1. REVENUE MANAGEMENT MASTER CLASS
20 November 2018

2. BACKGROUND
Municipalities have a mandate to provide services to communities.
For sustainability, they should collect revenue from the services.
Due to problems faced by municipalities in revenue management and credit control, research and interventions have increased.
SALGA study undertook a comprehensive diagnosis of debt situation in several poorly performing municipalities
Breakdown of processes in revenue management value chain
Challenges around institutional configuration of local government system
Inability to cut electricity for debt owing on other services in Eskom areas
Districts do not have electricity function
Many rural municipalities only collect refuse or property rates
Legal process on recourse
Capacity issues in smaller rural municipalities

3. PROBLEMS UNPACKED
There is growing evidence / suggestions that the LGES is inadequate for LG to meet its mandate
Current structure of LG based on a set of expectation and revenue raising assumptions
A number of problems / issues with the assumptions of the White Paper
Revenue model to realistically support the expectations on LG
The financial and fiscal repercussions of Eskom’s role in EDI on local government
How does Eskom’s participation in the EDI affect LG revenue?
Consumer remains a challenge threatening the financial position of LG.
Since 2004, debt owed to municipalities increased progressively, amounting to over R143.2 billion in at end of June 2018 (National Treasury, 2018).
Electricity sales revenue reportedly decreasing over the past three years
Some deliver services at losses and are unable to meet their credit obligation for bulk purchases.

4. RESEARCH QUESTIONS
What are the Financial and Fiscal repercussions of Eskom’s Role in the Electricity Distribution Industry on Local Government?
How does ESKOM’s participation in the EDI really affect LG revenue and financial standing
What is the spatial distinction ito Municipal and Eskom distribution areas
Why are some municipalities unable to obtain electricity distribution licences
What is the tariff revenue and surcharges forgone to LG owing to ESKOM distributing in some areas (EDA)
Can we quantify the non-electricity municipal debt owed to LG in municipal distribution areas versus EDA

5. RESEARCH QUESTIONS
Is the LGES adequate for LG to meet its developmental mandate
What is the reality of municipalities’ ability to raise their own revenue?
What are the main constraints that they face in this respect?
How has the relationship between municipal income and municipal expenditure progressed over the past ten years, and what are the main drivers in this respect?
What is the actual cost of providing free basic services, and how does this relate to numbers of indigent households and thus to available municipal resources?
What are the key constraints that municipalities face in utilizing conditional grant funding?
How do we address the issue of ‘differentiation’, both in respect of the horizontal allocation of the LGES and the challenges of under-spending and the misallocation of funds?
What are the implications of all these findings for the current LGES system, including the vertical division of revenue and the equitable share versus conditional grant split?

6. RESEARCH QUESTIONS
What is the Feasibility of Implementing a District Collection Agency in South Africa?
What are the practical and operational implications
What are the legal and administrative implications
What are some of the considerations or alternatives to LG?
Is there an appetite / rationale for centralising the revenue management and credit control system with the establishment of a district revenue collection agency in SA?.

7. PRELIMINARY FINDINGS (LGES)
Most importantly, there are a number of problems/issues with the revenue raising assumptions in the LG White Paper:
The statement around LG being able to fund 90% of recurrent expenditure from own revenue was not based in any fact, and has never been true
The White Paper acknowledged that significant additional funds would be required (even if it seriously under-estimated the quantum of the gap) and envisaged a range of innovative funding mechanisms, most of which are not possible, particularly for smaller municipalities
The White Paper insisted that municipalities would retain the right to use electricity disconnections as a credit control measure –this never happened.
The dynamics of the electricity market have changed considerably since 1998
What does all this mean for the current model? The WP and subsequent research indicate that the model always intended there to be a funding “gap” filled by the equitable share, but did it envisage such a large gap?

8. PRELIMINARY FINDINGS (EDI)
Gauteng Province analysed as it accounts for the quarter of the electricity sales country wide
Significant data gaps in terms of Data
No spatial distribution data, StatsSA data will be used
Firm data available at aggregated level
There is no Eskom data by province / municipality
Questionnaire to be developed to fill the data gaps
Non electricity municipal debt amounts to almost R4 billion
LG losing an estimated R1.8 billion worth of surcharges

9. PRELIMINARY FINDINGS (DCA)
Section 87 of Municipal Systems Act allows for the establishment of such an entities
Need to conform to national legislation of function
Political and Geographical Feasibility
Council will likely be required to take a decision on establishment
Conventional engagement processes and consultations to obtain by-in
Can be political feasible, at district level
Institutional and administrative capacity already exists
Legally demarcated entities
Analysis of economies of scale at district level, particularly rural municipalities
Financial Feasibility Questionable
No one-size-fits-all for the revenue model
Municipal analysis is required to determine appropriate funding model
Municipalities can amalgamate billing and credit control divisions to the entity
All related systems can be assigned to the entity

10. PRELIMINARY FINDINGS (DCA)
Resource Feasibility also Questionable
Proposal to amalgamate all revenue departments
In terms of personnel and existing systems
Such skills and capacity already exists and can be improved on
Likely to be a considerable initial investment related to establishing of the DCA
Although savings in the long run there are likely to be large initial costs and capacity requirements
Capacity constraints already exist at this level

11. DISCUSSIONS & CONSIDEARATIONS FOR SALGA
THANK YOU
DISCUSSIONS & CONSIDEARATIONS FOR SALGA