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Same old funding model can’t keep South African cities going or serve residents

SA’s municipalities are in dire straits.
Soweto residents protest over lack of electricity. Fani Mahuntsi/Gallo Images via Getty Images

Local government, neglected under apartheid in South Africa, was elevated in the 1996 constitution so as to strengthen democracy and help redress past inequities. The idea was that by making services (water, electricity, and refuse) accessible and affordable, national government would be legitimised.

But in 2021, South Africa’s municipalities are in dire straits. They are mired by service delivery failures, poor management, financial mismanagement, billing crises and power outages. The electricity cuts are due to ageing and failing infrastructure, compounded by electricity supply cuts by Eskom. The Auditor General has said that almost half of the country’s municipalities are under financial strain and are likely to get worse.

South Africa’s constitution allocates three revenue sources to municipalities to fulfil their mandate: property taxes; surpluses generated from services; and funding transfers from national government. Electricity is by far the biggest contributor among the services, and always has been. But this funding model comes with significant risks.

For my PhD, also published as a book, I traced events to gain an understanding of the evolution of this income stream and the practice that supports it. Documents from as far back as the early 1900s show that the municipal funding model remains largely unchanged. If this deeply entrenched path dependent practice isn’t understood, it will undermine necessary reform – and not for the first time. It will place further pressure on municipal finances and service delivery and ultimately erode national government legitimacy.

South Africa’s municipal funding model

Since the country was formed into a Union between the British and Afrikaners in 1910, South African municipalities have only had one true revenue source: property taxes. But this has always been insufficient, and unpopular. Thus, the British system of generating surpluses from the provision of services provided a solution for local government politicians who sought to please the electorate with greatest influence – property owners. They argued that it encouraged property development.

Municipal electricity departments, however, were vehemently against cross-subsidisation, referring to it as the relief of rates. For them it was an indirect and inequitable tax. And it created the perverse incentive to defer maintenance and capital investment to fund other projects and keep increasing electricity tariffs to fund revenue shortfalls. In short, the practice was unsustainable.

For over 20 years, the Association of Municipal Electricity Undertakings fought to terminate or cap surpluses, but finally gave up in 1945, when it became evident that national government had no intention of financing municipalities or giving them other ways to raise revenue. This entrenched the chosen path of municipal funding.

When democracy finally came to South Africa in 1994, the opportunity to change was missed. Both the outgoing and new governments agreed (for their own reasons) that local government should be strong. This approach was also supported by the mainstream economic theory that by being closer to citizens, municipalities are better placed to understand community needs.

The 1996 constitution elevated local government to a sphere of government – an equal partner with protected functions and revenue sources. Local government was allocated two exclusive revenue sources: property tax and the existing practice of relief of rates. The past, once again, decided the future.

The ink on the constitution had hardly dried before national government announced plans to reform the electricity distribution sector (municipalities and the national utility, Eskom). Key drivers of reform included attracting new investment, broadening economic ownership, increasing operational efficiencies, energy security, and stabilising prices. This would alleviate the distribution burden for smaller municipalities, with the larger ones participating in the new structure.

More than ten years and several billion rand later, the plan was shelved. This was because Eskom, local and national government could not agree on a structure, and without a constitutional change the deadlock could not be broken. National government withdrew.

During this time, municipalities continued to rely on electricity surplus revenues, but delayed capital investments while awaiting the final outcome of the reform process. And they happened to benefit from steep tariff hikes from 2007 onwards (180% in real terms by 2020), deepening the “stickiness” of the practice.

The tide turned in 2017. High tariffs, environmental imperatives of climate change, self-generation and a decade of low or no economic growth all took their toll. Stagnant revenue due to decreased demand and eroded margins meant that, by 2020, surpluses became deficits and Johannesburg’s City Power (with particularly acute mismanagement) had a R5.6 billion (US$400 million) overdraft.

History matters

Electricity surpluses may return, as they have in the past. But my research suggests that the exploitation of surpluses has finally reached its economic limits. The thorny issues raised by the Association of Municipal Electricity Undertakings almost 100 years ago remain relevant:

  • Municipal electricity tariffs include an indirect tax, making them non-cost reflective.
  • High tariffs ignore the needs of poor and large households.
  • Inflated tariffs encourage fuel switching by those who can afford it, placing the cross-subsidisation model under further strain.
  • Cross-subsidisation compromises prudent accounting practices like depreciation and redemption.
  • Electricity provision must be efficient to stimulate the economy.
  • Surpluses vary annually. Over-reliance may lead to funding problems if sales decrease.

