Bulk Water Tariff Review 2013/14

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Bulk Water Tariff Review 2013/14

17 APRIL 2013

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Outline

• Compliance to section 42

• Impact of previous SALGA recommendations

• Summary of proposed increases and analysis

• Key Issues

• Recommendations

• (Highlights of each WB review)

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Compliance to Section 42

Water Board Compliance to section 42 Quality of the submission

Response to SALGA

comments

Final Submission to the Executive Authority – Compliance

Section 42 (3) c & d

Rand Water Good

Umgeni Water Good X

Lepelle Water Acceptable but can be perfected X

Bloem Water Acceptable but can be perfected X

Magalies Water Acceptable but can be perfected X

Sedibeng Water Acceptable but can be perfected X

Pella Water Requires significant improvement X

Mhlathuze Water Acceptable but can be perfected X

Amatola Water Acceptable but can be perfected X

Botshelo Water Requires significant improvement X

Overberg Water Requires significant improvement X X

Bushbuckridge Water Requires significant improvement

Section 42 (3) (c) Any written comments received from the National Treasury, organised local government or any municipalities (d) an explanation of how such comments have been taken into account.

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Response to previous recommendations

Water Board 2010/11 2010/11 SALGA* 2011/12 2011/12

SALGA 2012/13 2012/13 SALGA

Amatola 8,4% 6,7% 8,3% 7.96% 9.26% 9%

Bush Water 12,46 6,7% 7,27% 7.25% 5% 5%

Bloem Water 10% 6,7% 9.17% 11.4% 9%

Botshelo 16% 6,7% 18% 9,81% 12% 9%

Lepelle Northern 6,5% 6,7% 10,22 8,69% 7.55% 7%

Magalies 18% 6,7% 16,6% 11,5% 8,2%% 8%

Mhlathuze 18% 6,7% 14% 14% 9,4% 9%Namakwa 43% 6,7% 10,2% - - -

Overberg 9,95% 6,7% 15% 12% 4.36% 0%Pelladrift 20% 6,7% 20% - 15% - Rand Water 14,10% 6,7% 12,9% 10,78% 11.3% 9%

Sedibeng 12% 6,7% 8,5% 13% 8,4% 7%Umgeni 6,2% 6,7% 6,1% 6,1% (5.6) 16,9% 9%4

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02

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810

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Cumulative increases - Apr 2010 - Mar 2013

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• In March 2010, the conclusion of the PC on Water and Environmental Affairs, after presentations by DWA, Water Boards and SALGA was that DWA needs to engage SALGA before finalising the adjustments.

• This did not happen.

• Water Boards implemented tariffs as per the presentation of DWA to parliament. A question has to be asked as what is really supposed to be the role of parliament in this process.

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Previous recommendations still to be implemented

• Establishment of an independent regulator - work underway in the sector to be completed by 2014

• Review of water pricing policy for whole value chain - work underway in the sector to be completed by 2014

• Bulk water tariff determination should be a multi-year process - had discussions with DWA

• Water Boards require balanced Medium and Long-term Capital Investment Programmes

• Expense parameters should be set by DWA – especially for Energy and Staff

• Tariff Policy is required to standardise approach to funding of assets and operations

• Water Board funding models to be reviewed – over-reliance on debt?

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Summary of proposed tariff increases

Water BoardProposed Tariff (ave) 2013/14

Increase requested

Previous year’s increase

SALGA projected increase @ 9.3% elect. increase

Rand Water R5.52 9.82% 12.90% 8.59%

Umgeni Water R4.70 8.90% 16.90% 8.44%

Lepelle Water R4.50 11.60% 12.25% 10.10%

Bloem Water R4.37 11.00% 11.00% 9.83%

Magalies Water R4.65 11.50% 9.78% 10.35%

Sedibeng Water R7.17 8.50% 8.50% 7.69%

Pella Water R3.20 7.00% 9.15% 3.71%

Mhlathuze Water R3.35 9.00% 9.40% 8.47%

Amatola Water R 7.55 8.41% 5.9% 7.88%

Botshelo Water R5.71 13.6% 11.30% 12.62%

Overberg Water R 7.00 14.68% 0.00% 13.30%

Bushbuckridge R4.37 12.00% 5.50% 11.50%

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Summary of Proposed Increases

