THE South African Cities Network (SACN) has published its 2020 State of Cities Finance Report, showing the difficulty faced by the country’s main cities to balance their books.
Cities are operating in a difficult environment, with continued low economic growth and rising fiscal risk, but have still grown their revenues by an average of 5.7% per year, above operating expenditure growth of 5.5%.
The report looked at nine cities: Johannesburg, Cape Town, eThekwini, Ekurhuleni, Tshwane. Nelson Mandela Bay, Buffalo City, Mangaugn and Msunduzi.
It found that municipalities are battling to generate enough revenue to keep their levels of service up, and this has been heavily exasperated by the Covid-19 pandemic. “There is simply too little money to go around,” it said.
“There are also the challenges of collecting monies on behalf of the public, as many can’t from an affordability point of view or not willing. People are also in some instances taking the procurement of services, e.g. water into their own hands which also affects collections.”
The increasing issue of raising revenue is compounded by the public’s inability – whether through willingness, which is more complex to address, or affordability – to pay for city services, as many have lost their jobs or have had household incomes cut down, and is a significant concern for cities.
“And while price increases have largely been driven by higher water charges, all services are not affordable for the poorest. As such, structuring and setting tariffs is a delicate balancing act,” said Danga Mughogho, South African Cities Network programme manager.
“Reviewing affordability is thus essential, especially for lower income households. Given this, the payment of bills by higher income customers is crucial for generating revenue, cross-subsidising vulnerable households and ensuring ongoing financial sustainability.
“Yet, a fair portion of this demographic is seeking alternative supplies, for instance electricity which is unreliable and expensive, further affecting cities’ financial collections.”
What people pay
The report looked at what residents are paying for a host of services in the country, with a particular focus in the methodology on the ability to pay, the SACN said.
The tariffs charged by the nine cities were used to estimate household bills and compared to household income, using four standard household types that are defined based on property values, electricity and water consumption, and frequency of solid waste removal.
The progressiveness of municipal bills in all nine cities was then analysed by comparing the cost of a type A (low-income household) package to a type D (high-income household) package.
The municipal bills for each city are compared to household income, using the aforementioned four standard household types. The analysis includes only households that pay tariffs and so excludes indigent households. The household types are specified based on four essential characteristics:
- Property values.
- Electricity consumption (monthly consumption in kilowatt hours, kWh).
- Water consumption (monthly consumption in kilolitres, kl).
- Frequency of solid waste removal (of a 240-litre bin).
According to the data, household incomes can be divided into three main groups:
- Income bands 0–4 (households with incomes less than R3,200 per month in 2011 rands) account for around 53% of all city households. According to the cities’ indigent policies, the majority of these households would not be liable for any municipal taxes and service charges, as long as they kept within determined consumption limits.
- Income bands 5–8 (households with incomes of R3,200–R51,200 per month in 2011 rands) account for 42% of all city households. These households are liable for rates and service charges.
- Income bands 9–11 (households with incomes of above R51,201 per month in 2011 rands) account for just 5% of all city households and can definitely afford to pay their municipal bills.
The report noted that the composition of household municipal bills is influenced by how a city designs its rates and services charges, as well as the relative prices and volumes of services consumed by households.
Cities make different strategic choices about how to balance rates and tariffs, with some cities choosing to charge higher property rates and keep tariffs lower, and others choosing the reverse.
This is a key reason why affordability is best assessed on the municipal bill as a whole: one city may appear to have very inexpensive water charges but have high property rates, whereas households experience these costs as a package through the full municipal bill, it said.
On Average, low-income households (type A) are paying around R1,425 per month for services – while high income households (type D) are paying over four times as much, at R6,119.
Electricity charges (including the basic levy) make up the largest share of municipal bills in all cities and for all package types, ranging from 47.5% (45.1% + 2.3%) for Type A to 54.7% (53.1 % + 1.6%) for Type D.
Water charges (including the basic levy) account for the second largest share, making up between 28.2% and 17% for Type A and D, respectively.
In general, property taxes are structured as a progressive tax, and their share of municipal bills increases across the package types, from 5.9% for Type A to 13.8% for Type D.
Between 2017 and 2019, the prices of all service packages increased in most cities. Water charges were the biggest contributors to the increase in the price of service packages.
Ultimately, cities can only provide affordable services within their overall financial ability. In this regard, the report suggests that cities may need to consider interventions, such as:
- Scaling back levels of service to make them more affordable;
- Increasing focus on core services;
- Avoiding unfunded or expanding mandates;
- Making better use of revenue sources than property rates and tariffs.
It also questions whether it is perhaps time for a complete review of the local government fiscal framework.
“Now is perhaps the time to reopen the discussion about a new tax instrument for cities in order to ensure continued financial sustainability,” said Mughogho.
- BusinessTech SA