Skip to main content

2016-03-30 | News

Utilities-based funding model is a problem in SA cities

CAPTION: South African cities earn a good income from selling electricity and water, which doesn’t encourage consumption cuts. CREDIT: © Talitha_it, Shutterstock.

CAPE TOWN: South Africa’s bigger cities get a large amount of their revenue from the sale of electricity and water to consumers. And owing to the pricing structure of these services, cities earn more from large-volume users, and use this revenue to cross-subsidise smaller volume users, who often fall in lower income communities.

Together, these don’t incentivise municipalities to encourage consumers to reduce their consumption patterns. 

This emerged during a demand-side management research workshop held in Cape Town this March, hosted by the University of Cape Town’s Environmental Policy Research Unit (EPRU).

The event was part of EPRU’s annual policy day, aimed at bringing researchers and policy makers together to help inform policy processes with evidence-based studies from resource economists.

Kim Walsh, an economist with the development consulting firm PDG who spoke during the workshop, says that municipalities are stuck between a rock and a hard place.

‘There is a strong imperative to encourage demand-side management, but this undermines their ability to support the poor through subsidised tariffs and the provision of publicly accessed services,’ she explains. 

If municipalities encourage reduced water and electricity use, in order to support conservation of these pressured resources, they must make up the fiscal shortfall either by raising rates and taxes, or by reducing their running costs.

The most recent national treasury figures show that South Africa’s large cities get just over a third (38%) of their revenue from selling electricity, and another 15% from selling water and sanitation services.

‘There hasn’t been much thought given to alternative funding models for these municipalities,’ says Walsh. ‘Internationally, there have been attempts to ‘decouple’ electricity, which means separating the revenue of the utility from the volume of electricity they sell. Basically, the utility receives revenue based on the number of customers that it serves, instead of the amount of electricity that it sells.’

This works in a stand-alone utility, but is more difficult to implement in the case of a municipality that provides a range of services, and then uses the many income streams from these to cross-subsidies between services.

Another idea that Walsh says has been considered, from an electricity perspective, is for municipalities to change from being sellers of electricity, to gaining income from storing and redistributing power. Under this model, they would buy electricity from households and businesses who generate it independently, and charge for storing and feeding that power to other users who are not generating electricity at that time.

‘This is all very new thinking, though, and not well developed yet. We need a fundamental shift in the model, and it needs some blue-sky thinking by both local and national government.’

Smaller towns, however, as less dependent on this model, since more of their revenue comes from national government grants, and transfers.

Block tariff pricing not necessarily pro-poor

Inclining block tariffing is a cost structure that has been promoted strongly in South Africa, since it is perceived to be pro-poor and to encourage resource conservation.

This costing model gives free basic water and electricity, in order to subsidise poorer communities, and then increases the cost per unit of utility used, as volumes increase. However, this assumes that wealthier communities are the biggest users.

However, researchers noted during the workshop that this funding model may be based on faulty assumptions.

‘South Africa has a big problem in that large households are often in poorer communities,’ explains workshop co-ordinator and EPRU economics professor, Martine Visser. ‘The free basic amounts of water and electricity for households is set on the assumption that needy households consist of eight people, but there could be 12 in a home. Their use will be much higher, but they still can’t afford it.’