Confirmation that municipalities are a huge burden on taxpayers

They should be run as sustainable businesses.
The biggest problem in municipalities is that large quantities of water and electricity seem to disappear. Image: Suzanne Plunkett, Bloomberg

Imagine a retail chain with nearly 300 outlets, supplying essential services to a captive market, with guaranteed price increases every year. In addition it has no competition, as other businesses are mostly prevented by legislation from supplying any of its products or services.

On top of this, everybody within the target market pays a monthly fee just for being there.

It sounds unbelievable, and it is even more unbelievable to learn that this particular retailer is struggling to survive. Taxpayers are forced to support the enterprise to the tune of 40% of its annual turnover.

Billion-rand business

The business of selling water, electricity, refuse removal, sewerage services and car licences to people – also known as municipalities – is a huge industry, with revenues of nearly R400 billion in the year to September 2019.

The R400 billion figure can be calculated from the latest Statistics SA report on the quarterly financial statistics of municipalities, published in December. The report contains the latest aggregate quarterly figures for all municipalities in South Africa for September 2019, as well as figures for previous quarters going back long enough to identify interesting trends.

The supply of electricity, water and other services to consumers could be seen as a retail business.

Municipalities buy large quantities of products and sell them to consumers at higher prices in smaller quantities in exactly the same way a big supermarket does.

They produce services such as refuse removal, renting out of halls, collecting stray cattle and horses, and issue invoices, not unlike companies that repair broken swimming pool pumps or install new carpets.

Perspective

Looking at the Stats SA report as though municipalities are businesses puts a different perspective on the numbers and highlights a few problems with this ‘retailer’. 

  • The biggest problem is that large quantities of the two main products – electricity and water – seem to disappear.
  • A second problem is that too much electricity and water, as well as other products and services, are given away for free.
  • A third problem is that consumers are reluctant to pay.

Another serious concern is that operating costs and wastage are astronomical.

Read: The problem of failing municipalities

The Stats SA report shows that municipalities generate a big proportion of their revenue from the sale of electricity to residents and businesses. In the 12 months to September 2019, electricity sales amounted to nearly R108 billion, equal to 27% of municipalities’ total revenue.

Bulk purchases of electricity amounted to just less than R87 billion, indicating that municipalities made a gross profit of more than R20 billion from the sale of electricity.

Unfortunately, neither the Stats SA report nor similar figures kept by National Treasury show municipalities’ costs directly associated with the sale of electricity, such as distribution, salaries and maintenance of electricity networks.

However, the gross profit margin of 24% on electricity sales is probably way too low to ensure sustainability for the electricity department of municipalities overall. It is also noticeable that profit margins have declined over time, from a gross margin of 34% in 2009.

Lucrative

Selling water is a much more lucrative business, with the figures showing that the gross profit is much higher at 41%, but also lower than the 45% achieved ten years ago. Water revenue is much smaller at less than R38 billion and contributes less than 10% to total revenue, according to the Stats SA figures.

But water earned municipalities nearly as much profit as electricity, probably due to the fact that most municipalities price water on a sliding scale that charges bigger (and presumably richer) users higher prices. The figures suggest that gross profit from water sales in the 12 months to September amounted to R16 billion. The contribution from other services is way smaller.

In short, municipalities survive on property taxes and government grants.

Government grants to municipalities exceed revenue from electricity sales and amounted to nearly R110 billion in the 12 months to September. Property taxes increased to nearly R46 billion in the last year.

Together, tax on residents within the borders of the city or town and tax collected by government and passed on to municipalities, amount to 40% of municipalities’ total revenue.

Source of municipal revenue, year to September 2019

  Rm %
Grants    
National government 86 410  
Provincial government 2 006  
Conditional grants 21 363  
Total grants 109 779 28%
Electricity sales 107 923 27%
Property rates 46 919 12%
Water sales 38 639 10%
Refuse removal and sewerage 27 625 7%
Other 64 645 16%
Total 395 530 100%

Source: Compiled from Stats SA’s quarterly financial statistics for municipalities

Other revenue comprises other service charges such as vehicle licences and rent paid for the use of municipal property and equipment.

Two of the interesting large revenue sources include the income from the imposition of fines (R4.6 billion in total) and interest on outstanding accounts (R8.2 billion). The latter exceeds interest earned on investments (R5.2 billion).

