Cash management,
tariffs &
cost recovery
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CASH MANGEMENT
IMPORTANCE of TARIFFS
TARIFF PRINCIPLES
COST RECOVERY
CONCLUSIONS
What is the most important operational activity of a
municipal CFO?
To ensure sufficient cash available to sustain operating
activities
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2010/2011 – 66 municipalities under financial
distress
30 June 2012 - Aggregate municipal consumer
debt - R77.6 billion
30 June 2011 – Aggregate municipal consumer
debt - R64,6 billion
Growth since 30 June 2012 – more than 20%
A breakdown of consumer debt as at 30 June 2012 is:
Government
R3,2 billion (4.1%)
Households
R50,8 billion (65,4%)
Other (business, industry) R23,6 billion (30,5%)
Total
R77,6 billion
Government is buffered against the practical survival
challenges experienced by households and industry
Consumer debt - factors
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Affordability for example, unemployment and
pensioners;
Resistance to pay as a result of claimed poor
service delivery for example incorrect consumer
accounts or still clinging to the pre-94 payment
boycotts; and
Ineffective collection for example a failing
disciplinary system to address non-payment on a
fair basis and political interference.
AGSA audit opinions for all municipalities, 2006/07 to 2010/11
300
4
4
3
4
32
250
46
40
7
13
120
115
1
54
91
113
Number of Municipalities
200
73
150
Audits outstanding
Unqualified - without findings
63
Unqualified - with findings
Qualified
50
Disclaimer
Adverse
100
104
110
50
53
53
55
103
50
19
0
2006/07
11
10
7
7
2007/08
2008/09
2009/10
2010/11
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What is the most important annual activity in a
municipality?
The approval of a balanced budget
What is the most important objective of a
municipality?
Service delivery
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Do ratepayers have a right to complain?
Yes!
Why?
Because of the budget agreement.
BUDGET AGREEMENT
Between the community and the municipality:
 Municipality promise:
 Provide
goods and services at an agreed quality and
quantity
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Community commitment:
 Pay
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the agreed rates and tariffs.
The setting of rates and tariffs – seldom major arguments
Defaulting to budget agreement – results in major arguments
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The setting of rates and tariffs – seldom at the core of
major arguments
Defaulting to budget agreement – results in major
arguments
Tariffs – basic principles
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Goods and services have value
Free market trading - a value (tariff) is attached to
goods and services that benefit both parties
Municipality - only supplier of municipal goods and
services - not free market
Consumers does not have a strong bargaining edge rely on the integrity of their political representatives for
fair tariffs.
Viable trading - elements
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The quality and quantity of the good or service must
be as promised by the supplier;
Full cost recovery – effective tariffs & payment on
due dates.
Legislative framework
Section 74(1) of the Municipal Systems Act (Act 32 of
2000):
 The
municipal manager
 must implement the tariff policy adopted by the
council
 on the levying of fees for municipal services
 provided by the municipality itself
 or by way of service delivery agreements.
TARIFF ISSUES
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Cognisance of:
the tariffs applicable elsewhere in the economic region, and
 the impact of tariffs on local economic development
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Tariffs ≠ Taxes
Uniformly & fairly applied throughout the region
Tariffs should recover the cost &:
should be directly related to the standard of service received and
 the quantity of the particular service used or consumed
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Annually review - indigency support programme
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Differentiation between categories of consumers ito
the Constitution and other legislation – must be
reasonable and fully disclosed in the budget
Take due cognisance of the high capital cost of
establishing and expanding trading services
Tariff adjustments - effected from 1 July each year
All minor tariffs - standardised within the municipal
region & adjusted annually in line with the CPI.
TARIFF PRINCIPLES
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The two most important qualities of a tariff
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Simplicity &
Transparency
Consumers should be able to relatively easy
calculate (verify) the service charges levied
CFOs should be familiar with the tariff principles
and policies to properly advise their councils
Principle
Whenever costs are measurable,
they should be recovered by way of user tariffs (user
charges), and not taxes.
COST RECOVERY
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Costs must be recovered to ensure the provisioning of
the relevant goods or services is sustainable
Tariffs must be realistically calculated:
 based
on reliable quantities and
 the required standard of the services
Measurable services –
Cost recovery is achieved by charging the end-users the
total cost of production plus a relevant portion of the longterm operating and maintenance costs, eg:
A consumer who wanted to have electricity provided to his
home would be expected to pay:
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the cost of connecting the house to the electricity grid;
a portion of the amortized operating and maintenance cost of the
bulk infrastructure required to generate and distribute electricity,
and
a rate on the volume of electricity used based on the marginal
cost of every kilowatt hour of electricity consumed.
Models used for determining cost
recovery rates
Measurable services:
 Downward-sloping marginal cost curve - economies of
scale resulting in those consuming more, charged less per
unit than those consuming less.
 The size of a marginal cost will change with volume and
includes the following:
variable costs dependent to volume,
 fixed cost independent to volume,
 jump fix cost increase or decrease.
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TOTAL COST
Price
Total cost
Variable cost
Fixed cost
0
1 2
10
Volume
TOTAL COST (JUMP IN FIXED COST)
Price
Total cost
200
Variable cost
140
100
Fixed cost
0
Volume
1 2
8
10
12
MARGINAL COST
Price
0
1 2
10
12
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Progressive block tariff model make the initial levels of consumption (blocks) more
affordable, or even free, while charging
increasingly higher prices as the consumption levels
rise.
Not easily measured services
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A flat rate that covers the average fixed and
variable cost of the service.
Equity concerns can be dealt with through the
application of differential rates.
All cost-recovery models depend on ‘ringfencing’
CONCLUSIONS
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Municipalities should be given the opportunity to
present realistic budgets
Service delivery must be on standard (as agreed
during the budgeting process)
Tariffs should be simple and transparent
Cost must be recovered
Cash management must be disciplined
No political interference.