1. Parliamentary Portfolio Committee on Energy
Presenter: Marissa Moore| 22 March 2012

2. Local government fiscal framework
Transfers and Grants
Municipal own revenues
Direct transfers
Operating revenues
Equitable share & RSC levy replacement grant
Municipal operating budget
Rates and taxes
Service charges
National / provincial operating grants
Sources of capital funding
Surplus / cash-backed reserves
Municipal borrowing
National / provincial infrastructure grants
Municipal capital budget
Indirect transfers
Chapter 3 Intergovernmental relations and the local government fiscal framework

3. Local government fiscal framework
The whole local government fiscal framework is designed to finance municipalities, including the municipal electricity distribution function
Need an appropriate balance between own resources, grants and borrowing
Free basic electricity to the poor is funded through equitable share, including increases in bulk electricity prices
Need an appropriate balance between investing in new infrastructure and maintaining existing infrastructure
Tariffs to be used to fund new infrastructure and maintenance for services provided to non-poor households
Indigent policies to be appropriately targeted towards the poor and such cross-subsidisation be explicit

4. Local government fiscal framework
Transfers by type, 2006/ /13
Massive real growth in national transfers
Municipal Budget and Reporting Regulations
Three-year allocations and payment schedules for national and provincial transfers (DoR Act)
Improved in-year financial monitoring
Significant policy reforms
Support in planning and budget reform
R3bn spent on Siyenza Manje between 2007 and to provide hands-on support to municipalities
Additional support through conditional grants
Targeted capacity and systems support

5. Local government fiscal framework
Demand for capital infrastructure remains high
National transfers provided 51% of capital funding in 2010/11
External loans contributed 20.7% as a funding source in 2010/11. This is down from 24.9% in 2006/07.
Scope for further growth in private capital funding
Lending dominated by the DBSA

6. Performance Municipal budgets must be funded and realistic
Depleted cash reserves – operating at the absolute margin
General under-pricing of municipal services – bankrupting municipalities
Revenue projections are unrealistic – not based on requirements of the MFMA
Operating expenditures are too high – driven by non-priority spending
Capital budgets are too ambitious
Maintenance of existing assets needs urgent attention
Lack of key technical skills – qualified managers, engineers and technicians
Weak asset management systems
Spending on repairs and maintenance inadequate to maintain assets
Maintenance spending is reactive, and so is more costly than planned maintenance
Own funding of capital budgets needs to increase
Increased grant reliance, and reduced own funding of the capital budget
Tariffs and operating budgets not making provision to fund capital
Municipalities (other than metros) not adequately leveraging private finance to fund economic infrastructure

7. Performance Municipal own contribution to capital spending
Municipal own contribution to capital expenditure, 2006 to 2012
Municipal own contribution to capital spending
Get the basics right to ensure revenue value-chain is complete
Integrity of billing information, accuracy of billing systems and ability to collect
Revenue management
In December 2010, municipalities were owed a total of R62.3 billion. This represents an increase of 10.8% from the same month in 2009
Debts
Municipalities not following the Systems Act principles for tariff setting
On average, tariffs must reflect the cost of rendering the service
Under-pricing of services
Cutting spending on maintenance will have a disastrous impact on the reliability of services
Repairs and maintenance
Less than 50% of total capital spending

8. Performance

9. Basic Services share on LGES

10. Integrated National Electrification Programme
Approximately household connections per annum; 6 bulk substations, 10 additional substations upgraded, 350 km of medium voltage lines constructed, 200 km o f existing medium voltage lines upgraded.
Total allocation over the MTEF Municipalities R4.2 billion and ESKOM R6 billion

11. Free Basic Energy
Free Basic Services was announced in 2000 and Electricity Basic Services Support Tariff (EBSST) Policy was introduced in 2003
An allocation of 50kWh per month be provided to all poor households connected to national electricity grid in both Municipal and Eskom areas of supply
LG Equitable Share (LGES) formula targets four basic services
Electricity, water, sanitation and refuse (also environmental health)
Number of poor households with (full allocation) or without access to basic services/infrastructure (partial allocation)
Poor household currently defined as households with incomes of ≤R800 per month (2001 Census data)
R6.7b was added to LGES over baseline for the 2010 MTEF for electricity bulk increases
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12. Free basic services
A municipality’s ability to provide basic services to poor households rests on three pillars:
Providing access through building infrastructure to connect households to services
Maintaining access by ensuring infrastructure is properly maintained to prevent breaks in supply
Subsidising consumption through municipalities’ free basic services policies,