Read: How VBS looted municipalities

The bulk of the revenue is used for salaries and wages. While the Stats SA analysis shows that municipalities spent around R106 billion – nearly 30% of total expenditure – on employee remuneration, one can argue that the number is much higher and needs to include other work-related expenses, such as contractors fixing roads and pipes, councillors who are also effectively employed and consultants who sell their skills and time to municipalities.

Thus the bill for remuneration balloons to R145 billion, equal to 40% of total expenses and 37% of total revenue.

Elected councillors were paid R4.6 billion in aggregate in the 12 months to September, while contractors got R32 billion and consultants scored more than R2 billion.

Top expenditure items by municipalities, year to September 2019

  Rm %
Employee cost 106 021 30%
Electricity purchases 81 577 23%
Other expenses 34 186 10%
Contractors 32 413 9%
Water purchases 22 655 6%
Depreciation 22 441 6%
Bad debt written off 16 591 5%
Interest paid 9 240 3%
Repairs and maintenance 5 705 2%
Councillors’ salaries 4 187 1%
Consultancy fees 2 448 1%
Plant hire 2 241 1%
Security 2 073 1%
Fuel 1 873 1%

Source: Compiled from Stats SA’s quarterly financial statistics for municipalities

It is interesting that one of the biggest expenses for municipalities is the continual writing off of bad debt, akin to giving services away for free, in addition to the formal policies that bring relief to poorer households.

Bad debt of R16.6 billion was written off by municipalities in the 12-month period.

Read: Failing cities stymie South African bid to revive growth

Anybody can get an idea of the implication of the financial state of municipalities by looking at any single municipality.

Sol Plaatje

A look at the Sol Plaatje Municipality shows the fragile state of its finances and its inefficient financial management. President Cyril Ramaphosa visited Kimberley recently and had to listen to residents complain.

The latest annual report available on its website, an incomplete draft for the year to June 2018, lists as one of the biggest problems the huge losses of water and electricity.

“The material losses reported in the 2016/17 financial year for water and electricity losses remain a concern. Action plans have been developed in the current year and significant progress was made in term of the electricity losses – a decrease from 24.1% in 2016/17 to 13.24% in 2017/18 was reported.

“The water losses reported, however, still exceed 50%,” according to the annual report.

It further noted that the collection rate of service levies was only 73%, meaning that nearly 30% of outstanding accounts were not paid. This is in addition to the 13 700 households from a total of 71 000 that each receive six kilolitres of free water and 50 kilowatt hours of free electricity per month.

Selling power at a loss

The annual report discloses the purchase and sales of electricity and the electricity department’s costs. The figures show that the municipality suffered a loss of R20 million from its electricity ‘business’, while capital expenditure in the department amounted to R25 million.

The municipality’s financial report shows that its total spend on employees and councillors of R676 million amounted to 37% of its revenue in the year to June 2018, above the average of 30% for all the municipalities in SA. It was the biggest single cost item at Sol Plaatje.

Less than 9% of the budget was spent on maintenance of infrastructure such as roads and water pipes, leading to the complaints by residents to visiting politicians.

The Auditor-General (AG) indicated that the problems with its financial management might be worse and issued a qualified audit opinion on the financial statements as “the municipality did not recognise all service charges accurately”.

“As the municipality did not maintain adequate and complete records of services rendered, I was unable to determine the full extent of the understatement of service charges,” concluded the AG. He also could not verify the municipality’s estimate that 50% of water is lost due to inadequate record-keeping.

Treasury summarises the financial data of all municipalities in hundreds of tables in its database, each telling basically the same story of financial deterioration.

An analysis of it all would probably  conclude that years of inadequate maintenance of physical infrastructure, consumer accounts, valuation rolls or financial records directly causes any municipality’s financial problems.

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Not forgetting that for the best part the Councillor’s and petty officials forget that in the true sense each and every resident / ratepayer comprises the “municipality” but see fit to treat them with irritation, contempt and nothing more than a bloody nuisance disrupting their feeding frenzy.

What else would you expect from the ANC? Just like the rest of Africa. Moving back to the stone age.

One important expenditure item that was omitted from the list above is the cost of the KFC take aways……

The argument about the ANC this, the ANC that is boring… The truth of the matter is there are over 50 million South Africans and the ANC only has just over 1 Million members. So how do they wield so much power? Why do so many blacks vote for the ANC, especially at national level?… its because there is no viable alternative. for 48 years we knew an oppressive regime. In 1994 we tasted an inclusive regime which systematically is being destroyed and eventually will collapse, but the fact of the matter is without a credible alternative non-whites, blacks in particular will vote ANC no matter what party they are members of…

Ag rubbish Boombang.There are plenty of other alternatives but the victim and entitlement mentality remains prevalent in Africa so it is a failed place. The voters choose poverty and corruption and blame the whites and apartheid and colonialism except themselves.. Maybe you should move to Zim for an alternative.

