May 25, 2012
Block tariff structure enjoys widespread support among municipalitiesBack
Africa|Building|Design|Resources|System|Water|Africa|South Africa|Municipal Water Services|Service|Services|Water Infrastructure|Water Services|Environmental|Infrastructure|Nelson Mandela|Stephen Hosking|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
Creamer Media Senior Deputy Editor
To subscribe email email@example.com or click here
To advertise email firstname.lastname@example.org or click here
Other Water News
Updated 4 hours ago While the current drought plaguing many parts of Southern Africa is taking its toll on mining operations, it will also start to impact on host communities, who are competing with the mines for potable water. Project management consultancy Royal HaskoningDHV mining...
Updated 33 minutes ago Gold-mining company Acacia Mining is looking to go beyond Tanzania into Kenya and West Africa. Acacia CEO Brad Gordon told the Investing in African Mining Indaba that the company’s growth had stemmed from a focus on business fundamentals, people and relationships.
Updated 1 hour 51 minutes ago The 50 MW Khi Solar One concentrated solar power plant near Upington in the Northern Cape has started commercial operation. The plant is operated and maintained by Spanish technology group Abengoa, which owns 51% of the project, with the Industrial Development...
Updated 2 hours 6 minutes ago Mining is good for the world if done sustainably, South32 CEO Graham Kerr said on Monday. Speaking at the Investing in African Mining Indaba, Kerr said the current challenge was around excess supply, which was risking long-term sustainability.
Recent Research Reports
Construction 2016: A review of South Africa's construction industry (PDF Report)
Creamer Media’s Construction 2016 Report examines South Africa’s construction industry over the past 12 months. The report provides insight into the business environment; key participants; local demand; geographic diversification; corporate activity; black economic...
Energy Roundup – February 2016 (PDF Report)
The February 2016 roundup covers activities across South Africa for December 2015 and January 2016 and includes details of a Government Gazette notice that confirms Cabinet’s decision to move ahead with the 9 600 MW nuclear procurement programme; State-owned power...
Energy Roundup - December 2015 (PDF Report)
The December 2015 roundup includes details of State-owned utility Eskom’s application to claw back R22.8-billion; South Africa’s ranking as an investment destination for renewable energy; and a nuclear expert’s thoughts on reactor designs for South Africa’s nuclear...
Water 2015: A review of South Africa's water sector (PDF Report)
Creamer Media’s Water 2015 Report considers the aforementioned issues, not only in the South African context but also in the African and global context in terms of supply and demand, water stress and insecurity, and access to water and sanitation, besides others.
Input Sector Review: Pumps 2015 (PDF Report)
Creamer Media’s 2015 Input Sector Review on Pumps provides an overview of South Africa’s pumps industry with particular focus on pump manufacture and supply, aftermarket services, marketing strategies, local and export demand, imports, sector support, investment...
Liquid Fuels 2015: A review of South Africa's liquid fuels sector (PDF Report)
Creamer Media’s Liquid Fuels 2015 Report examines these issues in the context of South Africa’s business environment; oil and gas exploration; fuel pricing; the development of the country’s biofuels industry; the logistics of transporting liquid fuels; and...
This Week's Magazine
Power and automation company ABB is in the launch phase of its highest payload, multipurpose industrial robot, the IRB 8700. The robot has a reach of 3.5 m and can handle a payload of up to 800 kg. “When designing the IRB 8700, we emphasised reach and payload, as...
Identity and Access Management (IAM) is a critical facet of a connected security ecosystem, as controlling the confidentiality, integrity and authorisation of data access and use is key to securing new digital business channels. However, companies face several...
Data underpins digital business models, the digital economy, the Internet of Things and the fundamental changes in the ways people interact and protecting data is crucial to securing new ways of doing business, says T-Systems South Africa information and...
The City of Cape Town will issue a tender for the procurement of electric buses for its MyCiTi service, in line with the council’s commitment to lower its carbon footprint, says executive mayor Patricia de Lille. The tender, to be advertised early in February, will...
The iSimangaliso Wetland Park Authority signed a R10-million contract last month with local tailings storage facility specialists Cyclone Engineering Projects to remove about 100 000 m3 of dredge spoil obstructing the natural course of the uMfolozi river, in...