Mubesko Africa has developed a tool to assist municipalities in setting basic tariffs that are easy to understand and will generate sufficient revenue to cover all necessary expenditure.
Many municipalities find themselves in a situation where there is a considerable gap between citizens’ expectations and the reality in terms of what they, in fact, can deliver.
Imbalance between revenue and costs.
In combination with the low-income levels among a large share of the community, the present imbalances between collected revenues on the one hand and actual costs for the provision of services and maintenance on the other represent a massive challenge.
In such a situation, actual facts and transparency are essential ingredients for creating trust. If citizens are expected to pay for a service provided by the municipality, it ’s reasonable to be able to provide them with accurate information on the costs of producing this service.
Impact of unsustainable processes.
Some municipalities in South Africa are operating in a way that is not financially sustainable. They do not generate enough income to cover the costs that should be incurred to provide services properly. To balance budgets, they cut costs, especially on items such as repairs and maintenance and asset rehabilitation. As a result, the condition of assets is declining, hampering the ability of the local authority to continue to provide quality services in future.
Critical need for cost-reflective tarif fs.
The setting of credible cost-reflective tariffs for municipalities is an absolutely critical necessity for any municipality to remain financially viable and sustainable and to render quality services to its consumers and ratepayers.
This important statement is now also emphasised and “enforced” by National Treasury in MFMA Budget Circular 123.
Extracts from Section 5.4 of the circular read as follows:
Setting cost-reflective tariffs.
The setting of cost-reflective tariffs is a requirement of Section 74(2) of the Municipal Systems Act, which is meant to ensure that municipalities set tariffs that enable them to recover the full cost of rendering the service. This forms the basis of compiling a credible budget.
National Treasury compliance.
The National Treasury issued a tariff setting tool and guide as part of MFMA Budget Circular No. 98 (refer item 4.2) on 6 December 2019 and, since 2019, has encouraged municipalities to utilise the tool. With effect, from the 2023/24 MTREF, all municipalities (except metropolitan cities and district municipalities that do not provide any services) as part of both the tabled and adopted MTREF submissions must submit the completed National Treasury tariff tool (in excel format) illustrating that the revenue component of the budget is credible and funded and that the municipality’s tariffs are cost reflective. If the municipality’s initial calculation results in high increases to facilitate cost reflectiveness, it is recommended that such are phased in over 3 to 5 years. The municipality’s strategy in this regard should be included as part of the budget narratives.
Circular 124 on Municipal Debt Relief, refers specifically to municipalities not generating adequate funding from their operations. Paragraph 1.6 of the circular reads as follows:
“A critical component of the conditions therefore relates to achieving a funded budget. This encompasses cost-reflective tariffs, ensuring a complete revenue base, aligning spending patterns to collection levels and optimising and enforcing collection by using both electricity and water as collection tools.”
Paragraph 1.9(iv) of Circular 124 refers to tariff modelling as follows:
“Municipal revenue enhancement initiatives: The National Treasury continues to implement initiatives to address weaknesses in revenue management in municipalities. These initiatives include setting cost reflective tariffs, developing proper budget policies to facilitate revenue enhancement and ensuring completeness of revenue by addressing variances between the billing system and the general valuation roll (GVR).”
Paragraph 6.5 of Circular 124 refers to cost-reflective tariffs as follows:
“Cost reflective tariffs – The municipality must include its completed tariff tool (refer MFMA Circular No. 98 and item 5.2 of MFMA Budget Circular No. 122) as part of the municipality’s annual tabled and adopted MTREF submissions with effect the tabling of the 2023/24 MTREF.
Towards facilitating a funded budget as required in terms of paragraph 6.4, the municipality must demonstrate through the National Treasury tariff tool that the municipality’s tariffs recover what it costs the municipality to render the four main trading – and other services (relevant to the municipality). If the tariff(s) for any service is not cost-ref lective, the municipality should phase the cost-ref lective tariff in over a period of 3 to 5 years. The budget narratives should include the municipality’s strategy in this regard.”
