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The South African Cities Network (SACN) has released its State of Cities 2020 Financial Report, showing the difficulty the country’s major cities face balancing their books.
Cities are operating in a difficult environment, with continued low economic growth and increasing fiscal risk, but they have still increased their revenues by an average of 5.7% per year, above the growth in operating spending of 5, 5%.
The report analyzed nine cities: Johannesburg, Cape Town, eThekwini, Ekurhuleni, Tshwane. Nelson Mandela Bay, Buffalo City, Mangaugn and Msunduzi.
It found that municipalities are struggling to generate enough revenue to keep their service levels high, and this has been greatly exasperated by the Covid-19 pandemic. “There is just very little money for everyone,” he said.
“There are also the challenges of raising money on behalf of the public, as many cannot or don’t want to from an affordability standpoint. In some cases, people are also taking the procurement of services, for example, water into their own hands, which also affects collections. “
The growing problem of revenue collection is compounded by the inability of the public, either through willingness, which is more complex to address, or affordability, to pay for city services, as many have lost their jobs or family income has been reduced, and it’s a problem. significant concern for cities.
“And although the price increases have been largely driven by higher water rates, all services are not affordable for the poorest. As such, structuring and setting rates is a delicate balancing act, ”said Danga Mughogho, program manager for the South African Cities Network.
“So reviewing affordability is essential, especially for lower-income households. Given this, bill paying by higher-income clients is crucial to generating income, cross-subsidizing vulnerable households, and ensuring continued financial sustainability.
“However, a good part of this demographic is looking for alternative supplies, for example electricity that is unreliable and expensive, which further affects the financial collections of the cities.”
What people pay
The report analyzed what residents are paying for a number of services in the country, with a particular focus on the methodology on ability to pay, the SACN said.
The fees charged by the nine cities were used to estimate household bills and compared to household income, using four standard household types defined based on property value, electricity and water consumption, and the frequency of solid waste disposal.
The progressivity of municipal bills in the nine cities was then analyzed by comparing the cost of a type A package (low-income households) with a type D package (high-income households).
Municipal bills for each city are compared to household income, using the four standard household types mentioned above. The analysis includes only fee-paying households and therefore excludes indigent households. The types of homes are specified based on four essential characteristics:
- Property values.
- Electricity consumption (monthly consumption in kilowatt hours, kWh).
- Water consumption (monthly consumption in kiloliters, kl).
- Solid waste disposal frequency (from a 240-liter container).
According to the data, household income can be divided into three main groups:
- Income bands 0 to 4 (households earning less than R3,200 per month in 2011 rand) account for about 53% of all households in the city. According to city indigence policies, most of these households would not be subject to municipal taxes or service charges, as long as they remained within certain consumption limits.
- Income bands 5 to 8 (households earning R3,200 – R51,200 per month in 2011 rand) represent 42% of all households in the city. These households are responsible for fees and service charges.
- Income bands 9-11 (households earning more than R51,201 per month in 2011 rand) account for only 5% of all households in the city and can definitely afford to pay their municipal bills.
The report noted that the composition of municipal household bills is influenced by the way a city designs its rates and charges for services, as well as the relative prices and volumes of services consumed by households.
Cities make different strategic decisions about how to balance rates and fees, and some cities choose to charge higher property rates and keep rates lower, and others choose the opposite.
This is a key reason affordability is best evaluated on the municipal bill as a whole: a city may appear to have very cheap water charges but have high property rates, while households experience these costs as a package through of the complete municipal bill, he said. .
On average, low-income households (type A) pay around R1,425 per month for services, while high-income households (type D) pay more than four times as much, at R6,119.
Electricity expenses (including the basic rate) make up the largest part of municipal bills in all cities and for all types of packages, ranging from 47.5% (45.1% + 2.3%) to Type A at 54.7% (53.1% + 1.6%) for Type D.
Water rates (including the basic rate) represent the second most important part, representing between 28.2% and 17% for types A and D, respectively.
In general, property taxes are structured as a progressive tax, and your share of municipal bills increases across all package types, from 5.9% for Type A to 13.8% for Type D.
Between 2017 and 2019, prices for all service packages increased in most cities. Water charges contributed the most to the increase in the price of service packages.
Ultimately, cities can only provide affordable services within their overall financial capacity. In this regard, the report suggests that cities may need to consider interventions, such as:
- Reduce service levels to make them more affordable;
- Greater focus on basic services;
- Avoid unfunded or expanding mandates;
- Make better use of sources of income than real estate rates and fees.
He also questions whether perhaps it is time for a complete overhaul of the local government fiscal framework.
“Now is perhaps the time to reopen the debate on a new fiscal instrument for cities in order to ensure continued financial sustainability,” Mughogho said.
Read: How Much Money South Africa’s Biggest Cities Make
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