Post on 31-Dec-2015
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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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