Ultimately, a century-old, locked-in path has run out of road. Urgent reform is needed as municipal funding shortfalls cannot simply be supplemented by increasing national transfers.

From a national policy perspective, conflicting objectives must be addressed – policies that support cost-reflective tariffs on the one hand and cross-subsidisation on the other.

When it comes to service delivery, neglected infrastructure can no longer lay the proverbial golden egg. Municipalities are over-burdened and many are overwhelmed. This is made worse by their limited scope to raise revenue. New and appropriate income streams, which reflect 21st century reality, are needed – such as non-subsidised property taxes, vehicle congestion charges and city taxes. Finally, it’s questionable whether municipalities should own and operate electricity utilities.The Conversation

Theo Covary, Energy policy expert / researcher, University of Cape Town

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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What is needed is that municipalities stop miss spending money. Stop stealing money. Stop employing incompetent officials. Stop mismanaging the resources at their disposal. And stop blaming apartheid. Under apartheid all municipalities worked just fine.

Just will not happen — This is Africa !!

The only excuse not trotted out is that under apartheid services were only available to whites and now that everyone uses them they are collapsing. The problem with this argument is that the ANC has not built any new sources of services. If their excuse is valid the lack of increasing the available services guarantee that they will collapse.

Worked fine for who, Chris Stoffel? Remember apartheid municipalities excluded the majority of people. They worked for a minority. Obviously, if you continue financing services on the basis of old colonial era model it is likely to collapse under the new circumstances. I’m not sure I agree with the few proposed solutions the author suggests. We need a solution that is oriented to meeting people’s needs. I’m afraid to say, it will require more taxation and subsidisation of needs, not less.

Enough money collected. The problem is the staff . Overpaid , under skilled , partly corrupt , partly bone idle , generally useless. The usual ANC mix.

“Particularly acute mismanagement” is the only relevant phrase in this piece, since the ANC has now exceeded even the Nats in their ability to provide State-funded jobs for their dribblingly incompetent worthies. cc. Nosiviwe Mapisa-Nqakula.

Local government is ground zero of this malaise, so it is borderline fantasism to propose that the primary solution to our municipal penury is more funding instead of less stealing.

Correction: the public service and municipalities actually functioned under the Nats. I happened to work with many public officials, on a municipal and provincial level, back then, and can assure you that most of them were extremely competent and not cronies. Garbage was collected and roads were fixed.

But hey, don’t let the facts get in the way of some good old virtue-signaling on your behalf.

Rob — The “Nats” built most road, railways, harbour infrastructure, mines, dams, power stations and industry than all of the rest in Africa within 30 years.

Crucify them but acknowledge what was built and then look at what was destroyed in the last 2 decades !!!!!!!!!!!!!!!!!

Under the viscous apartheid government billions were spent in the Eastern Cape to uplift the area.
All that is left of this are the relics of what was built by them — all mostly dysfunctional.
There was no improvement under the wonderful ANC government and the area is a time capsule that stopped in 1994. All the people got was the vote and nothing else !!!

I’m a property owner and landlord. Every year the municipality hikes rates, water,sewer,electricity and refuse by double digits. This has been going on since 2003.

It’s now at the point when the rent on the property cannot pay your municipal charges.

Meantime the economy has tanked and tenants can pay only so much. They can’t fund their own water and lights unless you have a really upmarket tenant.

Every month the bill you get from the council is a crapshoot. Actual billings that aren’t, mad estimates, and my favourite, when they suddenly decide to recalculate your bill for the last 500 days.

It’s no use reporting this, accounts are never corrected. When the DA got into power they re-rated all properties with fictional values so that they could gouge owners. I’m am selling properties at less than 50% of municipal valuation.

Nor has the amount of fraud and corruption helped. The true electricity and water prices would be about a quarter of current levels when you strip out the charges for theft and incompetence.

So now what? Well, residents are just stealing water and electricity and the government will do nothing about it because these are taxpayers. It’s rife in the townships and soon it will become rife everywhere.

The government is losing its grip. Just like etolls, soon we will all pay for nothing.

And why not, because your money just gets stolen anyway.

The only thing the people needed was the vote – which they failed to use responsibly… They are the authority of thier irresponsibility.

As usual, academics see a solution in new and increased taxes.

That is like giving an alcoholic more whiskey to fix his dependency. Well, he doesn’t have enough whiskey, so give him more…

The current structure is simply a job creation scheme for ANC and DA alike. Score high enough in the party points and you too could get a comfy seat overseeing the engineering services department – whether you anything about engineering services or not. Even in a DA town, try take a basic dispute such as tariff design to the political head of engineering services. It is a joke, the man does not understand a MW from a kWh from a demand charge. He is a lawyer in a R1m council seat. If he cannot understand income tariffs, how is he supposed to run a R2billion cost center?