Boombang, I truly wish that ANC voters would open their eyes to the facts. Firstly, the previous ANC regime under Zuma and his henchmen has – to put it bluntly – utterly robbed the poor and destroyed South Africa. Yet the poor still don’t yet seem to realise it. In addition, a number of those involved in State capture are still in high places in the ANC. If continually elected to power, they will absolutely without doubt destroy SA for the sake of their own pockets.
What is now needed is not racist appointments, but the placing of people of merit in power – those who are qualified to do a proper job. If this includes Whites, then so be it. De Ruyter was selected from 147 original applicants by a multi-racial selection committee. Whether he can sort out the mess that is Eskom remains to be seen, but he was selected on the basis of merit.
We could be such a great country if voters stopped looking backwards all the time at ‘oppressive regimes’ and instead voted competent people of whatever colour into governance. Can we not learn an object lesson from Zimbabwe? If not, we are doomed to failure.

Well then they will get the government they deserve. Pity about the rest of us along for downhill ride. Stupid is as stupid does to quote Forrest Gump. If you gonna be stupid, you better be tough, maybe John Wayne.

Boombang has a point on alternative political parties but forgets to mention that the benefits handed out to those in the millions are also reminded it will end if the ANC loses control of national government

What is so “Boring” is reading of the “mould & rot” that is eroding the infrastructure and social fabric of the country and there is no apparent conscience on the part of the ANC cadres

They kill each other for the opportunity to serve as public servants.

Scum of the earth.

Bwhahaha, to “serve” as civil servant.
Too often it is to loaf or to loot as civil “servant”. To few are worth their massively inflated salaries.

Ok so -In this Apartheid free SA we do the following:

A. Pay our taxes,
B. Pay our rates and taxes
C. Pay sales tax.

Now all the services that are supposed to come with the above does not happen so we pay for:

1. Schooling at private schools
2. Full university costs.
3. Private healthcare costs.
4. Private armed response

The above has become de rigeur for those citizens that wanted to live the resemblance of an ordinary life.

Now recently:

1. Pay for solar and inverters so we can have some power.
3. Invest in Jojo tanks so we can flush our toilets
4. Keep 200l drinking water from the retailers for drinking water.
5. Fill the potholes in our streets
6. Having to store our rubbish when the werkers strike (we cannot reach the dumps in normal 4×4 vehicles due to poor roads)

What the FARK??????

We that do this need a effing good reason to continue to live here !! Not all the threats op property conviscation, NHI or gunlaws etc

Mauritius looks ever more inviting !!

1. Schooling at private schools
2. Full university costs.
3. Private healthcare costs.
4. Private armed response

This was always the case.. point 4.. not really, but then if you weren’t white you relied on post fact reporting as is the case now with police. Point 3, always relied on state too..

So yah.. that’s pretty much not changed. Quality of such services has changed as their mandate and service area has been extended but then if you wealthy, you can do the above.

With regard to your new list..Uhm again wow u must be affluent, because 1 & 3 is not something most people do. 4.. this was always done especially if you grew up in Cpt as droughts are periodic.. nothing new. 5… Cpt doesn’t really get much potholes so dunno about post 94, but they go thru phases of activeness..
6. Refuse removal workers always went on periodic strike.. nothing special about that either, knowing where to drop off refuse and garden refuse always helped.

So yah.. unless you were privileged prior and post.. for most, things aren’t as dire or bad as it seems but hey, live in your bubble of reinforced ideas and you won’t know this.

I’m not saying it’s all daisies tho.. just that not as bleak as people love making it out to be. Seems this is the new sport people play.

You miss the point. The willing payers are diminishing!!

Dear Sir -Maybe you should move to the free workers paradise of Zim to see how “nothing has changed ” and “bleak” look. Will open your eyes.

Fix your chip.

The golden goose has been cooked. In a world of open markets capital and skill will move to an alternative. Those who remain will unlikely be able or willing to pay for corruption and zero service delivery. The small minority of rich will become richer and the rest will eke out an existence while the middle class dissappears.

I disagree. Municipalities are not businesses trying to make profits but they should be run as sustainable entities.
What we have in SA is unsustainable wages and politically inspired practices of non payments by large swathes of the citizens making it unsustainable.
Then there is the corruption wastage and looting. These topple the budgets every year and the debts are not recoverable.

