Funding Options / Models Electricity Indaba Presenter: Marissa Moore| 16 March 2012.

Funding Options / Models

Electricity Indaba

Presenter: Marissa Moore| 16 March 2012

Municipal own revenuesTransfers and Grants

Direct transfers

The whole local government fiscal framework is designed to finance municipalities

2

Municipal operating budget

Municipal capital budget

Equitable share & RSC levy

replacement grant

National / provincial operating grants

Operating revenues

Rates and taxes

Sources of capital funding

Service charges

Municipal borrowing

National / provincial infrastructure grants

Surplus / cash-backed

reserves

Chapter 3 Intergovernmental relations and the local government fiscal framework

Indirect transfers

What is the current reality in municipal electricity distribution?

• The whole local government fiscal framework is designed to finance municipalities, including the municipal electricity distribution function– Need an appropriate balance between own resources, grants and

borrowing• Free basic electricity to the poor is funded through equitable share,

including increases in bulk electricity prices– Need an appropriate balance between investing in new infrastructure

and maintaining existing infrastructure• Tariffs to be used to fund new infrastructure and maintenance for services

provided to non-poor households• Indigent policies to be appropriately targeted towards the poor and such

cross-subsidisation be explicit

3

National government continues to provide significant support to LG

Massive real

growth in national transfers

• Municipal Budget and Reporting Regulations• Three-year allocations and payment schedules for national and

provincial transfers (DoR Act)• Improved in-year financial monitoring

Significant policy

reforms

• Support in planning and budget reform• R3bn spent on Siyenza Manje between 2007 and 2010 to provide

hands-on support to municipalities• Additional support through conditional grants

Targeted capacity and

systems support

4

Transfers by type, 2006/07 - 2012/13

Key issues impacting on municipal performance

• Municipal budgets must be funded and realistic– Depleted cash reserves – operating at the absolute margin– General under-pricing of municipal services – bankrupting municipalities– Revenue projections are unrealistic – not based on requirements of the MFMA– Operating expenditures are too high – driven by non-priority spending– Capital budgets are too ambitious

• Maintenance of existing assets needs urgent attention– Lack of key technical skills – qualified managers, engineers and technicians– Weak asset management systems– Spending on repairs and maintenance inadequate to maintain assets– Maintenance spending is reactive, and so is more costly than planned

maintenance

• Own funding of capital budgets needs to increase– Increased grant reliance, and reduced own funding of the capital budget– Tariffs and operating budgets not making provision to fund capital– Municipalities (other than metros) not adequately leveraging private finance to

fund economic infrastructure

5

Municipalities continue to face important fiscal challenges

Municipal own contribution to capital

spending

• Get the basics right to ensure revenue value-chain is complete• Integrity of billing information, accuracy of billing systems and ability to

collect

Pay attention to revenue management

• In December 2010, municipalities were owed a total of R62.3 billion. This represents an increase of 10.8% from the same month in 2009

High outstanding consumer debts

• Municipalities not following the Systems Act principles for tariff setting• On average, tariffs must reflect the cost of rendering the service

Under-pricing of services

• Cutting spending on maintenance is not seen as politically sensitive, but will have a disastrous impact on the reliability of services

Inadequate spending on repairs and

maintenance

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Chapter 4 Revenue and expenditure trends in local government

Municipal own contribution to capital expenditure, 2006 to 2012

Municipal own contributions are now less than 50% of total capital spending

Scope exists to improve access to private finance

Demand for capital

infrastructure remains high

• National transfers are the major source of finance for municipal capital budgets – they provided 51% of capital funding in 2010/11

• External loans contributed 20.7% as a funding source in 2010/11. This is down from 24.9% in 2006/07.

Scope exists for

further growth in private capital funding

Lending dominated

by the DBSA

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50

100

150

200

250

300

Metros and secondarycities

Town based municipalities Mostly ruralmunicipalities

R b

illi

on

Growth Backlogs Rehabilitation

Is expenditure supporting sustainable electricity service delivery?

