MICHAEL O’DONOVAN: How Joburg council killed the golden goose
The city’s pricing policies have imposed unaffordable increases on residents, reducing the flow of income
26 August 2024 - 05:00
byMichael O'Donovan
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Rand Water, Eskom and the Johannesburg local government have essentially leveraged their monopoly on service provision to maximise their own income. Picture: 123RF
Income from the resale of water and electricity has, along with rate payments, traditionally been the mainstay of city revenues in SA. A decade ago almost two-thirds of Johannesburg’s revenues were derived from rates and service charges. At that stage 80% of income from “trading services” came from the sale of water, electricity, refuse and other services.
Typically, SA cities purchase bulk services from entities such as Eskom and Rand Water, and sell them on to local businesses and households at a premium. The financial sustainability of the city depends heavily on this trading income.
However, as the charges for water, electricity and other municipal services rose, so seemingly did city coffers swell. Johannesburg and other municipalities had little reason to moderate the increases they imposed.
Ultimately, the ability of an SA city such as Johannesburg to increase electricity prices is limited only by the intervention of the National Electricity Regulator of SA (Nersa). Each year Nersa caps the increases municipalities and Eskom can impose on consumers.
In practice, the Nersa-mandated increase is also used to set price increases for bulk water and electricity reticulation charges (the costs incurred in distributing bulk electricity to residents). For example, despite the cost of electricity being an inconsequential component of bulk water services, Rand Water routinely raises its prices to match those set by Nersa.
Municipalities such as Johannesburg also leverage the Nersa decision by applying that “permitted” increase to the cost of electricity and the reticulation component of costs. Reticulation costs include fuel, administration, labour, plant and equipment — the prices of which rarely rise as fast as that of Eskom’s bulk supplies.
Declining income
The upshot is that Nersa has consistently facilitated price increases above the inflation rate — often at rates substantially higher than the rise in the consumer price index. Its largesse unfortunately has a significant effect on water and other service charges demanded by local governments.
Despite its growing population for the past decade, Johannesburg has experienced a notable decline in “real” revenue from electricity. While municipal revenue from water and electricity sales has nominally increased, factoring in the inflationary effect shows that real income has in fact been declining.
The accompanying graph shows the relationship between the price of a kilowatt-hour of electricity once inflation has been considered. Despite a growing population, higher electricity charges clearly correspond with declining income. Moreover, the more rapidly the price of electricity rises, the faster real revenue from that service charge drops.
Local governments (and Nersa) seem oblivious to the fact that applying above-inflation increases to water, electricity and reticulation costs reduces real revenue. They seem blind to the effects of their pricing policies and the ability of consumers to pay what is charged.
In principle, to increase revenue from services the City of Johannesburg should cut the price of electricity sold to residents and local businesses, as these consumers would then buy more of the service. The trend in price increases imposed by the city indicates that real revenue from electricity sales will drop about 9% annually. What happens after that depends on the magnitude of the increases imposed.
Buying more
Compounding the effect of declining real income is enormous wastage (and theft) of the electricity and water purchased from bulk suppliers. In 2012, Johannesburg had to pay 64% of the revenue it earned from electricity sales to Eskom. Since then the proportion passed on to Eskom for bulk purchases has steadily increased, and the city now has to pay almost 90% of the revenue it collects to Eskom.
Given that Nersa pegs the increase municipalities can pass on to residents to the increases Eskom can pass on to municipalities, the ever-rising proportion of Eskom’s share of city electricity revenue can be explained only by wastage and theft. The city is buying much more water and electricity than it sells.
Ultimately these dynamics mean the city’s coffers now accrue a smaller fraction of the revenue it was accustomed to. Ever-increasing service charges have placed a huge burden on rate-paying households (for expedience, this sector can be referred to as the “middle class”). This price burden has been accepted (largely without protest) by the middle class as they seem to assume the premium is used to benefit the poor.
