How will disruptive socio-economic trends and breakthrough technologies impact municipal financial sustainability and how should local government adapt to accommodate these developments?

Louis Fourie, Senior Business Consultant for Aurecon, addressed this question at a recent Next Generation local government round-table discussion in Cape Town. In a detailed presentation on the impact of rapid change on established operational and financial models, Fourie addressed some of the most pressing issues facing local government today.

“Facing the challenge of providing a better quality environment for local populations that are continuing to expand rapidly under urbanisation pressures, municipalities across the country are under severe financial strain and are budgeting for shortfalls,” said Fourie.

“One of the biggest sources of revenue is the sale of electricity but this revenue stream is being severely constrained, resulting in a negative impact on their revenue and cash flow.”

A recent analysis released by PricewaterhouseCoopers paints a grim picture. Local government budgeted for a R5 billion loss in the 2015/16 financial year while municipalities are owed R113 billion in unpaid service fees.

“Against this backdrop, disruptive trends such as rapid urbanisation, changing demographics, resource scarcity, shifts in global economic power and technological breakthroughs are also having an impact,” Fourie noted.

“Recognising that in today’s world change is the norm, the way in which municipal finances are managed needs to be completely revolutionised. Simply focusing on deficits and ways in which to increase revenue in specific areas isn’t the solution.”

In view of the importance of electricity as a revenue source, the disruptive impact of renewable energy technology and the switch to mixed-source energy usage needs to be considered. Uber and Airbnb are two well-known examples of how new technologies can disrupt entire industries – and we need to prepare for the effect of similar developments in the energy sector.

From a cost perspective, solar renewable energy can now compete with the cost of electricity supplied through the national grid. This is making it an attractive option for consumers facing steep tariff increases every year, even though the capital cost of making the switch to solar is still a prohibiting factor.

From a residential consumer perspective, using a mix of solar energy and energy drawn from the grid nevertheless makes good financial sense. This is an important consideration for local government as customers using more than 600 kWh per month are most likely to switch to mixed sourcing – and these are their most profitable users. As this happens, it will have a negative, spiralling effect on finances. Municipalities will be faced with even greater income deficits and will need to find ways in which to make up the shortfall.

“The move to mixed sourcing is inevitable. The challenge is, therefore, to find a way in which to manage the effects of the transition.”

The solution, he said, lies in local government developing a more integrated and strategic approach to financial management. An important component of this will be retaining existing electricity customers through efficient and cost-effective service delivery.

“The art and the science of it lies in embracing technologies such as solar and making them part of the overall service offering. We cannot stop the advancement of technology and changing consumer behaviour, so we need to find ways to adapt to these realities effectively,” Fourie concluded.