Intergovernmental Cooperation in Fiscal and Financial Management: Bulk Resources for Municipal Services

Michelle Rufaro Maziwisa, Dullah Omar Institute, University of the Western Cape
Lungelwa Kaywood, South African Local Government Association

Relevance of the Practice

The Municipal Finance Management Act (MFMA) requires extensive consultation before an organ of state can increase the price of a bulk resource supplied to a municipality or municipal entity. This forms part of government’s effort to ensure consistent policy implementation and achievement of macro-economic objectives. This process is comprehensive and must be completed timely and contain motivations to be tabled in Parliament or the relevant provincial legislature. Careful planning is required to meet the obligations of the MFMA before the pricing amendments can take effect.

Local government is generally the major provider of essential services to communities and so their ongoing financial sustainability is important in meeting national objectives. All municipal budgets must be introduced and put forward for debate and approval in council no later than 31 March each year and adopted before 1 July which provides improved certainty in the process. As the purchase of bulk services makes up a significant component of municipal expenditure (roughly 25 per cent) and will impact directly on the tariff policies adopted by council, it is imperative to coordinate and finalise the pricing from bulk resource providers in a timely manner. Municipalities and bulk service providers are encouraged to take into account the government’s broad economic objectives and adhere to the inflation targets when concluding their bulk and retail tariffs. Related mainly to report section 2 on local responsibilities, section 3 on local finances, section 5 on intergovernmental relations and section 6 on people’s participation, this practice note is relevant for the LoGov-project to the extent that it affects bulk municipal services, municipal budgeting and consultation with communities as well as how other organs of state plan and cooperate with one another on matters of national interest.

Description of the Practice

According to Circular no 23 of the MFMA, the water boards should demonstrate how they have taken into consideration SALGA and National Treasury comments before the proposed tariffs can be passed. In response to this requirement, SALGA annually undertakes the review of the water boards’ proposed tariffs. The 2019/20 review included analysis of documents submitted by water boards consisting of the proposed tariff submission to SALGA and business plans. The MFMA provides two significant features in relation to the provision of electricity, water and other bulk resources to municipalities and municipal entities. Firstly, if an organ of state intends to increase the price of such resources, it must undertake a comprehensive consultation process, which must be completed on or before 15 March in any year. Secondly and to complement the consultation process, National Treasury is required to monitor the pricing structures and payments made by municipalities and municipal entities to organs of state for the supply of bulk resources. To do this, organs of state are required to submit monthly statements to National Treasury setting out payments received, arrears and any action taken to recover arrears from municipalities and municipal entities (Section 41). Table 1 describes the practice regarding the approvals for bulk water service providers’ tariffs.

Table 1: Description of the practice- bulk resources for municipal services (Water)[1]

Department of Water Services (DWS) provides resources for 3 consecutive years to water service providers                    Prior 15September
Bulk water service provider calculates tariffPrior 30 September
Consultation with water services authoritiesOct & November
DWS preliminary review meeting of bulk water service provider’s tariffsNovember
Bulk water service provider’s submission to the National Treasury (NT) & SALGA requesting written commentsPrior 7 December
SALGA and NT to provide commentsPrior 25 January
Formal submission to DWS including comments by SALGA, municipalities & NTAfter 25 January
Bulk water service provider’s tariffs tabled in Parliament15 February
Any amendments to tariffs are tabled in Parliament1 March
Water service providers are notified of tariff increase in writing15 March
Water services authority tariff determination process:
Water services authorities to comply with other regulatory processesAfter 15 March
Water services authorities to table draft budget before municipal councilPrior 31 March
Implementation by water services authorities1 July
Water services authorities submit pro-forma statements on water and sanitation tariff determination to DWS as reflected in norms and standardsImmediately after 1 July

Assessment of the Practice

From SALGA’s perspective, the main objective of the analysis was to assess applications received from water boards for tariff increases for the 2019/20 financial year. SALGA undertook to comment on these applications with a view to protect the interests of the municipalities that are served by water boards. In undertaking this analysis, SALGA took into consideration that bulk water tariff increases are required in order to ensure that water boards remain financially sustainable, but this must be balanced with the need to ensure that water remains affordable to municipalities and, ultimately, the end users. The main historic challenge with regards to SALGA’s participation in bulk water IGR processes (specifically, in the tariff increase consultations with local government, by the water boards as regulated through the MFMA) has been the lack of consultation with municipalities which made the submissions and comments weak. The challenge of SALGA to fully represent local governments often resulted in unaffordable tariffs being imposed on local governments, which in turn, passed on the costs to consumers through service charges. From the Treasury perspective, SALGA’s involvement in the tariff consultations for bulk water services allows for the monitoring of the pricing structure of the organs of state for the supply of electricity, water or any other bulk resources to municipalities and municipal entities as well as payments made for such bulk resources. Another challenge more broadly is that there seems to be no ‘board’ as such that is formally responsible for regulating water boards, unlike electricity which has a clear regulator. It is therefore especially important to ensure that submissions by SALGA are taken into account as SALGA is in a way playing a monitoring role although it is also representing local governments in the budget forum.