Paragraph 5.4 of Circular 124 refers to critical financial management minimum best practise as follows:
“Municipalities are cautioned that the National Treasury considers the conditions set out in paragraphs 6.1 to 6.14 as critical f inancial management minimum best practise and conf irms that if a municipality fails to meet any and/or a combination of the conditions set out in this Municipal Debt Relief framework , it could (over-and-above the consequences set out in 5.1 above) constitute a serious breach of its financial management f iduciary responsibilities and may also constitute f inancial misconduct as envisaged in the MFMA and Municipal Regulations on Financial Misconduct Procedures and Criminal Proceedings, 2014. The National Treasury reserves the right to immediately invoke section 216 of the Constitution and/or any other remedies available to government in terms of the prevailing legislative framework in such a situation (including instituting individual financial misconduct and/or criminal proceedings).”
Although Circular 124 refers explicitly to debt relief in terms of outstanding Eskom payments, it is significant to notice that the failure to submit a tariff structuring tool can be regarded as financial misconduct and may have severe consequences for the municipality and the responsible officials.
mSCOA , in the Project Segment, makes a clear distinction between the cost of free basic services and the revenue cost of free services. The difference between these two items cannot be determined without proper calculations of the actual cost of services and the revenue collected from the services. To determine the cost of free basic services, a baseline tariff must be calculated based on the cost to deliver services.
Tariff setting can be a very complex process. However, if sufficient data is available and the tariff practitioner is experienced, then complex tariffs can be designed to closely reflect the detail of costs incurred in providing services.
Mubesko has developed a tool to assist municipalities in setting basic tariffs that are easy to understand and will generate sufficient revenue to cover all necessary expenditure.
A distinction must be made between fixed and variable costs to determine basic and unit cost tarif fs. Fixed costs should be covered by basic and/or availability charges, while variable costs should be covered by units consumed.
The Mubesko Tarif f Setting Model Tool.
Several Municipalities have asked Mubesko to assist them in setting cost-reflective tariffs through a tool which is user-friendly and will enable them to meet the requirements of Circular 123. Based on this, Mubesko’s tool accommodates the complete cost-reflective tariff setting function which is now, in terms of the circular, a prerequisite when submitting future budgets to the National Treasury. It was already successfully finalized and implemented at some municipalities to their satisfaction. It was also used with outstanding results during the draft budget tabling to Councils and public participation processes.
What does the Mubesko Tarif f Setting Tool entail?
- It is based on the National Treasury tool principles.
- The tool is excel driven tool but different from the National Treasury tool in that fixed cost and variable cost are automatically determined from the trial balance.
- It calculates baseline tariffs based on the actual cost of rendering services and final tariffs based on strategic decisions incorporated into the calculation process.
- The tool needs a once-of f mapping of the Trial Balance, after which all calculations automatically culminate to all applicable tariffs as per service as well as setting a rates tariff to balance the budget, which has the following characteristics:
– Cost-reflective
– Determines fixed and variable costs
– Divides support services as overhead costs to all the applicable services
– Determines and establishes baseline tariffs
– Highlights financial implications of “strategic” decisions
– Links costs of providing services with tariffs
– Facilitates financial sustainability of the Municipality; and
– Offers a systematic process for tariff setting
The tool to determine the tariffs is developed to be interactive as with every new Trial Balance import, all the facets as described above would automatically be recalculated and all the tariffs adjusted accordingly.
After the model is adjusted and finalised to the satisfaction of the Municipality, the tariff modelling tool is the property of the Municipality.
This tool would be reasonably easy to maintain and utilise by the municipal officials for all future budgets.
The tool assists municipalities in reconciling consumer records with monthly billing and assists municipalities in facilitating revenue enhancement and ensuring completeness of revenue by addressing variances between the billing system and the general valuation roll (GVR).
Tariff Setting Report
The tool is also accompanied by a comprehensive tariff modelling report in which all current deficiencies and shortcomings are identified, followed by a recommended tariff structure to rectify the deficiencies emanating from the tariff setting tool model.
Contact Mubesko’s Managing Director Nico De Kock to find out more and schedule a presentation. nico@mubesko.co.za
Mubesko Africa is a consulting service which offers financial accounting and management solutions, asset accounting and forensic ser vices to the private and public sectors.