Energy GovernanceOp EdPublications

Another Reason Why Eskom is the Bull in the Fiscal China Shop

By Tracy Ledger

 

We have seen many headlines over the past two years highlighting the negative effects of Eskom on the national fiscus. Billions of rands have been allocated to the national utility to try and shore up its fragile balance sheet. The total amount of money handed over to Eskom for this purpose currently stands at about R132-billion, with plenty more to come. The minister of finance has repeatedly highlighted the dangers that the power utility poses to the national fiscal framework because of these huge financial demands. The more money that goes to prop up Eskom, the lower the amount available for critical socioeconomic developmental needs. The enormous fiscal cost of the coronavirus pandemic — both direct, through new expenditure demands, and indirect, through a collapsing tax-revenue base  — makes the price of supporting Eskom from our limited national resources even higher.

But there is another way in which Eskom is undermining our national fiscal framework. It doesn’t get much attention, but the long-term effects may be even more calamitous than those created by its constant need for bail-out cash.

The national fiscal framework effectively determines how much money is available to all parts of government. The key component of that national framework is the equitable division of revenue among the three spheres of government (national, provincial and local). During the negotiations for South Africa’s new Constitution, there was considerable debate around the decentralisation of the tax-raising authority.

Local government already had some own-revenue-raising capacity (property taxes and service charges being the main items), but provinces had hardly any. All income, value-added and related taxes were levied at a national level. In order to counter demands for a federal fiscal system (where provinces would have greater own-revenue-raising capacity), an agreement was reached on a system for the equitable distribution of nationally raised revenue in order to attain a fiscal balance between the available revenue and expenditure of the three spheres of government.

Under the current system, national revenue is allocated among the three spheres (the vertical allocation) and then among the various parts of those three spheres (the horizontal allocation of each vertical allocation) on the basis of a detailed formula. This is reviewed and revised periodically by the Financial and Fiscal Commission and is contained in the annual Division of Revenue Act (DORA).

 

Under the current revenue-sharing arrangements, local government receives by far the smallest share of nationally raised revenue — less than 10% of non-interest allocations in the original 2020/21 budget estimates. At the same time, municipalities have a wide range of responsibilities that are essential to achieving the state’s developmental mandate, most notably the roll-out and maintenance of basic services infrastructure, and the provision of those basic services.

The reason for this apparent mismatch between share of national revenue and expenditure demands lie in the assumptions made in the 1998 White Paper on Local Government about the revenue-raising capabilities of municipalities. The White Paper proceeded on the assumption that, in aggregate, local government could fund 90% of all its operating expenditure requirements from its own revenue. Operating expenditure includes not just operating overheads such as salaries, but the costs of service provision such as payments to bulk service providers and infrastructure maintenance.

What would be the main sources of this own revenue? Property rates (which under the new wall-to-wall system of municipalities would be extended to many more households than before) and service charges — electricity, water, sewerage and refuse removal being the major items — were forecast to be sufficient to finance 73% of total operating expenditure requirements (with the balance coming from other licensing income, rentals, etcetera).

Income from services would comprise the difference between bulk purchases of items such as electricity and water, and the price charged to consumers. The assumptions in respect of the contributions of these different services to municipal revenue and operating expenditure are set out in the table below.

By far the most important source of margin income to local government was assumed to be electricity — in aggregate, some 38% of local government’s total operating expenditure requirement was going to be financed by buying power from Eskom and on-selling it to consumers. […]

go to full article in M&G