The whole system must change – reduce political layer by 90%

I have been in municipal management for more than 25 years. Before 1994 municipalities were regulated by one document, the Municipal Ordinance of 1974. It gave basic guidelines and the management of the municipality was left to councils creating policies and professional, well qualified officials executing the policies and managing the operations. There was a clear seperation between the role of politicians (Council) and officials (management). After 1994 municipalities were written into the Constitution and a horde of municipal laws. Politicians were “deployed” into management positions and professional qualifications were seen as barriers to “transformation”. The seperation between politicians and management was wiped aside. (I know it was still written in all the legislation, but in practice it was ignored). This resulted in poor management and failed municipalities.
There is nothing wrong with the municipal funding system. The deĺivery of services at a reasonable price still allows a town’s people the ability to look after themselves, but the political interference of incompetent “deployments” has destroyed the system. Communities looking after themselves create competence and pride, but it can only be restored if competent officials are allowed to do their work without political interference.

From my experience ( 40 Years ) you are quite right. Restore competence and remove political interference. There is nothing wrong with the law and if your property is ” overvalued” get off your backside and object! If you live in a DA controlled council count your self lucky or go and live in Umtata for a weeks holiday to experience ANC management.

The ANC requires its members to swear allegiance to the party. Loyalty to the ANC is an imperative, an essential of paramount and over-riding importance. Just like the mafia. There is also a strong and paternal feeling towards all aspects of the societies under their wing. But this only extends so far as to keep themselves in control whilst they pillage and bleed the State coffers and economy for all that it can give and then even more and more and more. There is no requirement for loyalty to the nation or to all of its citizens, nor to the fundamental principles, responsibility and duty of public service within a democratic and open system of governance. And so, the selfish imperatives of the ANC have always made it unfit for purpose as a candidate for the ruling party. If only the eyes of the majority of the electorate could be opened, or even allowed to become open.

The implosion of municipalities is written in the stars, it is built into the structure. The laws that govern municipalities contain a malignant code that feeds the bankruptcy cancer with a constant stream of redistributed rates and taxes. The financial reality of municipalities simply demonstrates, once again, the impossibility of socialism.

Socialism has two critical failures, as explained by August von Hayek, who received the Nobel Memorial Prize in Economic Sciences in 1974. It allocates resources inefficiently and incentivizes detrimental behavior patterns. Socialism has a pricing problem and an incentives problem. The central planning authority ignores affordability and cost issues when it allocates resources to benefit some groups who cannot afford it, to the detriment of others who must finance it.

This act of redistribution of wealth incentivises the beneficiaries to become ever more dependent, demanding, threatening and militant, and forces the funding party to become increasingly despondent, agitated, and racist. It motivates and rewards the slave mentality among the beneficiaries and it instills hatred and animosity among property owners. It allows and rewards criminal behavior patterns among the group in charge of the process of redistribution. It creates criminals, tears a community apart, and guarantees social unrest.

Redistribution of capital destroys social cohesion instead of building it. It consumes wealth instead of creating it. It fuels tensions within the community instead of bringing peace. It destroys the economic activity that was supposed to create jobs. It spreads poverty and decay universally and evenly.

The ANC promised to transform the rural traditional communal lands to resemble the sophisticated and developed South Africa. After 27 years they have done the opposite. They have redistributed and consumed the property, and now they have transformed the entire nation to resemble the decay and poverty in the traditional communal lands. They did not bring the Transkei to Johannesburg, they took Johannesburg to the Transkei.

The laws that govern municipalities do not consider or acknowledge the reality of the unique local social anthropology. Therefore, municipalities, as we know them, cannot survive. They have been built upon a fallacy.

Now Now Sensei : You are forgetting the Promised Super Cities and Bullet Trains on the ANC Planning Committees Tables :
I guess the Bullet Part will come to fruition.

Heard a comment somewhere: “While Japan and China uses bullet trains, in the Cape Flats it relates to ‘bullet holes in the train coaches’

I think , at heart, we all know what you are saying is absolutely correct.
The real question now is how can “we” fix the problem? if at all.
I am continually reminded that this is Africa and that policies will always be set for the masses.
The ANC is what they voted for and they now have exactly what they voted for.
For the rest of us just stay under the radar and moer on!

The solutions will be the same as in the rest of Africa.
Murder, Arson, Looting, Corruption and eventually civil war — Look North and witness the near future !!

The author seems to be advocating central government printing/borrowing money to prop up badly run municipalities that fail to get a clean audit year after year.

