PRESENTATION TO THE

PORTFOLIO COMMITTEE ON

WATER AND ENVIRONMENTAL AFFAIRS

24 MAY 2011

Presenters:

Mthobeli Kolisa – Executive Director: Municipal Infrastructure Services

William 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 funding

NT provides subsidy

to finance the trading

account

Users 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 ROA

A 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 increases

Economic 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

charge

SALGA and DWA to

work together in reducing

pollution at resource level

SALGA to give

inputs into the

pricing strategy

SALGA is part of

the green drop

certification process

Raw 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

deficit

This will result in higher

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 Tier

National security

of supply

2nd Tier

Regional supply to

WSA’s

3rd Tier

Local 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

11

Bulk Water Tariff

Increases 2011/12

Context : International

Experience

0%10%20%30%40%50%60%70%80%90%

100%

Global

Average

High Income

Countries

Upper Middle

Income

Countries

Lower

Middle

Income

Countries

Low Income

Countries

Global water tariffs to country

income level; O&M and Capital

Sufficiency

Too Low Sufficinet Sufficinet O&M and partial capital

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Global

Average

High Income

Countries

Upper Middle

Income

Countries

Lower

Middle

Income

Countries

Low Income

Countries

Sufficiency of Global Water

Tariffs

Too Low Sufficinet Sufficinet O&M and partial capital

Source: Lee, 2005Source: Komvies, 2005

Other key factors that impacts on affordability by households and

businesses

Electricity price increases

Petrol price increases

Context : International

Experience

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)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

0

20

40

60

80

100

120

Average 3-year tariff USD/15KL

WEF Rank

c

c

APPROVED TARIFFSS

ou

rce:

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

15

Our Comments

16

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

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2009 2010 2011 2012 2013 2014 2015

Projected Weighted Growth Rates for

the Water Utilities to 2015

Projected Growth Rate Average Affordable Growth Rate

Average Sustanable Growth Rate Water Provison Growth Rate

• 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

2.96 2.96 2.96 2.96 2.96 2.96 2.96 2.96 2.96 2.96

0.86 0.86 0.86 0.86 0.86 0.86 0.86 0.86 0.86

0.45 0.45 0.45 0.45 0.45 0.45 0.45 0.45 0.13 0.13 0.13 0.13 0.13 0.13 0.13

0.19 0.19 0.19 0.19 0.19 0.19

0.53 0.53 0.53 0.53 0.53 0.26 0.26 0.26 0.26

0.12 0.12 0.12 0.16 0.16

0.14

5.13 -

1.00

2.00

3.00

4.00

5.00

6.00

Co

st o

f sa

les

(Wat

er)

Dir

ect

lab

our

cost

Ele

ctri

city

Mai

nte

nan

ce m

ater

ials

Chem

ical

s/p

uri

fica

tio

n

Oth

er o

pee

x

Net

Fin

ance

Char

ge

Dep

reci

atio

n

Oth

er e

xp

ense

s

Surp

lus

Tar

iff

inco

me

0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39

1.23 1.23 1.23 1.23 1.23 1.23 1.23 1.23 1.23

0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41

0.59 0.59 0.59 0.59 0.59 0.59 0.59 0.25 0.25 0.25 0.25 0.25 0.25

0.76 0.76 0.76 0.76 0.76

0.36 0.36 0.36 0.36 0.12 0.12 0.12 0.19 0.19

0.52

3.54 -

1.00

2.00

3.00

4.00

5.00

6.00

Co

st o

f sa

les

(Wat

er)

Dir

ect

lab

our

cost

Ele

ctri

city

Mai

nte

nan

ce m

ater

ials

Chem

ical

s/p

uri

fica

tio

n

Oth

er o

pee

x

Net

Fin

ance

Char

ge

Dep

reci

atio

n

Oth

er e

xp

ense

s

Surp

lus

Tar

iff

inco

me

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

0%

5%

10%

15%

20%

25%

Tariff Application Average Increases and Business Plan Projected

Increases for 2011/12

Business Plan Tariff Application

21

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

22

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

23

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

26

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.

Benchmarking

Agree with the point

Acknowledge need for

an independent regulator

role

What do we do in the

short term where there is

no independent

regulator? – panel

Benchmarking 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

Recommendati

on

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

downwards

Moderating other boards

tariff will require will require

detail investigation

Such 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 such

Infrastructure 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

Recommendat

ion

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

Point noted

Reduce

Energy costs

Attempt 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

32

Thank You!