Going down in the flood of rate reforms for Joburg

The City of Johannesburg has released its rates policy and assessment rates, as well as tariffs for utility charges for the 2008/09 tax year over the last fortnight, raising some concern, especially in the media, of the prospect of shock increases in rates and user charges for Johannesburg residents. In relation to rates, the City has gone to great lengths to convey the principles of simplicity and competitiveness that have guided their design, but these principle are not echoed in a series of reforms to utility charges, especially the basis for charging for water and refuse removal, which may have some damaging repercussions for already debt-ridden and financial pressed residents, as well as, by implication, the City’s books.

Possibly the most controversial and profound adjustment in a slew of tariff reforms relates to removing the first free step tariff for water (the first 6 kilolitres of water were delivered for free to all residents and the pricing per unit rises exponentially thereafter; progressively increasing the charge for heavier users). At a policy level, the most interesting feature of the reforms is the explicitl opposition to the Department of Provincial and Local Government (dplg) gazetted proposals that put forward a set of rigid, standardised rate ratios for different users to be applied by all municipalities across the country (raising the ire of local government as potentially undermining its fiscal autonomy). Ironically, however, the potential for a significant, above-inflation hike in the average Johannesburg resident’s municipal bill as a consequence of reforms to the rating and user charges systems adds credence to the national government contention that local government needs to be more stringently regulated to protect the national, macroeconomic interest.

 For rate payers, the good news is that the residential cent-in-rand rate has been dropped from the indicative rate of 0,005 announced in November 2007 to 0,004 cents, although new valuations will not necessarily mean that this will result in a lower monthly bill if the value of an individual property has risen. With updated valuations, almost 25% of residential properties will be subject to an increase in rates, while just over 21% will experience a reduction (with relief available for eligible pensioners, sectional title holders and those paying taxes for the first time). But it is owners of the 91,000 vacant properties in Johannesburg, worth an estimated R67.8bn, that will certainly face hikes – they are to be charged four times more than the residential property rate of 0,004 cents in the rand (although rebates will apply where infrastructural concerns have inhibited development). Businesses are also to be charged more (three times more than residential properties; at 0,012).

In a bid to increase densification, the City will automatically offer a 20% rebate for sectional title holders on their property rates, while developers will be eligible for rebates where inner-city and densified residential properties are built. For the 70,000 properties entering the tax base for the first time (such as private schools and properties in Soweto which previously had land values falling under the threshold level), taxes will be phased in over four years. In addition, the residential value exclusion threshold of R150,000 is far in excess of the threshold of R15,000 proposed by the Municipal Property Rates Act, and will apply to 38% of residential properties. But for all households except those registered as indigent, a minimum rates levy of R60 per annum is to apply.

This universal charge is in line with the phasing out of a zero-based first phase of the stepped tariff for water charges - Johannesburg will no longer provide six kilolitres of water free to anyone other than those residents registered as indigent. This means that for residents using between 10 kilolitres and 15 kilolitres, user charges are set to increase in excess of 85% (given the additional cost of R15 for the first 6 kilolitres of water, although the unit costs for units between 7-15 kilolitres will remain the same as last year), while residents using more than 40 kilolitres face a 12% hike. Given that the City’s indigent register is in the process of revision, the removal of a universal, free step effectively represents regressive treatment of residents (essentially increasing the water costs more aggressively for low-end consumers than heavier users).

While the use of an indigent register may be appropriate from a strict poverty targeting approach, some sort of phasing-in is advisable to ensure that progress made in debt collection is not reversed, especially in the case of what is likely to be perceived as unreasonable and disproportionate tariff increases for the working class. For the City, the unintended consequence of trying to encourage better use of a scarce resource across all user groups through higher costing is that the City is at a higher risk of defaulting consumers, especially given the current inflationary economic climate, compounded by the possibility of increased property rates and other user charges.

For properties valued between R700,000 and R1.5m, a monthly charge of R130 is to be levied for refuse removal; representing an increase of 45%, but for those in properties worth less than R150,000, the service  will be free. Unsurprisingly, electricity charges will rise by 21%, but the free lifeline tariff will be increased from 50kW to 100kW (for those households using less than 500kW per month) to soften the impact of increased electricity charges.

  

The break from the tried and tested traditional stepped tariff structure is certainly bold, but in a year of so much reform in the structure of charges, it may be unwise. To this end, the argument advanced by the Democratic Alliance (DA’s) leader of Johannesburg, Mike Moriarty that some sort of impact analysis should have been conducted is understandable. Moriarty’s reasoning is underpinned by concern around potential losses to revenue where consumption is reduced, especially at the top end of the tariff structure. While the conservation argument for the tariffs, as advanced in the City’s press statement (to encourage conservation of scarce resources given the national electricity crisis, projected water shortages and depleting sites for landfill waste), are laudable, risks to revenue from reduced top-end consumption should be clearly modelled, as should the likelihood of default by poorer residents (not registered as indigent).

In addition, it is regrettable for the City, however, that the sweeping changes to rates and user charges this year will mean that many residents are likely to experience above-inflation rises for services and rates, confirming rather than confounding dplg’s contention that there is a need to curtail local government fiscal autonomy where it might result in adverse macroeconomic consequences.

 

Ends.

 

Heese is Municipal IQ’s economist, while Allan is Municipal IQ’s Managing Director. Municipal IQ is a web-based data and intelligence service (www.municipaliq.co.za), specialising in the monitoring and assessment of South Africa’s municipalities. Objections to the proposed rates and tariff structures are to be accommodated during the public participation process, which will run until the end of April.