The legacy system is used all over the world and should work as follows:

1.The government uses its power to support an environment conducive to economic growth. This includes tossing out the rotten apples and respect for private property.
2.The municipality provides certain services and must right size its workforce to provide those services within budget.
3.Providing subsidies and free housing should not be the responsibility of the ratepayer.
4.Economic growth means more jobs and ratepayers to support municipal services expansion.

The cause of the problem is much simpler as summarised in this ‘thesis’ for the writer’s PhD.

The problem lies in the wording (and application) of the Employment Equity Act (No. 55 of 1998).

…we have “lost skills”…

As RW Johnson in his books points out, so (western) economy can survive a system where people are paid more than they’re worth / and where the incentive to upskill (to earn a higher salary) has been removed.

SA’s munis are slowly dying in function….from the far North, and will reach the far South sometime in the distant future. So long as the EE Act is applied.

Agree one thousand percent!??? EE AND BBBEE to blame, in the way they have been implemented. The concept is correct to redress past imbalances, but only the privileged, connected few get any benefit!??

Comment removed

At least things like electricity worked ne Broer !!!

Yeah, for some. And look where it got you. You forgot to price in capital and to pay for pollution. Now you have no caps city and lots of pollution and no future in your own country.

How proud you must be of the future you built for your kids. Lol.

The author neglects to mention that the main source of our municipal problems is due to the poor quality of our municipal workforce, and the extravagant salaries our cities feels compelled to pay them. For example, City of Johannesburg staff remuneration has gone up by 116% in real terms over the past 16 years. Also, our cities haven’t kept up with the times. They continue to work in a highly inefficient manner, with the justification of “job creation”. For example, in New Zealand, one guy picks up the rubbish in the morning using automated trucks. Contrast that in South Africa, where its not uncommon to see one rubbish truck having five guys on the back. This example, is replicated in various forms across the entire public sector to extent that the entire system becomes unsustainable.

116% over 16 years is like 5 percent per annum. Hardly notable. If you salary isn’t growing more than inflation, then you are getting poorer and I can understand why you are bitter.

The guy in NZ also earns a lot more than 5 times the SA manual unskilleds. That truck also costs. Talk about extravagant. Try again and work towards a congruent argument.

Aonk: clearly taking too much advantage of the currently liquor availability .
Not a single intelligible comment in about 30 . Take a break.

Please read my original comment – It says in REAL terms. This means inflation is stripped out. Johannesburg city workers are earning more than double in today’s money, despite the fact that there are potholes everywhere. It is safe to say, city residents are getting extremely poor value for money. Its impossible that municipal worker in New Zealand earns five times more than a municipal worker in SA.

The fundamental problem causing Municipal dysfunction is that – in addition to providing core services that individual ratepayers cannot themselves provide (roads, water, sewage, electricity etc) – municipalities are expected to act as a CHARITY providing expensive services to a rapidly-expanding population that CANNOT pay for these services.

Providing these services as a charitable act, is based on pure ASSUMPTION – that SOMEHOW this gift will automagically transform a primitive society into a modern, hardworking society that will eventually be able to pay its own way.

NOBODY at any political or economic level is keeping a check on – or even caring – whether the underlying assumptions driving these policies do, in fact, hold true.

The DA is every bit as wilfully blind to interrogating these assumptions as the ANC is.

The fundamental management principle that is being ignored here is that distributing Charity that does NOT include an INESCAPABLE obligation on the RECIPIENTS themselves to reduce their own problem, is a GUARANTEED recipe for GROWING the problem – NOT defeating it.

This is exactly what we see happening in every metropole – fast-growing populations of the dependent-poor with a misplaced sense of self-entitlement. And not the slightest notion of taking any self-responsibility for conscientious co-operation.

In the eyes of the poor, their problems have nothing to do with their own behaviour. They are instead the wholly innocent victims of “the privileged”, who must consequently naturally pay for “everything”.

It’s impossible to build a nation when the leaders (everywhere!) shy away from confronting baseless assumptions that undercut policy expectations.

I agree completely except for a small note. “CANNOT” pay is often an excuse for “won’t pay”. Everyone should pay something, across the board. The total rates holidays given to those with properties of lower value etc etc are just voter bait and should be done away with. As if…….

This isn’t a money problem.

A simple and cost effective way to rescue the municipalities.

The problem is management: Pre 94 all the city and town counsellor positions were honorary, i.e. unpaid.

It attracted a good class of citizen that had life, business and professional experience and they put the interests of the town before their own.

The money saved on salaries can be applied for service delivery, especially in the smaller towns.

End of comments.

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