May 25, 2012
Block tariff structure enjoys widespread support among municipalitiesBack
Africa|Resources|System|Water|Africa|South Africa|Municipal Water Services|Water Infrastructure|Water Services|Environmental|Infrastructure|Nelson Mandela|Stephen Hosking|Water|William Moraka
© Reuse this
A recent Water Research Commission study, led by Nelson Mandela Metro- politan University’s Professor Stephen Hosking, looking into the municipal water tariffs of 15 South African municipalities, found that the primary driver of water service tariffs is the quest to balance tariff revenues with explicit financial costs.
Given that the national government requires this balance, and it is a prudent financial practice, the question arises whether this aspect of municipal water service management is in a sound and healthy state.
The water supplied by South African municipalities may be categorised into nontariff water, water charged at average financial cost (the tariff level), and water charged to balance total revenue with total financial cost.
Nontariff water relates to all water losses and water services supplied at no charge or without national government subsidy support.
Water services are charged at their average financial cost of production to government, selected businesses, other municipalities and residents whose tariffs are paid on their behalf by national government.
The remainder of water service users are charged in a way that balances total revenue with total cost, namely full-tariff-paying residents and businesses not qualifying for average cost tariffs. Revenue, and captured consumer surplus from this group, are increased by means of price discrimination. Those who are prepared to pay more for their water are charged more for it, and the latter are targeted in terms of how much they demand. The more service demanded, the higher the unit rate charged.
South African Local Govern-ment Association water services manager William Moraka confirms that the increasing block tariff structure enjoys wide-spread support among municipalities.
Municipalities argue that it works in such a way as to recover their costs, it enables them to cross-subsidise the poor’s low water-service use with extra payments made by the rich owing to their high water-service use, and it curtails demand for water and capital to build new water infrastructure – both scarce resources.
Along with national government subsidies, this cross-subsidisation has contributed to improved water services to those previously excluded from them.
Unfortunately, not all the findings of the survey were as positive. It was also found that the financial information avail- able to calculate the water service tariffs was often inadequate, costs of provision of services were underestimated and important environmental costs were excluded. More seriously, it was found that there was widespread ignorance and, perhaps, even disregard in some cases of the demand for municipal water services.
The study concluded that the primary current influence on municipal tariff design is com-pliance with water and municipal governance law and policy.
For many of South Africa’s municipalities, meeting the compliance goals is challenging to the point of being almost overwhelming.
Further, there is uncertainty within South African municipalities as to the underlying economic rationale of the water service tariff structure. The use of increas- ing block tariff structures is appropriate for curtailing individual user demand, but other more targeted instruments are superior for the pursuit of other goals, such as cross-subsidising the cost of providing water services to the poor.
Increasing block tariff structures may redistribute income in unintended ways.
The case studies evaluated show that the municipalities calculate water service tariffs by balancing their tariff revenue and explicit financial costs. It is a cost accounting exercise.
When municipalities pay minimal attention to demand, that is, what residents and business are able and willing to pay for, the link between the supply of and demand for water services is undermined. The main concern that this delinking gives rise to is that there may be unacceptable delays in water supply infrastructure being built, with consumer welfare being compromised as a result.
Hosking’s findings raise the question as to whether the increasing block tariff system is as economically meritorious as is commonly thought. It may well be true that a tariff hike is a cheaper way to solve the problem of excess demand than building a dam, but the question remains whether this gain exceeds the cost of consumer welfare and business opportunities lost through municipalities’ ignorance of the demand they face.
Edited by: Martin Zhuwakinyu© Reuse this Comment Guidelines (150 word limit)
Other Water News
Article contains comments
Updated 38 minutes ago E-tolling Gauteng's highways has failed and the system falls short of its intentions, the Opposition to Urban Tolling Alliance (Outa) said on Tuesday. "This system is falling far short of its intentions and targets," Outa chairperson Wayne Duvenage told public...
Updated 51 minutes ago Fuel cell products provider Ballard Power Systems has appointed Randall MacEwen as president and CEO, effective October 6, replacing John Sheridan, who is retiring after serving as the company’s president and CEO since 2006. Sheridan would continue to serve as an...
Updated 1 hour 14 minutes ago Sub-Saharan Africa’s digital revolution was not set to get under way – it had already started, Ericsson VP for strategy, marketing and communication Tumi Sekhukhune told delegates at the Southern Africa Telecommunication Network and Application Conference...
Recent Research Reports
Road and Rail 2014: A review of South Africa's road and rail infrastructure (PDF report)
Creamer Media’s Road and Rail 2014 report examines South Africa’s road and rail transport system, with particular focus on the size and state of the country’s road and rail network, the funding and maintenance of these respective networks, and the push to move...
Real Economy Year Book 2014 (PDF Report)
This edition drills down into the performance and outlook for a variety of sectors, including automotive, construction, electricity, transport, steel, water, coal, gold, iron-ore and platinum.
Real Economy Insight: Automotive 2014 (PDF Report)
This four-page brief covers key developments in the automotive industry over the past 12 months, including an overview of South Africa’s automotive market, trade figures, production and the policies influencing the sector.
Real Economy Insight: Construction 2014 (PDF Report)
This five-page brief covers key developments in the construction industry over the past 12 months. It provides an overview of the sector and includes details of employment in the sector, infrastructure and municipal spending, as well as insight into companies’...
Real Economy Insight: Electricity 2014 (PDF Report)
This five-page brief covers key developments in the electricity industry over the past 12 months, including details of State-owned power utility Eskom’s generation activities, funding and tariffs, independent power producers and prospects for the sector.
Real Economy Insight: Road and Rail 2014 (PDF Report)
This six-page brief covers key developments in the road and rail industries over the past 12 months, including details of South Africa’s road and rail network and prospects for both sectors.
This Week's Magazine
South African State-owned defence industrial group Denel has announced its fourth consecutive year of profits. The group's results for the financial year 2013/2014 were recently announced at its head office in Centurion, south of Pretoria. Revenues grew by 17%, net...
There is little opportunity for JSE-listed infrastructure company Group Five to grow shareholder value in the domestic market, says CEO Mike Upton. He says value can still be found in the private sector, in the renewable and industrial power sector, as well as in...
The National Association of Automobile Manufacturers of South Africa (Naamsa) has announced the event dates of the 2015 Johannesburg International Motor Show (JIMS). The event will take place from October 14 to October 25, 2015, at the Johannesburg Expo Centre, Nasrec.
UK engineering support services provider Babcock is set to deliver the largest order of global truck manufacturer DAF’s truck tractors in Southern Africa to bulk carrier road-based logistics company Ngululu Bulk Carriers (NBC), with 133 trucks to be delivered in...
Digital radio communications in the African local government space can open up the world, but have many challenges to overcome, notes integration and migration of legacy radio communications infrastructure with digital mobile radio company Emcom Wireless head of...