The practice is one of the useful means to ensure local government budgets are credible to the extent that they are based on realistically anticipated revenues and expenditures. For example, following the review, SALGA rejected eight out of nine tariff submissions from the water boards and urged them to take into consideration the points of reservation SALGA made against their tariff proposals for the 2019/20 financial year. This was premised on the review which revealed that overall, the tariff increases requested by water boards were extremely high and unaffordable to the local government sphere. Largely, the high tariffs were attributable to high input costs, unrealistic demand projections that did not match historical actual consumption of the service etc.[2] There is differentiation in terms of how the practice works in urban and rural settings in that, rural municipalities pay higher tariffs due to higher costs of service provision (topography is the main cost driver). This further exacerbates the financial constraints affecting most rural municipalities characterised by poor or no revenue base and places an additional burden on the national fiscus.

While SALGA made input, the extent to which its recommendations (as the voice of local government) have been taken into consideration reveals a loophole in the IGR system which in turn affects both rural local governments (RLG) and urban local governments (ULG) negatively. The water boards do not always implement the comments / inputs from both SALGA and National Treasury, and consultation is a compliance driven exercise that is often not done in good faith and consultation from SALGA’s view.[3]

References to Scientific and Non-Scientific Publications

Legal Documents:

Constitution of the Republic of South Africa 1996

Organised Local Government Act 52 of 1997

Public Finance Management Act 1 of 1999

Municipal Systems Act 32 of 2000

Municipal Finance Management Act 56 of 2003

Intergovernmental Relations Framework Act 13 of 2005

National Gambling Board v Premier: KwaZulu-Natal 2002 (2) SA 715 (CC)

Scientific and Non-Scientific Publications:

Cameron R, ‘The Upliftment of South African Local Government?’ (2001) 27 Local Government Studies 97

Department of Provincial and Local Government, ‘The Implementation of the Intergovernmental Relations Framework Act: An Inaugural Report 2005/6-2006/7’ (Government of South Africa 2007)

Department National Treasury, ‘Guidelines and Circulars’(national treasury, undated) <> accessed 29 July 2019

Government of South Africa, ‘Report of the Department of Provincial and Local Government’ (1997)

Sokhela PM, ‘Intergovernmental Relations in the Local Sphere of Government in South Africa with Specific Reference to the City of Tshwane Metropolitan Municipality’ (PhD thesis, University of Pretoria 2006)

South African Local Government Association (SALGA), ‘Organised Local Government in Parliament and Provincial Legislatures’ (unpublished paper 2013)

—— ‘Assessment of Proposed Water Board Bulk Water Tariffs for 2019/20’ (2019)

Steytler N, ‘Cooperative and Coercive Models of Intergovernmental Relations: A South African Case Study’ in Thomas J Courchene and others (eds), The Federal Idea: Essays in Honour of Ronald L. Watts (1 ed, Queen’s School of Policy Studies 2011)

—— ‘National Cohesion and Intergovernmental Relations in South Africa’ in Nico Steytler and Yash Pal-Ghai (eds), Kenyan-South African Dialogue on Devolution (Juta 2016)

—— Fessha Y and Kirkby C, ‘Status Quo Report on Intergovernmental Relations Regarding Local Government’ (Community Law Centre CAGE Project, now Dullah Omar Institute 2006) <> accessed 30 July 2019 Watts RL, Comparing Federal Systems (3 ed, McGill-Queen University Press 1999)

[1] National Treasury, ‘Schedule 3: Norms and Standards in Respect of Tariffs for Bulk Water Services Supplied by Bulk Water Services Providers or Regional Bulk Water Utilities to other Water Services Institutions’ (Government Gazette No 39411, Republic of South Africa, 13 November 2015) 123.

[2] This is based on SALGA’s own assessment reports which are not published, but are presented to Parliament and water boards as part of the consultation process.

[3] This is based on SALGA’s own assessment reports which are not published, but are presented to Parliament and water boards as part of the consultation process.