013 -4.2% -10.7%

Interest earned - outstanding debtors 2 127 2 189 2 362 - -

Dividends received 3 8 9 - -

Fines 1 430 1 492 1 675 - -

Licences and permits 600 536 554 - -

Agency services 1 327 1 375 1 477 - -

Transfers recognised - operational 28 970 39 322 49 519 57 474 39 476 39 819 42 845 25.7% -9.3%

Other revenue 12 303 12 770 14 866 17 490 9 592 9 477 10 091 12.4% -16.8%

Gains on disposal of PPE 593 278 265 - -

Total revenue 108 781 127 508 149 480 176 342 181 181 194 453 219 301 17.5% 7.5%

Percentage of total revenue – - – – – – –

Property rates 17.2% 16.8% 14.9% 14.9% 16.9% 16.8% 16.0%

Service charges 41.9% 39.2% 39.0% 41.0% 50.3% 52.8% 55.0%

Interest earned - external investments 3.0% 3.1% 3.0% 1.6% 1.1% 1.0% 0.9%

Transfers recognised - operational 26.6% 30.8% 33.1% 32.6% 21.8% 20.5% 19.5%

Other revenue 11.3% 10.0% 9.9% 9.9% 9.9% 9.0% 8.5%

Total revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

% Average annual growth

Revenues (gross) from service charges are the largest source of municipal revenue – but expenditures first need to be deducted to determine “net” revenues

Budgeted electricity operating and expenditure revenue

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• Total expenditure comprise of estimated bulk purchases• The electricity revenue is declining- due to high bulk increases• The scope for surcharges has diminished over the years

Budgeted electricity operating revenue and expenditure,2006/07-2012/13

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

R million Medium-term estimates

Operating revenue

Category A (Metros) 16 811 18 759 21 978 30 931 39 440 48 662 60 516

Category B (Locals) 9 209 9 838 11 412 16 322 19 520 20 244 23 647

Secondary cities 5 321 5 511 6 447 9 449 11 893 12 819 15 446

Large towns 1 679 1 857 2 140 2 940 3 715 3 652 4 000

Small towns 1 864 2 058 2 387 3 294 3 384 3 266 3 626

Mostly rural 345 412 438 639 528 506 574

Category C (Districts) 8 14 17 14 18 10 10

Total 35 238 38 449 44 820 63 589 78 498 89 161 107 819

Estimated total operating expenditure

Category A (Metros) 13 923 15 549 18 628 28 477 36 495 46 496 59 365

Category B (Locals) 7 723 8 364 10 162 15 528 18 912 20 575 24 929

Secondary cities 4 506 4 894 5 870 9 108 11 553 12 907 16 231

Large towns 1 369 1 450 1 765 2 789 3 501 3 744 4 285

Small towns 1 560 1 685 2 134 3 043 3 347 3 346 3 832

Mostly rural 287 335 392 588 511 578 581

Category C (Districts) 28 42 65 39 14 14 17

Total 29 397 32 320 39 017 59 571 74 332 87 661 109 240

Net Surplus 5 840 6 129 5 803 4 018 4 165 1 500 -1 421

% of surplus from revenue 17% 16% 13% 6% 5% 2% -1%

Electricity net surplus by category of municipality

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Electricity net surplus by category of municipality

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

R million Medium-term estimates

Category A (Metros) 2 888 3 211 3 350 2 454 2 945 2 166 1 151

Category B (Locals) 1 487 1 473 1 251 795 608 -331 -1 282

Secondary cities 815 618 577 341 339 -87 -785

Large towns 310 406 374 151 214 -92 -285

Small towns 304 372 253 252 37 -80 -205

Mostly rural 58 77 46 50 17 -72 -7

Category C (Districts) -21 -28 -48 -25 4 -4 -7

TOTAL 5 840 6 129 5 803 4 018 4 165 1 500 -1 421

• Although metros are still generating surplus from electricity; this operating surplus has started to diminish

• Other categories are operating at a loss• Rapid increase in bulk tariffs has impact on this revenue• Customers may find electricity unaffordable• Consequently municipalities are buffering the impact of bulk tariff

increases and absorbing the impact of bad debt; cash flow impact

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Property Rates

Grants

Other

Property Rates

Grants

Other

Municipal Income

Levels of surcharges levied in past

Municipal Services

Water

Sanitation

Refuse

Electricity

Roads

Fire Fighting

Development

Street Lighting

Municipal Income

Other

Grants

Property Rates

??Fall in Surcharges??