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Absolute values of tariffs

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Components of tariff

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2 Analysis of Net Profit Margin – 2013/14

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Key findings

• Affordability of above inflation increases• Impact of energy increases• Chemical cost increases• Interest cover (surplus) requirements• Debtor management• Tariff Structure?

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Affordability of above inflation increases

• Increases now typically in excess of inflation as well as in excess of equitable share increases

• Household expenditure increasing at a greater rate than household income (2005/06 – 2010/11)

• Ratio analysis shows many examples of increasing debtor balances, and increase in ‘Debtors’ days’.

• R2.4bn owed to WB’s of which R1.34bn is in arrears (and mostly owing for more than 120 days).

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CASE OF TWK

Tariff component Increase

Consumption charge Between 18% - 40%

Basic levy 44%

Capital levy 100%

Effective Increase 37%! As opposed to 16% as suggested in the DWA submission

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Effect of new tariff structure

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Bottom line

• 37% effective increase

• 16% increase as stated not true reflection

• Inordinate increase in basic levy – 44%

• New capital levy – 6% of total cost

• Higher basic levy encourage higher usage to obtain better unit rate

• Sliding scale discourage higher usage

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Impact of energy increases

• Electricity now a major cost driver

• Eskom increases unavoidable

• Consider task team to look at initiatives that can be applied at other Water Boards – e.g. Umgeni’s consideration of a methane gas harvester to generate up to 40% of their energy needs at the plant.

• Energy should be a driver (incentive) to:– Improve efficiency– Reduce water loss

• What evidence is there that WB’s are pursuing these options?

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Chemical cost increases

• Heavily influenced by Exchange Rates due to high import component

• Water Boards need to be more explicit about how they’re trying to generate cost savings (or efficiencies) in this area.

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Interest cover (surplus) requirements

• Some Water Boards are budgeting for high profit margins in order to satisfy the banks with respect to interest cover

• Surplus funds are taken to Reserves – creates a mismatch for a user between what he/she must pay, and the benefit that he/she receives

• Do Reserves ever end up getting used if Lenders are focused on interest cover and not contributions from Reserves?

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Bad debts still a concern

• Most Water Boards base their tariff models on the assumption that debt collection will improve. However the actual history of the past 3 years reveals regular non-payment in some cases and evidence of reduced collection efficiency.

• Support the task force that has been convened to assist with a centralised process for arbitrations of disputed amounts, and sharing of best practice.

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Issues relevant to certain Water Boards

• Capex plans often not supported by growth projections - lower return on assets– Umgeni, Overberg, Magalies

• Secondary work distracting from the primary - cost of secondary work imparting on bulk water pricing – Magalies, Amatola

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Capex plans not supported by growth projections

Water Boards such as Umgeni, Overberg and Magalies are providing for significant CAPEX over the next 5 years, but are not projecting a proportional increase in water sales.

• Leads to a lower Return on Asset

• Requires a higher tariff since the same volume is having to pay for a larger asset base

• Is correct for refurbishment/replacement, but augmentation should lead to increased volumes

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Secondary work distracting from the primary

Water Boards are allowed to do ‘section 30’ (Secondary) work as long as it does not impact on their ability to deliver on their primary mandate, and as long as it is ring-fenced.

• Magalies: Loss of secondary contracts led to significant increase in the overhead allocation to water schemes – implies that the s30 work was not fully ring-fenced.

• Amatola: s30 work is loss making and therefore impacting on sustainability of the WB – who is paying for the loss?