13. Free Basic Electricity
Household access improved
households
+ 6.2% households FBE
Operating revenue grows at above 20% per year in line with increases in the bulk price of electricity
Expenditure grew at 26.7% per year between 2006/07 and 2009/10
Budgeted capital expenditure on electricity increases from R4.7bn in 2009/10 to R5.7bn in 2011/12, before declining to R4.9bn in 2012/13
Compared to 2010/11, municipalities’ budgeted capital investment in electricity declines by 14% in 2011/12 and again by 7% in 2012/13
Expenditure R15bn in 06/07 to R59bn in 12/13
Chapter 9 Electricity

14. Free Basic Electricity
Province
Number of Munic
R940
R1100
R1880
other
Western Cape 30 1 13 14
Eastern Cape 45 6 15
Northern Cape 32 3 12
Free State 25 2 5 4 9
KwaZulu-Natal 61 21
North West 11
Gauteng 7
Mpumalanga
Limpopo 16
Total
283 8 81 88

15. Inclining Block Tariffs
Subsidised electricity provision (inclining block tariffs)
Costs recouped at higher levels of use through the increased tariffs
The inclining block tariff result in the tariff for poor customers declining by 8 % compared to the 2009/10 tariff and 18 % in 2010/11
On 24 February 2010, the National Energy Regulator of South Africa (NERSA) took a decision to introduce the inclining block tariff (IBT) to electricity consumers in South Africa. NERSA’s decision was in support of Government’s priority of protecting the poor.
The main feature of IBT is that it makes higher consuming customers pay a higher rate for electricity while a lower consuming customer benefits from a lower rate. IBT will thus generally result in the higher consuming customers cross-subsidising the lower consuming customers.

16. Inclining Block Tariffs
The IBT is structurally no-cost-reflective. The average cost of supplying a customer decreases as consumption increases and hence an inclining-block tariff where the tariff rate increases as consumption increases
Cost implications, especially where the existing metering infrastructure cannot accommodate these tariffs. Majority of municipalities use pre-paid meters for their customers and having to move to conventional meters in order to accommodate the inclining block tariff will put an additional burden on municipal budgets.
Concerns have been raised by a number of municipalities that the IBT structures and levels approved under each structure, are putting their ability to provide the municipal electricity service on a cost reflective basis at stake, which could have serious ramifications on the overall viability of municipalities, larger ones in particular, given the importance and size of this service.

17. Inclining Block Tariffs
National Treasury is of the view that a revised IBT proposal for domestic customers needs to be practical and sustainable, and ideally adopt a differentiated framework approach, rather than prescribing a specific IBT tariff structure.
It is also important that any proposed IBT is fully aligned to the principles set out in the South African Electricity Supply Industry: Electricity Pricing Policy ,2008, including the principle that electricity tariffs must be cost reflective and that any cross-subsidies should be explicit.
Although NERSA indicates that the IBT process is subject to consultation (February 2012), the application of a benchmark could have adverse implications on municipalities’ financial stability. The benchmark approach promotes uniformity; but has the potential to undermine efforts to ensure tariffs are cost reflective in line with the Electricity Pricing Policy. The alternative approach would be wherein each municipality discloses its cost structure (along the lines of the formula) and indicates the tariff increase that it proposes based on its individual cost structure (See Comments on D-Form process). Benchmarking has the potential to result in those municipalities with more efficient cost structures being able to charge higher tariff increases provided they can justify, while those with more expensive cost structures could be placing their financial sustainability at risk if they use the benchmark increases.

18. Inclining Block Tariffs
Although NERSA indicates that the IBT process is subject to consultation the application of a benchmark could have adverse implications on municipalities’ financial stability.
The benchmark approach promotes uniformity; but has the potential to undermine efforts to ensure tariffs are cost reflective in line with the Electricity Pricing Policy.
The alternative approach would be wherein each municipality discloses its cost structure (along the lines of the formula) and indicates the tariff increase that it proposes based on its individual cost structure
Benchmarking has the potential to result in those municipalities with more efficient cost structures being able to charge higher tariff increases provided they can justify, while those with more expensive cost structures could be placing their financial sustainability at risk if they use the benchmark increases.

19. ,
Thank You

20. SUPPORTING INFORMATION,
SUPPORTING INFORMATION

21. Operational Revenue

22. Operational Expenditure

23. Capital Expenditure

24. Capital Expenditure Continue

25. Performance

26. Size of LG equitable share

27. Free Basic Electricity