Household access to electricity

improved

340 000 more households had

access to electricity in 2009 than 2008

6.2% more households

received free basic electricity in 2009

than 2008

• Operating revenue grows at above 20% per year in line with increases in the bulk price of electricity

• Expenditure grew at 26.7% per year between 2006/07 and 2009/10

• Budgeted capital expenditure on electricity increases from R4.7bn in 2009/10 to R5.7bn in 2011/12, before declining to R4.9bn in 2012/13

• Compared to 2010/11, municipalities’ budgeted capital investment in electricity declines by 14% in 2011/12 and again by 7% in 2012/13

Expenditure increased from

R15bn in 06/07 to R59bn in 12/13

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Chapter 9 Electricity

2008 2009

Free basic electricity services


Province

Number of consumer

units

% Number of consumer

units

%

Eastern Cape 811 953 282 175 34.8% 872 170 312 975 35.9%

Free State 576 790 345 545 59.9% 602 434 379 981 63.1%

Gauteng 1 802 607 706 822 39.2% 1 829 044 724 178 39.6%

Kw aZulu-Natal 1 283 813 165 505 12.9% 1 327 485 192 265 14.5%

Limpopo 1 072 824 271 992 25.4% 1 157 388 319 559 27.6%

Mpumalanga 559 499 220 106 39.3% 591 867 234 183 39.6%

Northern Cape 227 033 100 021 44.1% 243 075 107 788 44.3%

North West 579 004 119 919 20.7% 588 298 129 443 22.0%

Western Cape 1 173 637 568 958 48.5% 1 209 566 552 314 45.7%

Total 8 087 160 2 781 043 34.4% 8 421 327 2 952 686 35.1%

Number of consumer

units receiving basic electricity

services

Number of consumer

units receiving basic

electricity

Electricity distribution losses are increasing

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Electricity distribution losses, 2005/06 - 2009/10

2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

Metros

Nelson Mandela 6.5% 6.0% 6.7% 7.5% 7.5% 7.5% 7.5%

Ekurhuleni 1.0% 3.0% 7.0% 7.0% 7.0% 7.0%

City of Johannesburg 12.0% 12.0% 12.0% 12.0% 12.0% 11.0%

City of Tshw ane 7.7% 10.0% 12.1% 12.0% 10.0% 10.0% 10.0%

eThekw ini 5.1% 5.1% 5.0% 5.0% 5.1% 5.0% 5.0%

City of Cape Tow n 8.9% 8.3% 8.4% 9.3% 9.3% 9.3% 9.3%

Secondary cities

Buffalo City 10.7% 11.9% 14.0% 7.5% 8.0% 8.0% 8.0%

Mangaung 8.3% 9.4% 9.1% 15.0% 16.0% 16.0%

Matjhabeng

Emfuleni

Mogale City 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Msunduzi 9.5% 9.1% 8.9% 9.5% 9.5% 9.5%

New castle

uMhlathuze 7.0% 4.0% 6.0% 4.0% 5.0% 5.0%

Govan Mbeki 5.6% 10.6% 12.7% 12.0% 16.0% 16.0% 16.0%

Emalahleni 22.7% 21.7% 33.4% 28.0% 30.0% 30.0%

Steve Tshw ete 8.8% 10.5% 7.3% 10.0% 10.0% 10.0% 10.0%

Mbombela

Sol Plaatje 18.0% 18.0% 18.0% 15.0% 16.0% 16.0%

Polokw ane 12.6% 12.2% 8.1%

Madibeng

Rustenburg 22.1% 18.3% 20.8% 16.3%

Tlokw e 10.1% 2.4% 0.7% 2.0% 2.0% 2.0%

City of Matlosana

Drakenstein 5.0% 7.0% 7.0% 7.5% 7.0% 7.0% 7.0%

Stellenbosch

George 12.3% 3.7% 5.5% 7.0% 9.0% 9.0% 9.0%

Source: National Treasury local government database

Abbreviated Extract: MFMA Circular 58 – 2 of 2

• Eskom price will increase by 16% on 1 July 2012. Municipalities are urged to examine cost structure of their electricity undertakings and apply to NERSA for electricity tariff increases that are cost reflective and ensure continued financial sustainability