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Summary of recommendations

Water Board Increase appears reasonable

Consider a lower increase Additional Comments

Rand Water Adjust for 25% water loss

Umgeni Water Work on lower interest cover

Lepelle Water Need to see evidence of improved efficiencies at Head Office level

Bloem Water Intervention required

Magalies Water Affordability and sustainability concerns

Sedibeng Water Recommendations need to be implemented

Pella Water Continue move to long-term sustainability

Mhlathuze Water Reduce depreciation? But tariff is lowest in country.

Amatola Water Smooth tariffs reduce 2014

Botshelo Water Clarity on institutional status required

Overberg Water Renegotiate fixed rate with customers

Bushbuckridge Water Smooth tariffs reduce 2014

DWA Decision Approved all tariffs as per the water boards submissions

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Recommendations

• Regulator needs to intervene on Interest Cover benchmark (to curb growing reserves)

• Need policy guidance on inter-area subsidisation of social development costs

• Continued focus required on Debtor management

• Task force to share ideas on best practice and innovative solutions with respect to reduced energy use, chemical use and other efficiencies.

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Thank you

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Findings for each Water Board

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• Justification required for increasing profit margin.

• Projected water losses of 25% for 2013/14?

• Possible to delay capital investment plans to cater for WC/DM initiatives?

• Reduce interest cover without impacting on debt covenants?

• Conclusion: Adjust downwards

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• Justification required for increasing profit margin.

• Projected water losses of 25% for 2013/14?

• Possible to delay capital investment plans to cater for WC/DM initiatives?

• Reduce interest cover without impacting on debt covenants?

• Conclusion: Adjust downwards

Water BoardProposed Tariff (ave)

2013/14Increase

requestedPrevious year’s

increase

Rand Water R5.52 9.82% 12.90%

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• Lower interest cover possible?

• Social development to be funded by the fiscus

• Recognise accounting loss on retirement fund immediately

• Flat volume growth too conservative? UW says no.

• Conclusion: Adjust downwards (work on lower interest cover)

3030

• Lower interest cover possible?

• Social development to be funded by the fiscus

• Recognise accounting loss on retirement fund immediately

• Flat volume growth too conservative? UW says no.

• Conclusion: Adjust downwards (work on lower interest cover)


2013/14Increase


increase

Umgeni Water R4.70 8.90% 16.90%

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• Very high overhead allocation (22% for some plants).

• Water sold appears to exceed water purchased in some cases

• Cash reserves being built up, no plans for further debt?

• Is cross-subsidisation based on fair principles?

• Conclusion: Consider accepting but need to see evidence of improved efficiencies at Head Office level

3131

• Very high overhead allocation (22% for some plants).

• Water sold appears to exceed water purchased in some cases

• Cash reserves being built up, no plans for further debt?

• Is cross-subsidisation based on fair principles?

• Conclusion: Consider accepting but need to see evidence of improved efficiencies at Head Office level


2013/14Increase


increase

Lepelle Water R4.50 11.60% 12.25%

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• Very low margins projected for next 3 years will make it difficult to raise debt if required.

• At risk of slow Debtor payment

• Customers have very high water losses – impacts on their ability to pay their bulk charges

• Improvements in infrastructure required

• Conclusion: Accept increase – but intervention required.

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• Very low margins projected for next 3 years will make it difficult to raise debt if required.

• At risk of slow Debtor payment

• Customers have very high water losses – impacts on their ability to pay their bulk charges

• Improvements in infrastructure required

• Conclusion: Accept increase – but intervention required.


2013/14Increase


increase

Bloem Water R4.37 11.00% 11.00%

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• Low profit margins, declining ROA, and poor debt collection

• Funding secured yet for Pilanesberg Programme?

• Affordability of projected increases?

• High overheads after loss of s30 work – not ring-fenced?

• Low refurbishment budget – sustainable?

• Conclusion: Accept increase – but affordability and sustainability concerns

3333

• Low profit margins, declining ROA, and poor debt collection

• Funding secured yet for Pilanesberg Programme?

