‘User pays’ idea is lacking

2013-06-02 14:00

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Review committee on state-owned entities has attacked the inconsistency of determining tariffs in different sectors

If the presidential review committee on state-owned entities had done its work a few years earlier, South Africa may have been spared the whole e-tolling saga.

Among the committee’s recommendations, which was released last week and adopted by Cabinet, is that the “user pays” principle should, in fact, not apply to roads.

At the same time, the review found that tariff decisions by regulators like Nersa, Icasa and the National Ports Authority, which set the prices charged by Eskom, Transnet and other major state-owned entities, are “sometimes unpredictable, arbitrary and of poor quality”.

The report reads: “It is unusual that basic infrastructure is funded such that the servicing of debt must rely on exorbitant increases in tariffs as exemplified by the funding methods by Transnet, Eskom and Acsa, and those proposed by Sanral for Gauteng’s freeways.”

The finance minister should prepare an infrastructure economic regulation bill that will eventually lead to a single regulator for the different sectors, according to the committee, which also attacked the inconsistency of determining tariffs in different sectors, as well as the “inability” to effectively review capital projects.

In the long term, entities must be able to avoid the “scramble for capital” that underpins Eskom’s rising tariffs after years of underinvestment.

The committee’s lengthy report took more than two years to compile and makes a multitude of recommendations about the future of South Africa’s hundreds of entities.

Among the overarching recommendations are the drafting of a new entities act to trump all the fragmented legislation governing the state’s companies and agencies, as well as an entities council of ministers – comprising the ministers of finance, public enterprises, trade and industry, economic development, and national planning – to make major decisions.

The idea would be to standardise the manner in which entities report and strictly define government’s role. A handbook for appointing boards is also mooted, among other things, to battle the “situation characterised as ‘political interference’”.

South Africa also needs a central remuneration authority that will determine the rules for paying entity bosses. At the moment, executive pay seems arbitrary with huge differences between entities that have no apparent justification, according to the committee.

Among the recommendations are some serious changes to the foundation of the BEE regime.

Entities range from the large national power utility, Eskom, to the small Brakpan Bus Company, although it is still uncertain exactly how many entities there are (see accompanying story).

The section on entity financing, however, is aimed squarely at large, well-known companies like Eskom, Transnet and Sanral, who are responsible for the bulk of state spending on infrastructure.

According to the report, the “user pays” principle should not apply to roads as they should properly be considered as “social” and not “economic” infrastructure.

Even in cases where the “user pays” principle is more appropriate, such as railways mostly serving mines, the cost should be partially met from other sources of funding, the report continues.

It specifically says that any future “resource rent tax” on mines should be partly ploughed back into mining-related infrastructure.

“South Africa’s small tax base and high unemployment rate limits the power of tariffs because it is generally the same people being taxed on

the ‘users pays’ principle,” reads the report.

“Funding of social infrastructure, including roads, should have less reliance on the ‘user pays’ principle and more on taxes.”

At the same time, reliance on tax revenue is also inadequate, according to the committee. “The emphasis on taxes and ‘user pays’ as the only sources of generating capital for infrastructure must be reviewed, moderated and blended with other diverse policy options.”

The setting of tariffs for power, rail and pipelines was also scrutinised and found lacking. Major problems with bodies like Nersa include the unpredictability of their tariff decisions and the effect this has on entities like Eskom.

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