NERSA MUNICIPAL DETERMINATION ON THE FINANCES OF MUNICIPALITIES

1. NERSA MUNICIPAL DETERMINATION ON THE FINANCES OF MUNICIPALITIES PORTFOLIO COMMITTEE ON ENERGY Presenter: | National Treasury | 30 July 2013

2. 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

3. Local Government Service Delivery Responsibilities : Roles of municipalities and oversight responsibilities of national government

4. Local government has very specific service delivery responsibilities Storm water Traffic and parking Building regulations Municipal public transport Water (potable) Electricity reticulation Sanitation Refuse removal Cemeteries Fire fighting Municipal health services Municipal planning Municipal roads

5. 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 maynot 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: • 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)

6. 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

7. Municipal base tariff and surcharge Future process (to be instituted once norms and standards are put in place on municipal surcharges) Cost of providing service xx Refurbishment and maintenance, etc xx Reasonable rate of return xx Base tariff to be regulated by regulator/Minister xx Maximum surcharge rate xx Tariff approved by municipal council xx Current process Cost of providing service xx Refurbishment and maintenance, etc xx Surcharge xx Tariff payable by xx consumer as approved by Municipality Regulator/Minister Surcharge currently still forms part of tariff approved by Regulator (falls under the 10% “Other Costs”)

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

9. The WHOLE local government fiscal framework is designed to finance municipal service delivery Transfers and Grants Municipal own revenues Operating revenues Direct transfers Rates and taxes Equitable share & RSC levy replacement grant Municipal operating budget Service charges National / provincial operating grants Sources of capital funding Municipal borrowing Surplus / cash-backed reserves National / provincial infrastructure grants Municipal capital budget Indirect transfers

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

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

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

13. Budgeted electricity operating and expenditure revenue • 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

14. Electricity net surplus by category of municipality Electricity net surplus by category of municipality • 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

15. Implications of electricity bulk increases on available municipal revenue pool • 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 Property Rates Grants Other Municipal Income Municipal Services ??Fall in Surcharges?? Water Sanitation Refuse Electricity Roads Fire Fighting Development Street Lighting Municipal Income Levels of surcharges levied in past Current surcharges Property Rates Grants Other etc

16. Challenges relating to tariff setting, revenue value chain and sustainability

17. Many municipalities do not have cost reflective tariffs; consequently operating at a loss An analysis of the 17 non-delegated municipalities 2013/14 MTREF – Trading Services

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

19. Electricity as a means of debt collection Source: Ekurhuleni Metropolitan Municipality – Collection Rates

20. 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

21. 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

22. 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

23. 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.

24. PROPOSALS FOR THE WAY FORWARD

25. 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

26. THANK YOU