“Bulk purchases of electricity amounted to just less that R87 billion, indicating that municipalities made a gross profit of more than R20 billion from the sale of electricity.”

In the past municipalities made a cost recovery on electricity.

What is possible justification for a mark up on Eskom electricity is that the municipality has to provide and service a substantial grid. I would say these costs should be recovered from the electricity tariff to residents. But all of this is theoretical as the ANC regime has deliberately destroyed the core of a municipality which should be run by the residents for the residents. They have done this deliberately for self interest.

The article describes a moment in time, but it is the trend over time that tells the story. Municipalities, like all SOE’s, and like the state itself, are in a death-spiral, or a race to the cliff.

The rising cost of electricity, water and municipal services are unsustainable. The amount of “equitable share” households are increasing exponentially. Even the small municipalities in rural areas have more than 4000 equitable share households. These households pay nothing because they cannot afford anything. Then, many can pay but don’t pay.

The resident’s house is collateral for the debt he owes to the municipality. It won’t be long before the municipality owns 90% of the property in all the wards. This is a slow expropriation of property, municipalities are vehicles for communalism, or shared property and resources, like in the rural homelands.

The ANC is taking us on a round trip over 25 years, out of the homelands, for a quick tour through civilization and property rights, and back to the degradation and decay of the homelands.

All the different forms of taxes are cannibalising each other. The redistributive municipal rates and taxes regime puts pressure on the value of properties, lowering VAT, CGT and estate duties when the owner dies. It increases cost for businesses, leading to lower profitability, disinvestment, unemployment and an implosion of tax revenue for the state.

Local government is cannibalising the central government, who cannibalises the nett worth of citizens. This policy of redistributive rates and taxes will redistribute value until the value is depleted, and value is the basis of taxes.

No wonder the ANC wanted the unicity, so that there was the possibility of perpetual cross subsisation.

@Sensei. I agree. It’s one huge “redistribution of wealth” exercise. Taxpayers funding the mostly inept, the latter not doing their work properly, which they get paid for.

Well said Sensei as usual and I think it is worth noting that many, many municipal residents are condemned to poverty as they run two households, one in a rural area and one in “town”, often with families at both. This is not sustainable even.

This is what happens when you put teachers, health workers and cleaners in charge of multi million rand businesses.

I long ago as the rural rate payers chairman went to congratulate the newly elected major and MM in Molteno. They were having a great giggle about being in government. I reminded them they are now the chairman and MD of a huge business, supplying services and invoicing for them and collecting the money and paying their suppliers. I was met with silence, They had NO idea.

The next thing that happens is that the newly appointed Financial Manager will be approached by an IT firm with a new billing system. Now he/she is probably a grade 2 teacher and this is the most powerful position they have ever held. A little persuasion and bingo there is a new system in place. All data is lost and years are spent catching up.
Believe me people there are lots who have never in their lives paid municipal rates because they exploit this system, data is gone they adamantly insist they are up to date, shove a few badly printed deposit slips under a clerks nose and their account is zeroed. I have seen it.

The municipalities are nothing more than bloated government that is non productive and feeds off of the productive . Sheltered employment for the non productive is not empowering , itself s in fact disempowering. These people will never learn to stand on their own feet and be self sustainable. Why is it that government wants to disempower their people ? Why is it that government puts in blocks to stop people from being productive . ….. is it to keep them dependent on them forever?? In other words socialism ??
Socialism never works over time , it always fails !! Is this what we are seeing now?

This country was run 1000% better by the previous government, everything worked, we had cheap electricity, ESKOM functioned, the municipalities were ran properly, SOE’s were in a good financial position. Then came the ANC, today the country is in a mess.

This may be sad and true but saddest of all is that the ANC regime (really just the ruling elite) do not care one jot. Their mission has nothing to do with running the country at all, let alone well. Their mission is pure venal self enrichment.

The other sad note, pointed out quite often here is that this elite also do not have to worry about the taxpayer or responsible citizen at all. Their constituent base is most of the government and SOE employees who are dependent upon ANC largess for their jobs and then the recipients of government grants who are told they will disappear if say the DA comes into power. This group is increasing in number while the whining taxpayers are, I would guess, getting fewer. Good luck SA.