• NT supports the use of the following formula, proposed by NERSA, for calculating municipal electricity tariff increases: – MTI = (B x BPI) + (S x SI) + (R x RI) + (C x CCI) + (OC x OCI) , Where

• MTI = % Municipal Tariff Increase • B = % Bulk purchases / increase • S = % Salaries / increase • R = % Repairs / increase • C = % Capital charges / increase • OC = % Other costs / increase

• Each municipality needs to design an IBT structure that is appropriate to its specific circumstances, and ensures an appropriate balance between ‘low income customers’ and other domestic, commercial and business customers, and the financial interests of the municipality

• Municipal surcharge issue to be considered

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Key areas to address existing challenges in electricity distribution

• National (policy, regulation and support)– National strategy to clarify roles and responsibilities, set norms

and standards– Regulator to align efficiency and costs in line with the national

strategy– Capacity support

• Building the requisite skills in municipalities to plan, budget, roll-out and maintain service (full value chain)

– Differentiation between municipalities in which services can be supplied in a viable manner and areas where investment support is needed

– Intern programme for technical capacity building• Municipalities

– Need for increased investment in maintenance and refurbishment of municipal electricity distribution infrastructure

– Municipalities need proper electricity distribution asset registers to inform refurbishment and maintenance plan

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Role of National Treasury

• National Treasury is undertaking budget reforms to provide for transparency in electricity budgeting and expenditure– Regulations introduced– Standard Chart of Accounts being developed

• Ongoing work between NT and NERSA– NERSA, in collaboration with Office of the Accountant General, to introduce

standardised reporting with respect to municipal electricity function – NERSA, Eskom and SALGA to address implementation challenges wrt

Inclining Block Tariffs • A review of the current LG fiscal framework currently underway, which

will complement reforms already introduced– LG equitable share has been reformed over last few years to direct additional

resources to small and poor municipalities– Substantial increases made to LG equitable share to enable municipalities to

cater for the price increases to provide Free Basic Energy to poor households• Norms and standards for electricity surcharges as per Municipal Fiscal

Powers and Functions Act– Regulation of municipal tariff setting and norms and standards on municipal

surcharges to be aligned12

Way Forward – 2 of 2

• National Treasury is undertaking budget reforms to provide for transparency in electricity budgeting and expenditure– Greater understanding of revenue and expenditure– Electricity distribution leads to increased revenue, greater ability to

borrow funds and leverage to improve the collection of other monies owed to the municipality

• Requiring skills and investment that not all municipalities have the capacity to manage– Intern programme for technical capacity building

• Differentiation between municipalities in which services can be supplied in a viable manner and areas where investment support is needed

13

,

Thank You

14

,

SUPPORTING INFORMATION

15

Operational Revenue

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Table 9.2 Budgeted electricity operating revenue, 2006/07 – 2012/13

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

R million

Medium-term estimates 2006/07 - 2009/10

2009/10 - 2012/13

Operating revenue

Category A (Metros) 16 811 18 759 21 978 30 931 39 440 48 662 60 516 22.5% 25.1%

Category B (Locals) 9 209 9 838 11 412 16 322 19 520 20 244 23 647 21.0% 13.2%

Secondary cities 5 321 5 511 6 447 9 449 11 893 12 819 15 446 21.1% 17.8%

Large towns 1 679 1 857 2 140 2 940 3 715 3 652 4 000 20.5% 10.8%

Small towns 1 864 2 058 2 387 3 294 3 384 3 266 3 626 20.9% 3.3%

Mostly rural 345 412 438 639 528 506 574 22.8% -3.5%

Category C (Districts) 8 14 17 14 18 10 10 23.7% -11.9%

Total 26 028 28 611 33 408 47 267 58 978 68 916 84 172 22.0% 21.2%


% Ave annual growth

Operational Expenditure

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Table 9.4 Electricity operating expenditure by category of municipality, 2006/07 – 2012/13

