NT Presentation for WRC Seminar 14-6-2013

Report
Transfers and Tariffs for
Municipal Water Services
Water Research Commission Seminar on Tariffs, Costs, Revenue and Regulation
Presenters: Steven Kenyon and Kevin Venter | National Treasury
| 14 June 2013
Presentation Outline
• General structure of the local government fiscal framework
Transfers
• Summary of transfers to fund water and sanitation in local
government
• Operational funding for water services
– New local government equitable share formula
Tariffs
• Findings from National Treasury’s benchmarking engagements
• Shortcomings in costing practices
• Summary of National Treasury’s work to improve municipal
costing
2
General principles for funding services in local
government
• The local government fiscal framework is made up of own revenues
(including service charges) and transfers
• Municipalities should charge cost-reflective tariffs for the supply of water
for all users that can afford to pay
• High levels of poverty mean that funds from national revenues are
needed to fund the delivery of services to poor households
Structure of the Local Government Fiscal Framework
National
Transfers
25%
Local Government
Own Revenue
75%
Charges
Rates and
charges
HH in informal settlement
Poor HH in RDP house
Employed HH in RDP house
with improvements
3
Middle to upper income HH
Summary of the transfers available for
water and sanitation in 2013/14
USDG
R9 billion
(mainly for providing serviced land
- including water and sanitation)
Municipal
Water
Infrastructure
Grant
R603 million
Water
Services
Operating
Subsidy
R560 million
Rural Households Infrastructure Grant
MIG
R14.4 billion
(over R7 billion for water and
sanitation)
R107 million
Regional Bulk Infrastructure
Grant
R3.2 billion
(indirect grant)
R16.1 billion in operations and maintenance funding for
W&S in the Local Government Equitable Share
Focus of this presentation is on
operating funding
(Not to scale)
4
The new LG equitable share formula structure
Review was undertaken by:
In partnership with:
Formula
Schematic of how the new formula works:
How it works
A new LGES formula
The local government
equitable share was
reviewed through a
consultative process during
2012 and a new formula,
based on 2011 Census
data is being phased in
over 5 years from 2013/14
2
1
3
Basic + Institutional and ± Correction &
Services
Community Services Stability
Allocation for
every poor
household in
the country
to enable
municipalities
to fund the
cost of free
basic services
(including
maintenance
costs)
Made up of three parts:
Institutional
funding
+
Funding for
Community
Services
Ensures
guarantees
are met
and
smoothes
changes in
allocations
Revenue Adjustment factor
Ensures more funds go to the municipalities with
less own revenue capacity
(Factor of between 0% and 100% applied)
LGES Allocation
5
Detail on the basic services component
• Formula funds free basic services for every household below an
affordability threshold of R2300 household income per month in 2011
– Based on value of 2 state Old Age Pensions (as proposed by municipalities)
during the consultation process
– 59% of all households in SA fall below this threshold
• Cost of services and number of households will be updated annually
– Cost of water updated based on average water board bulk tariff increases
FBS funding allocated for each HH through the formula:
Subsidy of
R275.17 per
month for a
package of
free basic
services
Water: R86.45
Sanitation: R72.04
Energy: R56.29
Includes
10%
provision for
maintenance
Refuse removal: R60.39
6
Summary of Local Government Equitable
Share allocations for water
•
•
•
Total of R8.7 billion allocated for water through the LGES
This amount includes an allocation of R86.45 per household per month for free
basic water (includes 10% allocation for maintenance)
Amount for water will be increased annually based on weighted average increase
of water board prices (for bulk water costs) and inflation (for other costs)
Amounts per basic service allocated through the Local Government Equitable Share
Allocation per household below affordability threshold
(Rands)
Operations
Maintenance
Total
Total allocation
per service
(R m illions)
Energy
50.66
5.63
56.29
5 719
Water
77.80
8.64
86.45
8 783
Sanitation
64.84
7.20
72.04
7 319
Refuse
54.35
6.04
60.39
6 136
247.65
27.52
275.17
27 957
Total basic services
7
Costing water and sanitation services for
the LGES formula
• During consultations, stakeholders wanted detailed costing in the formula
that would account for local cost drivers (e.g. topography and density)
• This proved to not be technically feasible due to a lack of credible and
agreed data on what factors drive costs (and by how much) and
consistent measures of these cost drivers across all municipalities
Advantages of using a single subsidy per poor household:
• Municipalities can use any excess funding on one service to
compensate for higher costs of another service
• Recognises that municipalities have a responsibility to provide alternative
services for households without connections
• Recognises that the provision of alternative services is not necessarily
any less expensive
• Allows the formula to be updated based on an estimate of the growth in
the number of households
8
The new formula and
service delivery
• Section 227 of the Constitution says:
“Local government and each province is entitled
to an equitable share of revenue raised
nationally to enable it to provide basic services
and perform the functions allocated to it.”
