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Municipal funding and electricity distribution running on empty

By Theo Covary, author of Running to Stand Still: Politics and Path Dependency in South Africa’s Municipal Electricity Sector

South Africa’s municipalities are in dire straits – mired by service delivery failures, poor management, financial mismanagement, billing crises and power outages due to ageing and failing infrastructure, compounded by Eskom loadshedding.  

It is hardly the post-apartheid developmental role municipalities were meant to fulfil in addressing inequities of the past; with the Auditor General (2021) concluding that nationwide almost half are under financial strain [1] and likely to get worse. In this, a major municipal revenue source that is in decline is the surplus generated from services, primarily electricity.

The evolution of this income stream, and the practice that supports it, were traced through historical documents, dating back to the genesis of municipal electricity operations. The findings have identified a deeply entrenched path-dependent trajectory, which if not fully understood, is likely to undermine sector reform, and not for the first time.

It all began with the retention of many British political structures when South Africa became a unitary state in 1910. Amongst these were local municipal elections. To start, only white males who were property owners were eligible to vote. Moreover, all surpluses from the sale of municipal services were used to fund municipal functions (relief of rates) – effectively subsiding property taxes.

Local politicians retained this practice even when the vote was extended to all (white and female) residents, on the premise that it encouraged property development. Municipal electricity departments, however, were vehemently against it, correctly viewing it as an indirect and inequitable tax, which would threaten the long-term operational sustainability. They pointed out that England expressly limited surpluses (1926), and finally abolished them in 1948. 

For over 20 years, the association of municipal electricity undertakings (AMEU) fought tirelessly to terminate or cap surpluses – finally giving up in 1945, when it became evident that the national government had no intention of financing municipalities or giving them alternative revenue-raising mechanisms. This effectively entrenched the chosen path of municipal funding; whereby in Johannesburg for example, net surpluses from electricity sales (1991 to 1994) funded 34% of all its municipal functions, with the balance coming from property taxes.

In the run-up to the first democratic elections (1994), the minority white government, knowing that it would lose the national election, insisted on a strong local government to protect concentrated areas of its electorate. Albeit for different reasons, this aligned with the African National Congress’ Reconstruction and Development Programme, which envisaged developmental local government [2] [3] to undertake vital service delivery.

This approach was also supported by mainstream economic theory, which postulated that by being closer to citizens, municipalities are better placed to understand community needs; and, in theory, can be more readily held accountable by voters.

Thus, local government was elevated to a sphere of government in the 1996 Constitution, alongside national and provincial. Parity, however, requires financial independence, because national transfers often come with conditions. And therein lies the rub. Central authorities are loath to share their tax-raising instruments, for legitimate reasons: overtaxing; tax exporting; centralised collection; perceptions of double taxation; or macroeconomic stability.

The 1996 Constitution addressed this by allocating two exclusive revenue sources to local government: property tax and the existing practice of generating surpluses from the provision of services. Municipalities are also guaranteed a share of national collections. This resulted in two outcomes. Firstly, the relief of rates was further embedded, and secondly, municipalities have only one true tax instrument (property). The past, once again, decided our future.  

The ink on the Constitution had hardly dried before national government announced plans to reform the electricity distribution sector (municipalities and Eskom) under the Regional Electricity Distributors (REDs) programme. More than ten years and several billion Rand later, REDs was shelved; with Eskom, local and national government unable to agree on a structure, and national government powerless to force it through without a constitutional change. Needed reform thus failed, because path dependency was too strong.

During this time, municipalities continued to rely on electricity surplus revenues, but delayed capital investments while awaiting an outcome. Moreover, they benefitted from steep tariff hikes, 2007 onwards (180% in real terms by 2020 [4]). Again, in Johannesburg, City Power generated large surpluses, despite losses (technical and non-technical) rocketing from 11-14% (2002 to 2011) to 28-34% (2012 to 2016) – as illustrated below.

City Power Bulk Purchases and Electricity Revenue (2002 – 2015) 
Electricity Purchased versus Delivered, Johannesburg (2007 – 2015)

The tide turned in 2017. High tariffs, environmental imperatives, self-generation, energy security, and a flat economy, all took their toll. By 2020, margins had eroded, surpluses became deficits and City Power had a R5.6 billion overdraft; but may bounce back, as it has in the past.

Nonetheless, the research suggests that exploitation of surpluses has finally reached its economic limits and neglected infrastructure can no longer lay the proverbial golden egg. Urgent reform is needed, as municipal funding shortfalls cannot simply be supplemented by increasing national transfers. The thorny issues raised almost 100 years ago, remain relevant:

  • Electricity tariffs are not cost reflective. Additional charges must be reflected as a tax
  • High tariffs ignore the needs of poor and large households (regressive tax)
  • Inflated tariffs raise the likelihood of reduced sales and fuel switching
  • The practise compromises prudent accounting practises (depreciation, redemption) – leading to deterioration of systems, as surpluses are prioritised for relief of rates
  • Electricity provision must be efficient to stimulate the economy
  • Surpluses vary annually. Overreliance may lead to funding problems if sales decrease

Ultimately, a century-old, locked-in path has run out of road.

Running to Stand Still: Politics and Path Dependency in South Africa’s Municipal Electricity Sector is available on Amazon

[1] Auditor-Generation South Africa, page 2
[2] Powell 2012, page 14
[3] De Jure (Pretoria) vol.50 n.2 Pretoria, 2017
[4] Eskom electricity prices – 1994 to 2020, Hanno Labuschagne17 August 2020

Now read this:
Signed amended Schedule 2 issued by Minister Mantashe

Guest Contributor
The views expressed in this article by the author are not necessarily those of the publishers and/or association partners. While every effort is made to ensure accuracy, the publisher and editors cannot be held responsible for any inaccurate information supplied and/or published.