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

R million

Medium-term estimates 2006/07

- 2009/10

2009/10 -

2012/13

Operating expenditure

Category A (Metros) 9 746 10 884 13 040 19 934 25 546 32 547 41 556 26.9% 27.7%

Category B (Locals) 5 406 5 855 7 113 10 869 13 238 14 403 17 450 26.2% 17.1%

Secondary cities 3 154 3 426 4 109 6 376 8 087 9 035 11 362 26.4% 21.2%

Large towns 958 1 015 1 236 1 952 2 451 2 621 3 000 26.8% 15.4%

Small towns 1 092 1 180 1 494 2 130 2 343 2 342 2 682 24.9% 8.0%

Mostly rural 201 235 275 412 358 405 407 27.0% -0.4%

Category C (Districts) 20 29 46 27 10 10 12 11.4% -24.0%

Total 15 172 16 769 20 199 30 831 38 794 46 960 59 018 26.7% 24.2%


% Ave annual growth

Capital Expenditure

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Capital budgets for electricity, 2011/12 - 2013/14

2011/12 2012/13 2013/14 11/12-12/13 12/13-13/14 2011/12 2012/13 2013/14

Buffalo City BUF 27 445 20 000 20 000 -27% 0% 2% 1% 1%

Cape Town CPT 667 449 648 879 731 863 -3% 13% 8% 6% 6%

Ekurhuleni Metro EKU 312 654 229 933 254 333 -26% 11% 3% 2% 2%

eThekwini ETH 873 567 730 238 816 422 -16% 12% 10% 7% 6%

City Of Johannesburg JHB 783 917 889 165 975 465 13% 10% 7% 7% 6%

Mangaung MAN 141 560 147 767 163 777 4% 11% 10% 9% 8%

Nelson Mandela Bay NMA 86 000 118 000 73 000 37% -38% 3% 4% 2%

City Of Tshwane TSH 518 800 591 900 554 235 14% -6% 7% 7% 5%

Total Metros 3 411 392 3 375 882 3 589 095 -1% 6% 7% 6% 5%

Budgeted Expenditure - Electricity reticulation (capital)

R Thousands

Growth rates - capital

Budgeted capital spending as percentage of budgeted revenue

from billed service charges

Capital Expenditure Continue

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Capital budgets for electricity, 2011/12 - 2013/14

2011/12 2012/13 2013/14 11/12-12/13 12/13-13/14 2011/12 2012/13 2013/14

Matjhabeng FS184 13 350 378 378 -97% 0% 3% 0% 0%

Emfuleni GT421 82 844 67 411 73 699 -19% 9% 6% 4% 4%

Mogale City GT481 43 784 33 360 82 642 -24% 148% 7% 4% 9%

Msunduzi KZN225 60 361 - - -100% 5% 0% 0%

Newcastle KZN252 42 626 31 774 32 462 -25% 2% 9% 6% 5%

uMhlathuze KZN282 22 806 54 800 81 724 140% 49% 2% 3% 4%

Polokwane LIM354 56 700 55 185 69 000 -3% 25% 11% 10% 12%

Govan Mbeki MP307 - - - 0% 0% 0%

Emalahleni (Mp) MP312 - - -

Steve Tshwete MP313 28 230 42 570 61 220 51% 44% 8% 11% 13%

Mbombela MP322 - - - 0%

Sol Plaatje NC091 87 003 16 600 5 000 -81% -70% 19% 3% 1%

Madibeng NW372 23 225 - - -100%

Rustenburg NW373 97 460 28 000 39 600 -71% 41% 8% 2% 2%

Tlokwe NW402 45 052 36 000 16 500 -20% -54% 10% 7% 3%

City Of Matlosana NW403 26 819 17 100 17 200 -36% 1% 5% 3% 3%

Drakenstein WC023 31 947 33 202 35 987 4% 8% 5% 4% 4%

Stellenbosch WC024 10 757 9 928 3 000 -8% -70% 3% 2% 1%

George WC044 57 149 28 675 35 400 -50% 23% 14% 6% 6%

Total Top 19 730 114 454 983 553 811 -38% 22% 7% 4% 4%

All other local municipalities 1 339 655 970 045 951 988 -28% -2% 14% 10% 9%

TOTAL 5 481 161 4 800 910 5 094 895 -12% 6% 8% 6% 5%

Budgeted Expenditure - Electricity reticulation (capital)

