FINANCE & POLICY Finance structures within municipalities: a guide to revenue loss recovery By Krish Kumar, CIGFARO President and Chief Finance Officer, Ethekwini Municipality T he distribution of electricity requires significant operating revenues and expenditure from municipalities. However, due to national power utility Eskom’s high bulk tariff increases municipalities have had to make tough financial decisions with regard to competing priorities. The priorities include the affordability and sustainability of free basic electricity, keeping electricity tariffs to consumers affordable, maintaining or improving collection rates, ensuring sufficient reinvestment in electricity infrastructure through cost-reflective tariffs, funding the rollout of electricity projects for economic growth, as well as environmental sustainability and energy efficiency. Accordingly, municipalities currently face a tricky balancing act in terms of structuring the finances of electricity. Funding sources of municipalities In 2015/2016, the main sources of revenue for municipalities in South Africa were property rates (14%), service charges (46.1%), transfers and subsidies (30%) and other own revenue sources (9.9%). Seventy percent of revenue of municipalities is self-generated. Service charges are comprised of electricity, water, sewerage and refuse and make up the bulk of revenue (46%). In 2015/2016 R83.6 billion ($6 million) was billed for electricity revenue in metros and secondary cities. This equates to about 22.4% of the adjusted revenue budget of R373.1 billion ($20 billion). Electricity revenue plays a huge role 54 only one municipality, Naledi Local Municipality in Vryburg, North West Province, has yet to pay Eskom and has not come up with a sustainable Electricity expenditure financial plan. The other eight As regards electricity expenditure, municipalities have managed to it is interesting to note that the come up with plans to foot their bills increase in bulk electricity costs have and are considered out of danger. far outstripped the overall increase in Illegal electricity connections are the operating expenditure. For example, major contributing revenue loss issue in 2013/2014 the total municipal in these municipalities. operating expenditure increased It must also be stated that the by 7.3% against an increase of Eskom bulk tariff increases have 16.3% in total municipal expenditure increased the burden on consumers on bulk electricity purchases whilst and have made it very difficult for in 2014/2015 it was 9.6% against municipalities to collect all revenues 16.6%. from electricity. The graph clearly illustrates the Paying of power bills above-inflation increases in bulk At the outset it must be stated that one there is no excuse Local Municipality in Vryburg, tariffs to West municipalities. yet The tariff only municipality, Naledi for any North Province, has to pay Eskom and not to up their utility increases were particularly significant municipalities has not come pay with a sustainable financial plan. The other eight municipalities have managed come up their bills considered bills. It is unacceptable to that such with plans to foot from 2008 and to are 2011 when electricity out of danger. Illegal electricity connections are the major contributing revenue loss issue in municipalities are not paying Eskom, these municipalities. especially as they are ringfenced It must also operations. be stated that the it Eskom pleasing increases has increased the burden on However, is bulk tariff consumers and has made it very difficult for municipalities to collect all revenues from to note that as of 31 January 2017 in terms of the financial sustainability and viability of municipalities. electricity. Average Eskom Tariff Increase versus Inflation 35 31,3 30 27,5 25 20 24,8 25,8 16 15 10 5 12,69 5,5 5,2 6,2 8,43 2,5 8 5,9 4,1 5,1 8 9,4 0 -5 Eskom Tariff Increase Inflation The graph clearly illustrates the above-inflation increases in bulk tariffs to municipalities. The tariff increases were particularly significant from 2008 to 2011 when electricity prices increased by 78% in real terms, however, increases continue to be ESI AFRICA ISSUE above inflation. Municipalities have in many instances absorbed some of these increases to alleviate the burden on consumers; however, decreasing collection rates remain a burden for 1 2017