Image: Water leak in road, Johannesburg/Bram Lammers Photography for PARI
By Tracy Ledger and Jugal Mahabir
[First published in Daily Maverick]
Extravagant councillor lunches should be sacrificed to ensure that everyone in Johannesburg receives their constitutional right to water, not the other way around.
Johannesburg’s water system is in crisis: almost all areas of the city have experienced water outages over the past few years, and some are regularly without water for days, even weeks.
Despite the decline in service quality, water tariffs have increased by almost 200% over the past 10 years – far ahead of inflation. Good quality, reliable and affordable basic services are a critical foundation of equitable development. Delivering these should be at the top of Johannesburg’s priority list.
The situation is worsening for multiple reasons, but the single most important is the dilapidated and leaking Johannesburg Water infrastructure. This not only contributes directly to service interruptions, but also to the rapidly rising cost of water.
Non-revenue water losses in the city are at 46%, and 25% of all the water that the City of Johannesburg buys from Rand Water disappears out of the dilapidated system through leaks. Those leaks waste 400 million litres of water each day, for which Johannesburg Water is paying R6-million – every day. That lost R2.2-billion a year is recovered through higher water tariffs.
Repairing old and broken infrastructure is, therefore, critical to improving services and reducing costs. And here is the supposed problem: Johannesburg Water says it needs R3-billion each year for the next 10 years to replace and upgrade infrastructure, but doesn’t have the money. Instead, it has managed to budget for only around R900-million in the current financial year.
The difference between budgeted maintenance and actual requirements is almost the same as the value lost to leaks. The faster that infrastructure is repaired, the faster Johannesburg Water will become financially sustainable.
Poor choices
At first glance, the “we cannot afford it” argument appears to have merit: Johannesburg Water billed just over R10-billion in the past financial year, but recorded a negative net cash flow after taking account of expenses. It doesn’t have additional funds to allocate to infrastructure maintenance and upgrading.
But the City of Johannesburg does. It just chooses to spend the money on less important things than water infrastructure.
A step back: Johannesburg Water is a separate municipal entity, with all its revenue and expenditure ringfenced from the rest of the city. That is, it is intended to operate entirely within its own revenue and expenditure, and to rely on its own resources for infrastructure maintenance and upgrading.
Ringfencing in this manner is generally considered to be good practice and is one of the basic foundations of Operation Vulindlela’s proposed new municipal utility model. The idea is that income from a specific service – in this case water – is kept within that service and doesn’t form part of the city’s general revenue.
It’s important to note that there is nothing illegal about transferring income from one kind of municipal service to another; to, for example, use a portion of electricity revenue to fund sanitation infrastructure maintenance. The local government fiscal framework is based on this cross-subsidisation assumption.
In the past (when Eskom’s bulk costs were very low), municipalities generally earned a good surplus on electricity sales and a portion of this surplus could be (and was) used to fund other municipal services.
Ringfencing utility revenue is intended to make service provision financially sustainable by preventing such transfers into municipal general revenue accounts.
Unfortunately, times have changed and in almost all municipalities, electricity and water services struggle to operate on a break-even basis. As the Johannesburg Water example shows, ringfencing won’t achieve the financial sustainability goal when the utility doesn’t have enough own revenue to fund essential expenditure.
In these circumstances, ringfencing provides the municipality with the opportunity to plead poverty and neglect their infrastructure, because there isn’t “enough” money.
But the cross-subsidisation model can also go in different directions: the original policy intention was never specifically for electricity to subsidise other functions; that was just the revenue reality at the time of very low Eskom bulk costs. The basic principle is that cross-subsidisation must be used to ensure that a municipality can fund its most important functions, but there is no prescription about what revenues should be used for that purpose.
In the financial year to June 2024, the City of Johannesburg had the following main categories of gross revenue (ie before the deduction of operating costs):
- Electricity: R19.2-billion;
- Water: R10-billion;
- Wastewater: R6.9-billion;
- Waste: R3-billion;
- Property rates: R17-billion; and
- Share of the national fuel levy: R3.8-billion
Property rates and taxes is the second-largest category of gross revenue, and unlike electricity and water, has very few direct costs associated with it. Property rates and taxes are the main source of general revenue in the city, with the share of the national fuel levy.
Some of that revenue is being used for basic services essential to meeting the city’s developmental mandate, such as the maintenance of roads, transport infrastructure and public space.
Non-essentials
But there are also things that the city spends money on that are clearly not essential to delivering a developmental mandate: exorbitant costs for councillor lunches, unnecessary office space and a range of sponsorship and events that are not directly contributing to improved service delivery. Last year, the city wrote off more than R1.5-billion in irregular expenditure.
This was never how the local government fiscal framework (LGFF) was intended to operate; that the most important basic services would be underfunded, while money was spent on far less important things.
The foundation of a developmental local government is that budgets will reflect development priorities first; that the most important obligations of the municipality to its residents will be funded from all available revenue before anything else is paid for.
Extravagant councillor lunches should be sacrificed to ensure that everyone in Johannesburg receives their constitutional right to water, not the other way around.
Johannesburg needs to fundamentally revise how it puts a budget together, and to implement a prioritisation strategy that reflects its constitutional obligations.
This means that all municipal revenue must be considered as general revenue.
From that general revenue, the city must ensure that its most important functions (from the point of view of residents – fully operational libraries and sports facilities, for example) are fully funded.
Whatever is left over is then available for less important activities. The implication is that a portion of property rates and taxes income must be allocated to essential functions like water infrastructure maintenance.
The LGFF precisely intended that surpluses in one area would fund essential requirements in another. At the time, the most significant surpluses were in electricity, but times have changed. The intention always was that revenue earned from one source would be used to fund priority development areas – and there is no greater priority than the right to water.
The City of Johannesburg has a constitutional obligation to ensure that the most important constitutional rights are funded first, before any other claims on that revenue.
In addition, the city needs to demonstrate that it has made every effort to fund its infrastructure backlog by cutting non-priority expenditure before it borrows more money that will further increase services costs.
Dr Tracy Ledger (Just Transition Programme Lead) and Jugal Mahabir (Local Government Programme Lead) are senior researchers at the Public Affairs Research Institute.
