The City of Johannesburg’s trading services are depleting resources because no one holds a residual claim on their performance.
City Power and Johannesburg Water generate revenue; however, their cash is transferred into a central municipal account. Surpluses are absorbed into the general fund, while deficits are covered by ratepayers, national transfers, or additional borrowing.
Managers face few personal consequences for high losses or poor collection rates. The result is predictable: water losses approaching 45%, electricity losses around 27%, mounting arrears, and an infrastructure backlog measured in hundreds of billions of rands. The Austrian school of economics has long warned that, without residual claimancy, resources are systematically misallocated. Johannesburg provides a textbook example.
Residual claimancy is the right to retain what remains after all costs have been met, or to bear the shortfall when they have not. In a private business, this claim is held by the owner or shareholders. Their wealth increases with the efficient use of resources and decreases with waste.
In a municipal utility, the residual is diffuse. Political appointees, bureaucrats, and elected councillors neither pocket the surplus nor personally fund the deficit. The costs are socialised across residents and national taxpayers, while the benefits of careful management are limited and delayed. Soft budgets and the expectation of bailouts further undermine fiscal discipline.
There are a couple of practical reforms that can reintroduce residual claimancy without requiring full privatisation or a political revolution. These reforms fit within the existing Municipal Systems Act of 2000 and the Municipal Finance Management Act of 2003, and are already partially practised in better-run metropolitan areas.
The first step is the genuine ring-fencing of the trading services. City Power and Johannesburg Water must become properly capitalised entities that retain their own surpluses and absorb their own losses. The practice of cash sweeping into the metro’s central account must cease.
Each entity should publish audited full-cost accounts that include realistic maintenance and capital charges. Management and boards should operate under performance contracts that link remuneration and continued employment to measurable outcomes such as collection rates, reductions in physical and commercial losses, and adherence to maintenance standards.
When an entity generates a surplus after meeting its obligations, it retains the residual for reinvestment or debt reduction. Conversely, if it incurs a deficit due to inefficiency or poor credit control, it must reduce costs or adjust tariffs within a regulated band rather than drawing on the general rates account. This arrangement effectively makes the entity a residual claimant. Those closest to the pipes and wires suddenly have a vested interest.
Ring-fencing alone is insufficient if the residual still vanishes into bureaucratic opacity. The second reform ensures the residual is visible and felt by ratepayers. Surpluses remaining after full cost recovery and prudent reinvestment should translate into tangible relief: a rates rebate, a freeze on tariff increases, or a dividend-style credit on municipal accounts.
Deficits resulting from operational failures or non-payment should be recovered transparently from the same rate base or through targeted tariff adjustments, rather than concealed within national equitable-share allocations or soft loans.
Residents who pay directly experience the consequences. Efficient service reduces their bills, while persistent waste increases them. Although this feedback loop is less sophisticated than private shareholding, it is far more effective than the current system, in which municipal deficits are socialised nationally and surpluses disappear.
Neither of these reforms will work without credible enforcement of payment. Residual claimancy collapses when free-riders can consume without contributing. The culture of non-payment, coupled with weak collection, must be confronted if there is to be any hope of rescuing South African municipalities.
Prepaid metering, consistent disconnection of non-payers (including those politically connected), and rigorous credit control are therefore prerequisites for any attempt to implement these reforms. Cape Town’s higher collection rates (97% compared to Johannesburg’s 83%) demonstrate that rather than demography political will determines outcomes. Johannesburg can and should adopt these methods without replicating the politics to which they are so inclined.
Critics may claim that these measures are “anti-poor.” However, the opposite is true. Collapsing infrastructure and unreliable supply already disproportionately affect the poorest residents. Cross-subsidisation that rewards non-payment while penalising those who pay accelerates the departure of formal customers and deepens the downward spiral.
Residual claimancy compels the system to address scarcity directly rather than obscure it with transfers. It aligns the interests of managers, paying residents, and the long-term health of the network. More importantly, it cultivates a culture in which everyone in society has some degree of skin in the game, thereby facilitating the enforcement of accountability mechanisms.
These steps are evolutionary. They require no constitutional amendment nor sudden ideological conversion of the electorate. They simply apply the basic insight that people allocate resources more carefully when they retain the residual.
Johannesburg’s and other municipalities’ current funding models treat trading services as common pools to be raided. Ring-fencing restores a clear residual at the entity level, while ratepayer feedback reinstates a diluted but genuine residual at the resident level. Together, they begin to replace political allocation with something closer to economic discipline.
Residual claimancy does not abolish local government; it merely insists that those who manage scarce resources face the consequences of their decisions, and that those who pay for the services see the results reflected in their own accounts.
Economic liberty in Johannesburg must start with these unglamorous incentives. Without them, the lights remain off, the taps stay dry, and the country’s economic engine continues its march towards serfdom.
Zakhele Mthembu has BA Law LLB from the University of the Witwatersrand, and is the Policy Officer at the Free Market Foundation.