1. Funding Options / Models Electricity Indaba Presenter: Marissa Moore| 16 March 2012

2. Municipal own revenues Transfers and Grants Direct transfers The whole local government fiscal framework is designed to finance municipalities 2 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 Chapter 3 Intergovernmental relations and the local government fiscal framework Indirect transfers

3. What is the current reality in municipal electricity distribution? 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 3

4. National government continues to provide significant support to LG 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 2010 to provide hands-on support to municipalities Additional support through conditional grants Targeted capacity and systems support 4 Transfers by type, 2006/07 - 2012/13

5. Key issues impacting on municipal 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 5

6. Municipalities continue to face important fiscal challenges 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 Pay attention to 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 High outstanding consumer 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 is not seen as politically sensitive, but will have a disastrous impact on the reliability of services Inadequate spending on repairs and maintenance 6 Chapter 4 Revenue and expenditure trends in local government Municipal own contribution to capital expenditure, 2006 to 2012 Municipal own contributions are now less than 50% of total capital spending

7. Scope exists to improve access to private finance Demand for capital infrastructure remains high National transfers are the major source of finance for municipal capital budgets – they 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 exists for further growth in private capital funding Lending dominated by the DBSA 7

8. Is expenditure supporting sustainable electricity service delivery? Household access to electricity improved 340 000 more households had access to electricity in 2009 than 2008 6.2% more households received free basic electricity in 2009 than 2008 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 increased from R15bn in 06/07 to R59bn in 12/13 8 Chapter 9 Electricity

9. Electricity distribution losses are increasing 9

10. Abbreviated Extract: MFMA Circular 58 – 2 of 2 Eskom price will increase by 16% on 1 July 2012. Municipalities are urged to examine cost structure of their electricity undertakings and apply to NERSA for electricity tariff increases that are cost reflective and ensure continued financial sustainability NT supports the use of the following formula, proposed by NERSA, for calculating municipal electricity tariff increases: –MTI = (B x BPI) + (S x SI) + (R x RI) + (C x CCI) + (OC x OCI), Where MTI = % Municipal Tariff Increase B = % Bulk purchases / increase S = % Salaries / increase R = % Repairs / increase C = % Capital charges / increase OC = % Other costs / increase Each municipality needs to design an IBT structure that is appropriate to its specific circumstances, and ensures an appropriate balance between low income customers and other domestic, commercial and business customers, and the financial interests of the municipality Municipal surcharge issue to be considered 10

11. Key areas to address existing challenges in electricity distribution National (policy, regulation and support) –National strategy to clarify roles and responsibilities, set norms and standards –Regulator to align efficiency and costs in line with the national strategy –Capacity support Building the requisite skills in municipalities to plan, budget, roll-out and maintain service (full value chain) –Differentiation between municipalities in which services can be supplied in a viable manner and areas where investment support is needed –Intern programme for technical capacity building Municipalities –Need for increased investment in maintenance and refurbishment of municipal electricity distribution infrastructure –Municipalities need proper electricity distribution asset registers to inform refurbishment and maintenance plan 11

12. Role of National Treasury National Treasury is undertaking budget reforms to provide for transparency in electricity budgeting and expenditure –Regulations introduced –Standard Chart of Accounts being developed Ongoing work between NT and NERSA –NERSA, in collaboration with Office of the Accountant General, to introduce standardised reporting with respect to municipal electricity function –NERSA, Eskom and SALGA to address implementation challenges wrt Inclining Block Tariffs A review of the current LG fiscal framework currently underway, which will complement reforms already introduced –LG equitable share has been reformed over last few years to direct additional resources to small and poor municipalities –Substantial increases made to LG equitable share to enable municipalities to cater for the price increases to provide Free Basic Energy to poor households Norms and standards for electricity surcharges as per Municipal Fiscal Powers and Functions Act –Regulation of municipal tariff setting and norms and standards on municipal surcharges to be aligned 12

13. Way Forward – 2 of 2 National Treasury is undertaking budget reforms to provide for transparency in electricity budgeting and expenditure –Greater understanding of revenue and expenditure –Electricity distribution leads to increased revenue, greater ability to borrow funds and leverage to improve the collection of other monies owed to the municipality Requiring skills and investment that not all municipalities have the capacity to manage –Intern programme for technical capacity building Differentiation between municipalities in which services can be supplied in a viable manner and areas where investment support is needed 13

14. , Thank You 14

15. , SUPPORTING INFORMATION 15

16. Operational Revenue 16

17. Operational Expenditure 17

18. Capital Expenditure 18

19. Capital Expenditure Continue 19

20. Performance 20

21. 21 Size of LG equitable share

22. 22 Basic Services share on LGES

23. Free Basic Electricity 23

24. INEP Connections 24

25. 25 LG Equitable Share 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 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 –Implementation challenges to be addressed

26. - Secret - 26 Funding distribution infrastructure backlogs will require additional increases in tariffs –Higher tariffs control demand for electricity Free Basic Services was announced in 2000 and Electricity Basic Services Support Tariff (EBSST) Policy was introduced in 2003 –EBSST policy prescribes that 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 Poor households cushioned by the free basic electricity policy, inclining block tariffs and solar water geyser programme Support to the poor through Free Basic Energy

27. 27 Monthly Income as cut off for Indigent Policy (DCoG data) ProvinceNumber of MunicR940R1100R1880other Western Cape30101314 Eastern Cape45161514 Northern Cape32031512 Free State252549 KwaZulu-Natal613141221 North West2501155 Gauteng140173 Mpumalanga211575 Limpopo3001635 Total2838618188