Finance minister Tito Mboweni says that a number of municipalities across South Africa do not have ‘cost reflective’ tariffs in place, which has negatively impacted the sustainability of municipal services.
Responding in a written parliamentary Q&A, Mboweni said that a sustainable tariff is the one that is cost-reflective and includes all the costs of providing a service, such as bulk purchases.
“In response, National Treasury has developed a tool for use by municipalities, that if used correctly it will see municipalities charging cost-reflective tariffs that will cover the cost of bulk purchases.
“Treasury, through its structures, is also offering technical support to municipalities to assess and set cost-reflective tariffs,” he said.
Mboweni said that Treasury is also working alongside the Department of Cooperative Governance and Traditional Affairs to jointly fund a study that targets the top 20 municipal defaulters of Eskom and top 10 municipal defaulters of the water boards.
“The study is intended to assist municipalities to determine the true cost for the respective services, water and electricity, which will subsequently influence better tariffs,” he said.
Problem with some municipalities
Mboweni said municipalities typically run into problems when they do not calculate tariffs through scientific means, and merely impose a CPI-incremental increase to the previous year’s tariff.
“There are observations that some rural municipalities or municipalities that have low revenue bases, have been found to be charging tariffs which are insufficient to cover the cost – or are not cost-reflective,” he said.
“In some cases, as the result of improper methods for setting tariffs, municipal councils reduce the proposed tariff based on their perception of what is affordable to their constituencies. Additionally, municipalities that have high distribution losses may also find it difficult to recover the cost of the service.”
Ideally, the tariffs set by municipalities should cover the cost of bulk purchases, and Mboweni said that National Treasury consistently advocates this practice.
“In the same understanding full absorption of the costs such as bulk purchases into tariffs, might result in unaffordable tariffs for low-income households. In some instances, calculating a cost-reflective tariffs makes use of municipal other revenue streams and the equitable share to subsidise the tariffs for the indigent and low-income households.”
Mboweni said that all the budgets of municipalities are assessed by national and provincial treasuries to determine whether the budget of the municipality is funded or not.
If the budget of a municipality is not funded, both national and provincial treasuries determine the reasons why the budget is not funded and assesses specifically whether the tariffs are cost-reflective to cover all the expenditure.
“If tariffs are cost-reflective then the tariffs will cover all the cost the render that service. If the tariffs are not cost-reflective then the municipality is advised to implement cost-reflective tariffs and provincial treasuries will assist the municipality to implement such cost-reflective tariffs.”
The tools designed to assist municipalities with cost-reflective tariffs can be found on Treasury’s website here.