• The equitable share is unconditional, but it is
intended to fund the delivery of basic services
• The new formula structure:
LGES DELIVERY CHAIN:
From formula to services
Formula divides LGES allocation
among 278 municipalities
(like slicing a R34bn cake)
Formula determines size of each ‘slice’
– is more transparent about the funds available for
basic services
– Has more realistic cost estimates
– Will have its data updated annually
– Includes more realistic levels of institutional and
community services funding
• This will make it easier to hold municipalities
accountable for how they budget for and use
LGES funds
Municipalities determine how funds are
used to deliver services to their
residents
9
Costing, tariff setting and
managing sustainability
10
Findings of benchmarking engagements (1)
• Basic accounting principles and costing methodologies are not applied to
determine the ‘real’ cost of providing services
• Tariff determination is not informed by accurate costing that incorporates
direct, indirect and hidden costs of services
• There is rarely a correlation between the annual tariffs in respect of basic
services and the cost of providing such services
• The traditional approach of incremental tariff increases is widely applied
• The financial imbalance of the basic services is becoming increasingly
greater with the costs exceeding the revenue generated by service
charges
11
Findings of benchmarking engagements (2)
• Decreased cash coverage and depleted cash backed reserves is a
further concern
• In general municipalities are becoming more and more grant dependent
• Cost efficiency does not seem a widely applied practice
• Inadequate allocations for asset renewal & maintenance
12
Elements of accounting for costs
Hidden
Cost
Trade
and
Economic
services
Total Cost
•Secondary Cost
•E.G. Dona tion recieved
for a cl ean-up project
whereby community or
pri va te s ector donate
thei r ti me
Indirect
Cost
Direct
cost
•Secondary Cost
•E.G. La bour, machine,
equipment, HR, Legal
a nd IT servi ces utilised
from other
departments
•Primary Cost
•E.G. Sa l aries, stationary
,tel ephone costs
13
Findings of benchmarking engagements (3)
•
An analysis of the 17 non-delegated municipalities 2012/13 MTREF found that 8
municipalities budgeted for a cost reflective tariffs, others applied an incremental
approach
2012/13 FY
R thousand
Metros
City of Johannesburg
City of Cape Tow n
eThekw ini
Ekurhuleni
City of Tshw ane
Nelson Mandela Bay
Mangaung
Buffalo City
Secondary Cities
Msunduzi LM
Rustenburg LM
uMhlathuze LM
Mbombela LM
Polokw ane LM
Sol Plaatjie LM
George LM
OR Tambo DM
Mafikeng LM
Total
Electricity Services
Surplus
Deficit
316,093
579,618
440,385
207,820
34,852
Water Services
Surplus
Deficit
468,649
54,464
(152,613)
76,730
(329,966)
(15,388)
(79,399)
(167,845)
(132,739)
43,385
(45,247)
22,021
(60,207)
18,831
(490,623)
146,406
18,914
18,833
56,729
1,869
12,539
2,947
(711,829)
(167,169)
(5,061)
(281,550)
(18,718)
(26,098)
57,329
135,188
(6,549)
(23,046)
9,104
(8,193)
58,833
(136,512)
(27,905)
(51,178)
124,710
(18,772)
(1,924)
(5,239)
894,920
736,086
117,488
131,377
756,568
14,901
(35,798)
261
33,749
(1,153,065)
Trading Services
Consolidated
Surplus
Deficit
(468,760)
(87,283)
(13,694)
721,829
(48,656)
(734,796)
(209,244)
218,202
52,849
325,611
52,045
(203,041)
(14,628)
1,989,872
Deficit
Waste Managem ent
Services
Surplus
Deficit
138,117
(276,613)
(56,281)
(8,748)
(365)
Surplus
(86,916)
297,742
19,535
93,828
Waste Water Services
(96,941)
8,503
111,052
(203,041)
(52,408)
(32,542)
286,574
(1,589,105)
2,120,971
(1,597,083)
Notes
Secondary costs have been included
Equitable share for Free Basic Services has not been factored in
14
Findings of benchmarking engagements (4)
• These deficits reflected on the table above mean that municipalities are:
– Cross subsidising tariff services with property rates
– Depleting the limited reserves available
– Budgeting for deficits or adopting the mythical “balanced budget
approach”
• This is detrimental to financial sustainability and consequently places
service delivery at risk
15
Findings of benchmarking engagements (5)
16
Findings of benchmarking engagements (6)
R - thousands
Mafikeng Water Services
100 000
90 000
80 000
70 000
60 000
50 000
40 000
30 000
20 000
10 000
–
Revenue
Expenditure
Bulk Purchases
Primary + Secondary
Costs
17
Shortcomings in costing practices
• Engagements were held with the various financial system vendors in
order to establish if their systems catered for internal cost recoveries
(cost accounting).
• It must be noted that only 40 % of municipalities do apply some sort of
cost allocation, but the manner in which they allocate direct and indirect
costs is weak
• Where municipalities are attempting to cost for services, there
calculations are usually limited to direct costs such as remuneration and
bulk purchases, with little or no consideration for indirect costs
• The traditional approach of incremental tariff increases is widely applied
• The financial imbalance of basic services is becoming increasingly
greater with costs exceeding the revenue generated by service charges.
18
Progress to date
•
•
•
•
•
•
Pilot study at uMhlathuze on costing;
Compilation of costing guidelines;
Accompanied DWA on their road shows;
Assisted various municipalities with costing and tariff setting;
Various training sessions to CFO forums & Provincial Treasuries; and
Inclusion of an additional segment (Management Accounting) in SCOA
19
Conclusion
•
•
•
Costs, cost management and a costing methodology should not be informed by a
specific approach i.e. ABC, absorption costing etc., but should rather be a hybrid
solution aimed at the specific requirement of LG in a South African context.
The time, effort and cost should always be justified by the outcome.
Municipalities that work to a longer planning horizon and understand the impact
of cost drivers and cost management will be in a position to:
– Test the likely impact of different income scenarios;
– Seek out alternative models for sharing local resources more effectively;
– Increase the impact of spending and influence;
– Challenge the status quo of the design, management and delivery of
services;
– Improve efficiency by streamlining business processes;’
– Be in a position to decide on trade-offs in meeting the current challenges and
preserving capacity for the longer term; and
– And start understanding the costs of specific service delivery i.e. agency
services, underfunded mandates etc
20

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