LUNGILE MASHELE: SA municipality model needs to change

The SA municipal model is broken. The future of municipalities is precarious at best and defunct at worst. According to Stats SA, municipalities derive revenue primarily from electricity sales (26%), followed by subsidies and transfers from the government (23%) and then property rates (18%).

My biggest concern is the electricity sales. Municipalities buy electricity from Eskom and on-sell it to their customers. Electricity revenue as a percentage of municipal revenue can be as high as 50%.

When comparing the first half of 2022 with the same period in 2023, these municipalities experienced a decline in electricity sales: Tshwane (by 2.5%), Johannesburg (10.3%) and Nelson Mandela Bay (14.5%). This directly affects their ability to provide free basic services for the indigent, clinic services, roads and public transport.

The existing municipal model is based on the social compact — cross-subsidisation between residents to counter glaring inequality. Over a decade ago municipalities were warned that this model was at risk, primarily because Eskom would be experiencing a “utility death spiral”. A few engagements were arranged by the SA Local Government Association, but it seems not much materialised.

Municipalities now have to deal with electricity market liberalisation, which brings with it wheeling of electricity and energy trading between large customers, resulting in a loss of revenue, increasing electricity tariffs and load-shedding. This in turn results in an increase in “prosumers” — individuals who both consume and produce — and dilapidated and outdated electricity infrastructure.

SA also has extensive internal migration — Gauteng welcomes 24,000 new people every month — and electricity and cable theft are rife (the City of Johannesburg put the cost at R11m a day). Finally, there is rising municipal debt — municipalities may owe Eskom R63bn, but R305bn is owed to municipalities.

With increased load-shedding, sometimes up to 12 hours a day, many customers have been forced to seek alternatives. This includes solar PV, batteries, inverters and diesel-based generators. In addition, large customers have opted for gas, biofuels, hydro and coal.

The rise of the prosumer is certainly not shocking and was anticipated by municipalities, but their exponential growth can be linked to the challenges at Eskom over the past three years. This has had a negative effect on municipalities and their ability to collect revenue primarily from larger and wealthier customers.

This may be a prudent time to mention that electricity prosumers will be replicated in the water sector, as more customers respond to extended periods of water unavailability with boreholes and tanks.

Where does that leave the future of municipalities? To increase revenue they could request higher transfers from the government in the form of grants and subsidies, though this is doubtful given the government’s proclivity for austerity. Municipalities could increase their service charges, but these are mostly regulated for the consumer’s benefit.

This presents a conundrum given that the constitution requires national and provincial government to step in and assist municipalities when they fail. Reducing expenditure may be contentious and politically unwise, which leaves municipalities with limited options.

A growing theme to the municipal conundrum has been municipalities considering securing their own sources of electricity to reduce their debt burden and provide reliable supplies. For instance, Mafube municipality is managed by Rural Maintenance, a distributor that initially managed the distribution of electricity and billing but now has a solar PV plant.

Tshwane is considering a 40-year concession to run its Rooiwal power plant, which is aimed at reducing electricity payments to Eskom, which now total about R11.3bn a year. Cape Town has piloted a trading model to on-sell electricity to its customers so that it can still benefit from electricity trading.

Municipalities are most people’s first point of contact with the government, so their failure is a broader issue than just service delivery. It is the failure of our social compact.

As things stand, if the model does not change the future could see poorer customers subsidising wealthier customers. Solutions are required urgently or the walls around SA’s “energy laagers” will not be high enough.

• Mashele is an independent energy economist.