At the mercy of Eskom and its tariff increases {writer: Piet Coetzer}

The Minister of Finance Pravin Gordhan allocated an additional R6.7 billion over the next three years to the equitable share for South African municipalities in his Budget submitted to parliament on 17 February this year.

It remains to be seen to what extent this allocation – of which R900 million will go to municipalities during the present budget year – will lighten the burden of mostly cash-strapped local governments.

At this stage, they are at the mercy of Eskom and its request for a 35% increase in electricity tariff over the next few years.

According to Empowerdex, the increase is not sufficient to achieve the objectives set out by Gordhan in his Budget Speech.

[Since then, Nersa has granted Eskom an increase of 24.8% for this year, 25.8% for next year and 25.9% in 2012]

The increase in the equitable share goes to municipalities over and above what they can raise from their own revenue streams and is intended to extend basic services to the poor and to offset the rising costs of electricity and water tariffs.

“However, to balance the expected tariff increase from Eskom alone, based on the anticipated 30% increase for each of the next three years, the increase for year one needs to be between R2.5 and R3bn.

The increase of R6.7bn presented is a combined figure for the next three years, of which only R900m will be allocated in the 2010/2011 financial year.

Eskom said in a media statement released that, “In addition, to increase electricity access from 74% to 100% of households, an increase of up to R9.7bn will be needed at current prices.

“Of course, the backlog does not have to be eliminated in only one year, but the proposed increase does not allow for much reduction in subsequent years.

“We are concerned that the minister’s allocation won’t stretch far enough,” said Empowerdex analyst, Paul Berkowitz.

These figures do not take into account other municipal challenges such as higher water tariffs, increased costs in sanitation and refuse removal, and reduction of the backlog in water services. However, there is also an assumption that there will be no increase in service delivery efficiency which, if achieved, would lower the cost of provision, the statement said.

Unlike with electricity, there is not clarity on the increased cost of water in the future. If the projected inflation rate of 6% is used as a proxy, the higher costs are likely to be covered by the allocations announced in the Budget.

“Electricity is a large input cost for water provision in a number of municipalities, particularly those in Gauteng, where water has to be pumped to high altitudes. These municipalities could face a shortfall,” Berkowitz said.

But do not forget that the minister further announced a R15.2-billion government guarantee for the Development Bank of Southern Africa to provide loans to “poorer municipalities”, specifically to develop municipal infrastructure.

“This could go a long way in eradicating service delivery backlogs, provided that viable projects are identified and correctly budgeted for. However, we feel that increased service delivery via this infrastructure rollout will have to be supported by additional equitable share allocations made by Treasury to the municipalities in question,” added Berkowitz.

Construction sector

The construction industry is optimistic that of the infrastructure spend programme of R846bn over the next three years, as announced in the Budget, between R160bn and R200bn will filter down to its sector.

According to some of the main industry players, the issue now is how quickly the money will start flowing and if there would be sufficient capacity in terms of skills – particularly at municipal and parastatal level – to implement the planned infrastructure programmes.

With many projects associated with the hosting of the World Cup now coming to an end and most players chasing every available opportunity, margins in the industry are coming under pressure, as the economy is still battling to shake off the effects of the recession of the previous 18 months.