Every layer of GOV is a burden whether national, provincial, local or the SOE’s, The main reason is the looting taking place; the fact that a large majority of the ANC support dont pay and that their share is written off as bad debt! At the end this amount is therefore being paid by the law-abiding taxpayers. The employee costs is further proof of the cadre deployment of which a very large number neither have the capacity, nor the capability or the attitude and bahavior to ensure that taxpayer funds are used to add value and to create growth on all level. The past 25 years showed that there is a serious lag of managerial capacity and conduct that neither maintain or safeguard that assets that belong to the taxpayers. Therefore, it make sense that foreign investors will rather not invest in the SA because beside the capital funding value being diluted the possibility of good returns are just not there

Anybody thinking that SA will not end like Zimbabwe also believes in Santa Clause.

….thank goodness this Ship SA is sinking slowly. The final domino. But once sunk, it will never rise again.

What more can be said about RSA Inc. that already hasn’t been said? There are so many valid comments here below. Those that can see the horrific car wreck in slow motion as is the case of that which is unfolding here in RSA. All this endless debate of how far we have slipped, however true and sincere, amounts to passing water into the wind. It inevitably blows back into the tax payer’s face. I see there are still a couple of comments here and there where people say, “it’s really not that bad you know”. Delusion is bad; self-delusion is dangerous and toxic. I hold no more hope for any sort of recovery for our country; whether financial or moral. The bloated fat cats of the ruling class have put paid to that. RSA is nearly comatose and no amount of political pontificating or backward/further divisive rhetoric will revive or save her. The pie is getting smaller and smaller, yet those who are at the table are getting more and more in number and avarice. 2020 will in all likelihood be the beginning of our end – you do not have to be a political analyst or economist to see the rising wave of the tsunami coming our way. The numbers for basically all that is RSA is stacked so very heavily against us; what we need now is nothing less than a miracle?

Those “wasteful & fruitless” expenditure frequently popping up in audit reports….are simply a “redistribution of wealth” exercise bar none. Into perpetuity. It does not disappear….it goes into pockets of salaried workers & their corrupt leadership!

Throwing good money at poorly skilled employees, with many not happy to do their jobs diligently. While those at the top look after themselves & their cadres.

The same thread goes through the whole of SA….be it national govt, to SOE’s and down to munis. Same cANCer. (to an extent private sector as well…the cost just get passed to consumer)

The biggest flaw of our municipalities is that they think the money they collect from the residents for services and legislated charges is for their salaries… That is why when there is a strike they will always qoute the revenue collected.

The company INCA (www.inca.co.za/) will confirm that over 95% of SA’s municipalities are un-bankable. So if all municipalities make up a province and provinces make up a nation, the engen of the economy is failing.

Dunno where Stats SA get there figures from. Even the supposedly best run municipality in SA emphatically deny making a profit from water and electricity. Who is lying?

The problem is that less water and electricity is sold to the end user(us). Due to load shedding and drought. But the infrastructure remains the same and needs to be maintained. Now the municipality adds levies to get more money to maintain infrastructure.
I don’t know whether this is right or wrong. But infrastructure must be maintained? It is what it is?

another term that became a very common one is currently: “the municipality or whatever government entity was put under administration” as if this will save it

To date never heard of any entity under administration that was restored / saved / or back into its normal operation and not under “administration” anymore.

Also never heard of anybody who was in charged of or other guilty party of an entity that was put under administration, that was brought to book and surely as employees they are still earning a salary from this self messed up entity.

In my opinion….Municipalities are also a wonderful opportunity to plunder – ask Dave King…he knows all about it!

A solution for municipalities:

Pre-94 city and town council positions were unpaid. That attracted councilors with life and business experience that put the needs of the community first. It functioned well.

The money saved on salaries (R4.6bn) can be used for better service delivery.

The facts and comments stated by the author is common knowledge in the civilized and competent business industry and a model for success and economic growth but an absolute non understandable concept for the thousands of political socialistic cadre deployments of the ANC in our municipalities. As long as the incompetent municipalities are not liquidated,closed down and restarted in context of such a civilized and competent business model tax paying residents will carry the burden forever.

Nothing will be done, this is the grass routes of the patronage and corruption network.

Having munics sell electricity also does not make sense as they are not buying from a competitive wholesale market, they are basically adding on another margin onto an already state owned wholesale supplier.

A munic should be a handful of people with strong systems in place to facilitate and everything else outsourced to private with no corruption. You will definitely find good people who can do maintenance and even capex projects through PPPs and service agreements.

Instead we have dozens of people, very few of which known what they are doing and even fewer who don’t skim off the top, then we wonder why 90% of them are close to bankruptcy.

ANC gov are basically not a sustainable government.

End of comments.

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