Current surcharges

Implications of electricity bulk increases on available municipal revenue pool

etc

• Large municipal surcharges on electricity was a valid concern in past• Electricity bulk increases (also impact of economic situation) have limited the ability

of municipalities to levy surcharges

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Challenges relating to tariff setting, revenue value chain and sustainability

Many municipalities do not have cost reflective tariffs; consequently operating at a loss

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An analysis of the 17 non-delegated municipalities 2013/14 MTREF – Trading ServicesTabled MTREF 2013/14

R thousand Surplus Deficit Surplus Deficit Surplus Deficit Surplus Deficit Surplus Deficit

MetrosCity of Johannesburg 50 427 434 287 289 524 0 -525 515 774 238 -525 515

City of Cape Town 605 306 94 490 39 546 0 -775 189 739 342 -775 189

eThekwini Metro 476 693 -440 443 -129 447 0 -259 913 476 693 -829 804

Ekurhuleni Metro 0 -7 759 62 624 319 755 0 -52 607 382 379 -60 366

City of Tshwane 67 589 38 546 129 353 0 -194 703 235 488 -194 703

Nelson Mandela Bay 13 047 0 -39 561 -24 858 17 136 30 183 -64 419

Mangaung Metro 0 -143 392 0 -3 741 0 -59 144 53 228 53 228 -206 278

Buffalo City 0 -33 485 -90 078 0 -89 606 0 -3 169 0 -216 337

Secondary CitiesMsunduzi LM 0 -248 458 0 -310 666 109 088 0 -80 885 109 088 -640 009

Rustenburg LM 143 515 0 -251 971 23 836 0 -57 113 167 350 -309 084

uMhlatuze LM 24 600 0 -31 235 0 -41 656 0 -14 113 24 600 -87 004

Mbombela LM 38 013 0 -128 639 0 -99 751 0 -69 828 38 013 -298 218

Polokwane LM 0 -16 257 0 -40 946 -3 232 0 -14 671 0 -75 105

Sol Plaatje LM 0 -26 652 17 805 -37 753 0 -2 532 17 805 -66 937

George LM 0 -21 717 10 709 10 827 7 531 29 067 -21 717

OR Tambo DM 0 0 -308 547 0 0 0 -308 547

Mafikeng LM 0 0 0 -12 579 0 -616 0 -27 287 0 -40 482

Total 1 419 189 -497 720 658 460 -1 658 407 921 931 -486 063 77 894 -2 077 524 3 077 474 -4 719 714

Note1.       Calculations are based on the tabled A2 schedules as presented at the benchmarking2.       Not all municipalities reflect the income portion for FBS under the relevant trade services.3.       Secondary costs have been included as a cost for the trade services and are allocated as follows

a.       Metros 10%b.      Secondary cities 18%

4.       All capital grant funding included in the A2 schedules have been excluded.

Water Services Waste Water Waste ConsolidatedElectricity Services

Metro Electricity Surplus/(Deficit)Financial Years 2011/12 to 2014/15

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Electricity as a means of debt collection

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Source: Ekurhuleni Metropolitan Municipality – Collection Rates

Municipal challenges as it relates to municipal tariff setting, revenue management and budgeting• Although much progress has been made by municipalities in combating

poverty and economic growth, challenges still exists in the system of local government

• The major challenge is to get the basics of revenue management right• This refers to paying attention to integrity of billing information, accuracy

of bills and dedicated managers to build administrative implementation systems that integrate each component of the revenue value chain

• Certain municipalities struggle to collect outstanding debts, especially the smaller municipalities

• In addition many municipalities’ taxes and tariffs are inappropriately structured (service tariffs are not fully reflecting the costs reasonably associated with rendering the service)

• Some municipalities do not fund repairs and maintenance of infrastructure adequately; consequently high level of non-revenue water and electricity

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National Treasury budget reforms

• National Treasury has taken various initiatives to address the challenges in previous slide: The revenue management initiative - create awareness and guide

municipalities with practical solutions to improve business processes relating to the root causes of poor data integrity, inaccurate billing, customer queries and ineffective policy implementation

Development of the Standard Chart of Accounts for Local Government in line with the Municipal Budget and Reporting Regulations to improve the quality of municipal financial information

Introduction of financial modelling to assist municipalities with management accounting (costing), tariff determination and cost benefit analysis for capital projects

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Revenue management initiatives

• The approach is to provide practical support to municipalities so that they can address the “root causes” of their billing problems

• The revenue management initiatives will focus on the largest seventeen municipalities(metros and larger secondary towns) and can be extended to other municipalities as per their request

• Expected outcomes- maximisation of revenue collection, introduction of effective debt management practices and achieving alignment between revenue management policies and the implementation thereof

• Key focus areas- revenue value chain; debtor management; policy implementation and customer relations management

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Financial modeling and tariff setting methodology for municipalities

• Financial modeling will target all costing activities with particular focus on tariff determination, cost benefit analysis for capital projects

• The model will enable municipalities to determine the real cost of municipal services provided

• A tariff modelling tool will ensure a consistent approach to tariff determination processes across municipalities; provide for scenario planning

• The uMhlathuze Local Municipality in the KwaZulu-Natal Province has been identified as a pilot project for developing a financial modeling and tariff setting methodology for municipalities

• Once the pilot project has been completed a working committee(s) will be established with all role-players including sector departments such as Department of Water Affairs, Department of Energy etc.

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PROPOSALS FOR THE WAY FORWARD

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Proposals for the way forward

• Department of Energy should monitor and enforce the implementation of NERSA approved tariffs

• Improve on consultation processes when municipalities draft their annual budget

• Improve the public understanding of NERSA process and linkages with municipal budgeting processes

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THANK YOU

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