How major metros ‘profit’ off water, electricity

An analysis of the operating budgets of the country’s five largest metros reveals how reliant each are on the different types of municipal charges to households and businesses.

The metros derive somewhere between 70% and 80% of their total operating revenue from property rates as well the so-called “trading services”, namely electricity, water, wastewater/sanitation and waste management/refuse.

The bulk of the remainder comes from transfers and grants from national and provincial government for certain functions. The five metros’ operating budgets total R239 billion.

Four of the five metros generate above 20% of their revenue from property rates, but this only tells a part of the story. The size of the rates base in each city (households, factories and commercial properties) is an important factor. A smaller rates base would mean that rates would need to be higher for this to contribute the same proportion of revenue that it does in another city, for instance.

Figures are not that easy to come by, but the City of Joburg has nearly 800 000 households that are charged rates and over 46 000 commercial properties (including industrial premises).

By contrast, Cape Town, Ekurhuleni and eThekwini each have somewhere between 520 000 and 600 000 households that are charged rates and a far smaller base of commercial properties (between 15 000 and 24 000).

Together, water and sanitation have an outsized contribution to Joburg’s budget – at 22% of operating revenue. This is mostly due to how the City of Joburg charges households for sanitation (based on size of the stand). In the current year, Joburg will generate about R5.5 billion from sanitation charges.

Trading services – especially electricity and water/wastewater because of the sheer size of the revenue – are used by councils to pay for or subsidise other services.

Certain of the metros budgets explicitly state that “as a general principle, the revenues for the trading services should exceed their expenditures”.

These are not ‘profits’ in the strict sense; rather they are surpluses that are used to fund other services and capital spending.

In other words, metros cannot rely on property rates, fines and transfers alone to pay for everything but the provision of water, electricity and refuse collection. If they did, rates would be significantly higher than they are.

When it comes to electricity, the City of Cape Town runs the largest surplus as a percentage of revenue, 13.4%. But it runs barely zero surplus on water and sanitation (here, its trading budgets are practically balanced).

Ekurhuleni runs a surplus of 32.5% on its water and sanitation charges and a surplus of 35.7% on waste management.

In the current year, the City of Joburg will generate a surplus of R1.8 billion on electricity trading and R1.9 billion on water and wastewater management. However, it will run a deficit on waste management (refuse removal) of just under R1 billion this year. It notes this deficit “is cross subsidised by the property rates account”.

Aside from using these surpluses to subsidise other operating expenses, they are also used together with grants and borrowings to fund capital expenditure.