However, if the city has undermined service accessible by the middle classes, it has devastated the access enjoyed by the poor. The latest available data (2022) shows that the city considers about 3% of Johannesburg households to be “indigent” and therefore eligible for service concessions.
By contrast, eThekwini supports 12 times as many indigent households, and Cape Town five times as many. The presumption that residents must put up with high costs so the poor can benefit is clearly a myth in the case of Johannesburg. The city is failing the poor even as the rate of urban decay rises across the city.
As revenue from service charges declines, the city has to find alternatives, and it is left with increased taxation and loans. The city can be seen to be shifting away from service charges based on consumption levels, towards taxation. An example of this is the R200 monthly tax being imposed on residents who use prepaid electricity meters. This charge is incurred even if the household consumes no electricity, and is supplemented by other taxes called “service charges” or “capacity charges”, among others.
Considered bankrupt
Another prominent source of income is borrowings by the city. Johannesburg city councillors (including the official opposition) recently approved a R2.5bn loan at a market premium. This loan carries a 5% interest rate premium above what the city is now paying on earlier loans. This lender clearly sees the city is a “high risk” and can therefore command that premium.
Given that there has been no indication that the loan is intended for development projects, it can be inferred that the money will be used to cover “running” expenses. Any established institution that requires a loan to cover operational costs is generally considered bankrupt.
And the loan will not address the core issues constraining Johannesburg: incompetent governance, low productivity, abysmal management, opaque contracts and financial innumeracy. Instead, the debt incurred by the city will temporarily defer the cost of mismanagement and pass the burden on to ratepayers for the next 15 years.
Rand Water, Eskom and the Johannesburg local government have essentially leveraged their monopoly on service provision to maximise their own income. Due to their monopoly and the inelastic nature of demand for these services, their pricing policy has imposed increases that are higher than residents can afford, and the effect has been to reduce the income earned by the city.
These organs of state have killed the “golden goose” that once funded development and supported the poor.
• O’Donovan is a data scientist focusing on the analysis, interpretation and publication of data and insights relating to democracy, governance and local government finances.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
MICHAEL O’DONOVAN: How Joburg council killed the golden goose
The city’s pricing policies have imposed unaffordable increases on residents, reducing the flow of income
Income from the resale of water and electricity has, along with rate payments, traditionally been the mainstay of city revenues in SA. A decade ago almost two-thirds of Johannesburg’s revenues were derived from rates and service charges. At that stage 80% of income from “trading services” came from the sale of water, electricity, refuse and other services.
Typically, SA cities purchase bulk services from entities such as Eskom and Rand Water, and sell them on to local businesses and households at a premium. The financial sustainability of the city depends heavily on this trading income.
However, as the charges for water, electricity and other municipal services rose, so seemingly did city coffers swell. Johannesburg and other municipalities had little reason to moderate the increases they imposed.
Ultimately, the ability of an SA city such as Johannesburg to increase electricity prices is limited only by the intervention of the National Electricity Regulator of SA (Nersa). Each year Nersa caps the increases municipalities and Eskom can impose on consumers.
In practice, the Nersa-mandated increase is also used to set price increases for bulk water and electricity reticulation charges (the costs incurred in distributing bulk electricity to residents). For example, despite the cost of electricity being an inconsequential component of bulk water services, Rand Water routinely raises its prices to match those set by Nersa.
Municipalities such as Johannesburg also leverage the Nersa decision by applying that “permitted” increase to the cost of electricity and the reticulation component of costs. Reticulation costs include fuel, administration, labour, plant and equipment — the prices of which rarely rise as fast as that of Eskom’s bulk supplies.
Declining income
The upshot is that Nersa has consistently facilitated price increases above the inflation rate — often at rates substantially higher than the rise in the consumer price index. Its largesse unfortunately has a significant effect on water and other service charges demanded by local governments.
