PRESENTATION TO THE PORTFOLIO COMMITTEE ON

WATER AND ENVIRONMENTAL AFFAIRS

24 MAY 2010

Presenters:Mthobeli Kolisa – Executive Director: Municipal Infrastructure ServicesWilliam Moraka – Director: Water Services

STRUCTURE OF

THE PRESENTATION • SALGAs Mandate

• Last year’s issues and how these we dealt with

• Water Tariff regime

• Proposed increases and our comments

• Optimal Institutional Arrangements

• Challenges on the current tariff regime

• SALGAs suggested recommendations

• Conclusion

• Organised local government institution recognised in terms of the Organised Local Government Act

• Mandate– Represent LG (Voice)– Advisor to municipalities– Employer role

• limited to representing municipalities in collective employer processes

• Does not employ on behalf of municipalities

– Profiling LG

Mandate

2010/11 Recommendations'

Issue Recommendation DWA Response SALGAs View

Tariff application increase > business plan for all Water Boards

WB’s to provide justification

Time difference between business planning process and tariffs

Re-look at the two processes and align accordingly

Raw water cost increases up 8% - 13%, capped @ 30%

Revise policy to PPI plus 3%

DWA is revising the pricing strategy – however there is guarantee in raw water costs reduction

Explore this further as part of the revision of the pricing strategy

Asset productivity reduction through capex of 98% but water sales growth of 15.2%

State assumptions of expansionary policy

Long term infrastructure planning is accepted as long as it take capacity demands into account

Infrastructure investments must be moderated by an effective regulator

2010/11 Recommendations'

Issue Recommendation DWA Response SALGAs View

Asset growth debt financed. No equity contributions from shareholder.

a) Appropriateness of debt levels

b) Make equity contribution as shareholder

Water boards to be self fundingNT provides subsidy to finance the trading accountUsers are subsidised through equitable share

Bulk raw and bulk Infrastructure funding should be subsidised where applicable

Wide range of return on assets [0.24% through 23.05%] PPI = 7.72%

Specific motivation for under or over return for each utility

PPI bears little or no relations to the ROAA higher ROA should be welcomed as it suggests that assets are employed productively

Should measure the real ROA excluding inflation

2010/11 Recommendations

Issue Recommendation DWAs Response SALGAs View

Staff Costs < 10%. Chemical costs reduced by advanced procurement.

a) Regulator to scrutinise costs

b) Set cost driver targets

Water boards costs are rising in excess of turnover increasesEconomic regulator will be set up

Supports the establishment of the regulator but short term arrangements are necessary

Pollution of raw water driving purification costs

Reduce pollution. Pricing strategy to introduce waste discharge chargeSALGA and DWA to work together in reducing pollution at resource level

SALGA to give inputs into the pricing strategySALGA is part of the green drop certification processRaw Water pricing to be link to water quality

Limit increases to PPI plus 3%

This is not sustainable cause the trading account have been running at a deficitThis will result in higher borrowings in capex

DWA to take long term view to recover from the apparent historical under-pricing

2010/11 Recommendations

Issue Recommendation DWAs Response SALGAs View

Scrutinise each water board as proposed

No response Short term set up a expert panel Long term Independent regulator w

Create a pricing policy for the entire water value chain

No response The importance of the development of the funding and pricing strategy for the entire value chain cannot be over emphasised

Separation of water board regulation from shareholding

No response Independent regulator will be key in this regard

1st TierNational security

of supply

2nd TierRegional supply to

WSA’s

3rd TierLocal service delivery

and customer management

DWA

BULK PROVIDERS

MUNICIPALITIES

(Water Services

Authorities )

TARIFF REGIME

Tariff regulated by the raw

pricing strategy

Not regulated however the Water Services and Municipal Finance

Management Acts provides guidance

Not regulated however the water services and Municipal Finance

Management Acts provides guidance

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Bulk Water Tariff Increases 2011/12