R Thousands

Growth rates - capital

Budgeted capital spending as percentage of budgeted revenue

from billed service charges

Performance

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21

Size of LG equitable shareEquitable Share

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

1998/99

2000/01

2002/03

2004/05

2006/07

2008/09

2010/11

2012/13

22

Basic Services share on LGES

Basic Services

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

Financial Year

R Th

ousa

nd

Water Sanitation Refuse Electricity

Free Basic Electricity

23

2008 2009



Province

Number of consumer

units

% Number of consumer

units

%

Eastern Cape 811 953 282 175 34.8% 872 170 312 975 35.9%

Free State 576 790 345 545 59.9% 602 434 379 981 63.1%

Gauteng 1 802 607 706 822 39.2% 1 829 044 724 178 39.6%

Kw aZulu-Natal 1 283 813 165 505 12.9% 1 327 485 192 265 14.5%

Limpopo 1 072 824 271 992 25.4% 1 157 388 319 559 27.6%

Mpumalanga 559 499 220 106 39.3% 591 867 234 183 39.6%

Northern Cape 227 033 100 021 44.1% 243 075 107 788 44.3%

North West 579 004 119 919 20.7% 588 298 129 443 22.0%

Western Cape 1 173 637 568 958 48.5% 1 209 566 552 314 45.7%

Total 8 087 160 2 781 043 34.4% 8 421 327 2 952 686 35.1%

Source: Stats SA, Non-financial census of municipalities for the year ended 30 June 2009

Table 9.7 Consumer units receiving free basic electricity services from municipalities, 2008 and 2009

Number of consumer

units receiving basic electricity

services

Number of consumer

units receiving basic

electricity

INEP Connections

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Indicator Programme Past Current Projections

2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15

Number of additional households electrified per year*

National Electrification Programme

123 364 145 157 191469 180 000 180 000 180 000 180 000

Number of new bulk substations built per year


6 4 4 7 6 6 6

Number of additional substations upgraded per year


13 3 3 3 10 10 10

Kilometres of new medium voltage power lines constructed per year


140km 310km 350km 350km 350km 350km 350km

Kilometres of existing medium voltage power lines upgraded per year


92km 241km 200km 200km 200km 200km 200km

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LG Equitable Share• LG Equitable Share (LGES) formula targets four basic

services– Electricity, water, sanitation and refuse (also environmental health)

• Number of poor households with (full allocation) or without access to basic services/infrastructure (partial allocation)

• Poor household currently defined as households with incomes of ≤R800 per month (2001 Census data)

– R6.7b was added to LGES over baseline for the 2010 MTEF for electricity bulk increases

• Subsidised electricity provision (inclining block tariffs)– Costs recouped at higher levels of use through the increased

tariffs – The inclining block tariff result in the tariff for poor customers

declining by 8 % compared to the 2009/10 tariff and 18 % in 2010/11

– Implementation challenges to be addressed

- Secret -26

• Funding distribution infrastructure backlogs will require additional increases in tariffs– Higher tariffs control demand for electricity

• Free Basic Services was announced in 2000 and Electricity Basic Services Support Tariff (EBSST) Policy was introduced in 2003

– EBSST policy prescribes that an allocation of 50kWh per month be provided to all poor households connected to national electricity grid in both Municipal and Eskom areas of supply

• Poor households cushioned by the free basic electricity policy, inclining block tariffs and solar water geyser programme

Support to the poor through Free Basic Energy

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Monthly Income as cut off for Indigent Policy (DCoG data)

Province Number of Munic R940 R1100 R1880 other

Western Cape 30 1 0 13 14

Eastern Cape 45 1 6 15 14

Northern Cape 32 0 3 15 12

Free State 25 2 5 4 9

KwaZulu-Natal 61 3 14 12 21

North West 25 0 11 5 5

Gauteng 14 0 1 7 3

Mpumalanga 21 1 5 7 5

Limpopo 30 0 16 3 5

Total 283 8 61 81 88

Funding Options / Models Electricity Indaba Presenter: Marissa Moore| 16 March 2012.

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