Despite its growing population for the past decade, Johannesburg has experienced a notable decline in “real” revenue from electricity. While municipal revenue from water and electricity sales has nominally increased, factoring in the inflationary effect shows that real income has in fact been declining.
The accompanying graph shows the relationship between the price of a kilowatt-hour of electricity once inflation has been considered. Despite a growing population, higher electricity charges clearly correspond with declining income. Moreover, the more rapidly the price of electricity rises, the faster real revenue from that service charge drops.
Local governments (and Nersa) seem oblivious to the fact that applying above-inflation increases to water, electricity and reticulation costs reduces real revenue. They seem blind to the effects of their pricing policies and the ability of consumers to pay what is charged.
In principle, to increase revenue from services the City of Johannesburg should cut the price of electricity sold to residents and local businesses, as these consumers would then buy more of the service. The trend in price increases imposed by the city indicates that real revenue from electricity sales will drop about 9% annually. What happens after that depends on the magnitude of the increases imposed.
Buying more
Compounding the effect of declining real income is enormous wastage (and theft) of the electricity and water purchased from bulk suppliers. In 2012, Johannesburg had to pay 64% of the revenue it earned from electricity sales to Eskom. Since then the proportion passed on to Eskom for bulk purchases has steadily increased, and the city now has to pay almost 90% of the revenue it collects to Eskom.
Given that Nersa pegs the increase municipalities can pass on to residents to the increases Eskom can pass on to municipalities, the ever-rising proportion of Eskom’s share of city electricity revenue can be explained only by wastage and theft. The city is buying much more water and electricity than it sells.
Ultimately these dynamics mean the city’s coffers now accrue a smaller fraction of the revenue it was accustomed to. Ever-increasing service charges have placed a huge burden on rate-paying households (for expedience, this sector can be referred to as the “middle class”). This price burden has been accepted (largely without protest) by the middle class as they seem to assume the premium is used to benefit the poor.
However, if the city has undermined service accessible by the middle classes, it has devastated the access enjoyed by the poor. The latest available data (2022) shows that the city considers about 3% of Johannesburg households to be “indigent” and therefore eligible for service concessions.
By contrast, eThekwini supports 12 times as many indigent households, and Cape Town five times as many. The presumption that residents must put up with high costs so the poor can benefit is clearly a myth in the case of Johannesburg. The city is failing the poor even as the rate of urban decay rises across the city.
As revenue from service charges declines, the city has to find alternatives, and it is left with increased taxation and loans. The city can be seen to be shifting away from service charges based on consumption levels, towards taxation. An example of this is the R200 monthly tax being imposed on residents who use prepaid electricity meters. This charge is incurred even if the household consumes no electricity, and is supplemented by other taxes called “service charges” or “capacity charges”, among others.
Considered bankrupt
Another prominent source of income is borrowings by the city. Johannesburg city councillors (including the official opposition) recently approved a R2.5bn loan at a market premium. This loan carries a 5% interest rate premium above what the city is now paying on earlier loans. This lender clearly sees the city is a “high risk” and can therefore command that premium.
Given that there has been no indication that the loan is intended for development projects, it can be inferred that the money will be used to cover “running” expenses. Any established institution that requires a loan to cover operational costs is generally considered bankrupt.
And the loan will not address the core issues constraining Johannesburg: incompetent governance, low productivity, abysmal management, opaque contracts and financial innumeracy. Instead, the debt incurred by the city will temporarily defer the cost of mismanagement and pass the burden on to ratepayers for the next 15 years.
Rand Water, Eskom and the Johannesburg local government have essentially leveraged their monopoly on service provision to maximise their own income. Due to their monopoly and the inelastic nature of demand for these services, their pricing policy has imposed increases that are higher than residents can afford, and the effect has been to reduce the income earned by the city.
These organs of state have killed the “golden goose” that once funded development and supported the poor.
• O’Donovan is a data scientist focusing on the analysis, interpretation and publication of data and insights relating to democracy, governance and local government finances.
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