Context : InternationalExperience

Source: Lee, 2005Source: Komvies, 2005

Other key factors that impacts on affordability by households and businesses

Electricity price increasesPetrol price increases

Context : InternationalExperience

Retail Water Tariffs of South African Metros and South Africa’s Main Competitors as compared to the World Economic Forum’s Global Competitiveness rankings for 2010. Tariffs in US$ per 15 kl. (Global Water Intelligence, 2011) (World Economic Forum, 2010)

APPROVED TARIFFSSo

urce

: DW

A

Average 13.58% = 6.8% and 9.38 above PPI and CPI respectively

Water Boards Tariff in 2010/11: R/kl %age increase Tariff in 2011/12: R/kl

Amatola R4.96 8% R5.35

Bloem R3.93 + R0.82 16.78% R3.50 system tariff

Botshelo R3.64 18% R4.29

Bushbuckridge R3.45 7.27% R3.70

Lepelle Northern R3.38 10.22% R3.72

Magalies R2.81 16% R3.26

Mhlathuze R1.73 14% R1.97

Namakwa R9.11 10.2% R10.04

Overberg R3.42 15% R3.93

Pelladrift R2.28 20% R2.73

Rand Water R3.97 12.9% R4.48

Sedibeng R5.86 8.5% R6.36

Umgeni R3.47 6.1% R3.68

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Our Comments

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RATIONALE

Section 42 of the Municipal Finance Management (MFMA) Act 56 of 2003 sets out a process within which bulk water providers should consult SALGA and National Treasury when proposing to increase potable bulk water tariffs. In essence the section states that, water bulk providers must give organised local government 40 days notice on the proposed bulk water tariffs before such can be submitted to the relevant executive authority or regulator.

Municipal Inputs  By the 10 of January 2011, SALGA had received a total of 11 bulk water tariff

increases proposals for the financial year 2011/2012 for comments from various Water Boards including Midvaal Water.

SALGA scrutinised each proposal and gave comments by the 25 of January 2011 as per requirements of National Treasury circular 23 of the MFMA.

WHAT INFORMS OUR COMMENTS

Cost Drivers

Cost Discussion

Raw Water Major cost driver driven by both deteriorating water quality needing additional chemicals – raw water standards (price relation to quality). Raw water cost increase total 33% of the tariff increases.

Labour Labour increases of over 10% are proposed whereas SAAWU is yet to negotiate increase with trade unions.

Power Eskom’s tariff increases are factored into the applications sometimes illegitimately above the 24% increase claiming that retail rates are demanded by municipalities.

Chemicals Wide range of cost increases casts suspicion over the legitimacy of some cost increase projections.

Depreciation Depreciation and “other operating” expenses sometimes change out of sync with capital expenditure and “other operating revenue” raising legitimacy suspicion.

Capital Planning

• Planed growth is higher than sustainable growth rate.

• Affordable growth rate assumes a 50% debt funding, higher than ceiling set by Regulator.

• BRIC countries growth almost double SA.

• Capital projections must factor affordability or high tariff increases will be thrust on existing rate payers.

Low and High Raw Water Cost Utilities

High Raw Water Cost Utilities Low Raw Water Cost Utilities

Low raw water cost utilities have much higher surpluses and other costs suggesting that the low input cost may produce inefficient operations

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Utility Proposed Tariffs SALGA Recommendation

Amatola 8% 7.96%

Bloem Water 16.78% 9.17%

Botshelo Water 18% 9.81%

Bushbuck water

7.27% 7.25%

Lepelle Northern 10.22% 8.69%

Magalies Water 16% 11.50%

Mhlathuze Water 14% 14.19%

Comments per Water Board

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Utility Proposed Tariffs Proposed and Recommended Tariffs