• Affordability of projected increases?

• High overheads after loss of s30 work – not ring-fenced?

• Low refurbishment budget – sustainable?

• Conclusion: Accept increase – but affordability and sustainability concerns


2013/14Increase


increase

Magalies Water Ave: R4.65 Ave: 11.50% Ave: 9.78%

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• Differentiate between Municipal and Mining sectors to allow for cross-subsidisation/full cost recovery from mines

• Confirm DWA Grants for Namakwa

• Improve Debt collection

• Conclusion: Accept increase – but recommendations need to be implemented

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• Differentiate between Municipal and Mining sectors to allow for cross-subsidisation/full cost recovery from mines

• Confirm DWA Grants for Namakwa

• Improve Debt collection

• Conclusion: Accept increase – but recommendations need to be implemented


2013/14Increase


increase

Sedibeng Water R7.17 8.50% 8.50%

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• Heavily reliant on the mine.

• Consider moving towards sustainability for the municipality

• Conclusion: Accept increase

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• Heavily reliant on the mine.

• Consider moving towards sustainability for the municipality

• Conclusion: Accept increase


2013/14Increase


increase

Pella Water R3.20 7.00% 9.15%

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• Accelerated depreciation results in higher tariffs

• Future sales growth very conservative

• Electricity increases appear to be in excess of Eskom rates

• Affordability concerns given trend of above-inflation increases.

• Conclusion: Consider a lower rate

3636

• Accelerated depreciation results in higher tariffs

• Future sales growth very conservative

• Electricity increases appear to be in excess of Eskom rates

• Affordability concerns given trend of above-inflation increases.

• Conclusion: Consider a lower rate


2013/14Increase


increase

Mhlathuze Water R3.35 9.00% 9.40%

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• Losses on secondary activities are over-shadowing the primary activities

• Cash-flow capex projections not supported by Business Plan

• Proposing a sharp increase, followed by 2 years of tariff reductions – why not a sustained (lower) increase?

• Significant drop in turnover predicted for 2013 – Secondary?

• Conclusion: Smooth tariffs – reduce 2014

3737

• Losses on secondary activities are over-shadowing the primary activities

• Cash-flow capex projections not supported by Business Plan

• Proposing a sharp increase, followed by 2 years of tariff reductions – why not a sustained (lower) increase?

• Significant drop in turnover predicted for 2013 – Secondary?

• Conclusion: Smooth tariffs – reduce 2014


2013/14Increase


increase

Amatola Water R 7.55 8.41% 0.00%

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• Very poor debt collection and hence liquidity issues

• Continued institutional uncertainty

• Conclusion: Support increase, but urgently need to resolve unsigned SLAs with customers and create clarity on institutional future.

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• Very poor debt collection and hence liquidity issues

• Continued institutional uncertainty

• Conclusion: Support increase, but urgently need to resolve unsigned SLAs with customers and create clarity on institutional future.


2013/14Increase


increase

Botshelo Water R5.71 13.6% 11.30%

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• Is a need to renegotiate water allocations with major customers

• Reduce fixed cost proportion of tariff

• Delay Capex plans

• Reduce Debtors’ days

• Conclusion: Adjust tariff down based on above

3939

• Is a need to renegotiate water allocations with major customers

• Reduce fixed cost proportion of tariff

• Delay Capex plans

• Reduce Debtors’ days

• Conclusion: Adjust tariff down based on above


2013/14Increase


increase

Overberg Water R 7.00 14.68% 0.00%

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• Risk of bad debts

• Consider smoother tariff increase

• Re-model to factor in debt finance

• Conclusion: Adjust tariff down for a smoother trajectory

4040

• Risk of bad debts

• Consider smoother tariff increase

• Re-model to factor in debt finance

• Conclusion: Adjust tariff down for a smoother trajectory


2013/14Increase


increase

Bushbuckridge R4.37 12.00% 5.50%

Documents

Bulk Water Tariff Review 2013/14