Overberg 15% 12.00%

Rand Water 12.9% 10.78%

Sedibeng Water 8.5% 13.59%

Umgeni Water 6.1% 6.1%

Comments per Water Board

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Institutional Arrangement

CHALLENGES

• Common understanding of the approval process • Who should approve the tariffs

• Timelines for the tariff consultation • Dec-Jan are not good for consultation • During the consultation process smaller municipalities are unable to scrutinise

tariff proposals and make meaning inputs• Different tariff methodologies are used

• Value chain uses different approaches• Lack of Transparency

• Adequate information is not made available • Quality of the tariff proposals

• Proposals are not standardised• Lack of an independent economic regulator to review investment decisions and

tariffs for the entire value chain• DWA plays referee, player and coach• Suggest panel of expert to fufil this role

SUGGESTED INSTITUTIONAL

ARRANGEMENTS

Short term • Should consider establishing a panel of expert in the

interim • Embark on a 3 multi-year tariff determination

framework (pricing strategy could be a platform)Long Term

• Have to establish an independent economic regulator

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Our Suggested Recommendations on the bulk potable water

tariffs

Recommendations

Recommendation Detail DWAs Response SALGA’s view

1. New schemes factor household income.

New scheme extension must set and fund tariffs under 5% of household budget

•South African inequality •Cost recovery will not be possible •Water Boards to be self funding

Affordability is key to price setting. There is a need for a funding and pricing strategy that balances the two

2. Low raw water utility costs

Investigate efficiency of costs of low raw water cost utilities.

BenchmarkingAgree with the pointAcknowledge need for an independent regulator role

What do we do in the short term where there is no independent regulator? – panelBenchmarking outcomes to be made available in the next tariff cycle

3. Low raw water cost utility surpluses

Curtail surpluses on low raw water cost utilities to 5% unless specific and valid justification is offered.

Reserves need for refurbishment and Development Debt collection

Developed a guideline on surpluses

Recommendations

Recommendation

Detail DWAs Response SALGAs View

4. Factoring of local government ability

Regulator to factor the ability of local council’s to absorb tariff increases.

LG to utilise Equitable share to pay for water services

The develop a water sector funding strategy

5. Tariff Applications Variance

Examination of detailed utility comments for dubious tariff increases and reduce tariff accordingly.

Bloem Water Tariff adjusted downwardsModerating other boards tariff will require will require detail investigationSuch moderation to be done by an independent regulator

For 2012-13 an independent panel of expert will be helpful in the process

6. Capital and Operating Cycle Optimisation

Form realistic capital programs and operating cycle performance

Infrastructure Development to be informed by the supply agreement including pricing for suchInfrastructure to be demand driven

An independent panel of experts should moderate infrastructure programmes in the short term

Recommendations

Recommendation Detail DWAs Response

SALGAs View

7. Alternative financing options

Explore project finance and “viability gap funding” type grants for eligible schemes in assistance to existing subsidisation.

Projects for Economic users are off budget RBIG and MIG to fund social projects

Develop a water sector funding strategy

Recommendations

Recommendation Detail DWAs Response

SALGAs View

8. Better reporting Curtail current tariff increases recognising limitations of current reporting deficiencies perpetuated by water boards.

Framework to be developed

Meanwhile there is a need to contain price increases that are not transparently justifiable

Recommendations

Recommendation

Detail DWAs Response

SALGA Views

9. Cash flow modelling

Enforcement of long-term cash flow models as the chief tariff determination mechanism.

Framework to be developed

Must be part of the pricing strategy

10. Sustainable growth projections

That utilities prepare capital expenditure budgets within the affordable growth rate of the utility given prescribed debt ceilings and CPI tariff increases.

Point notedReduce Energy costsAttempt will be made to cut cost

This must form part of the planning requirements

Conclusion

• For 2011-2012 DWA to take into considerations our suggested recommendations or inflation related increases plus 3%

• For 2012-2013 – establish a panel of experts to oversee the tariff increase process and make recommendations

• Long term the sector to focus its energies towards the establishment of an independent economic regulator

• The sector explores developing a sustainable funding strategy

– Common tariff methodologies

– Pricing of water

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Thank You!