Dolphin Coast and Nelspruit Concessions by Municipal Infrastructure Investment Unit

Water and Sanitation

30 October 2001
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The aim of this report is to summarise the main events at the meeting and identify the key role players.  This report is not a verbatim transcript of proceedings. 

water affairs and forestry Portfolio Committee
30 October 2001

Acting Chairperson:
Mr D. Maimane

Documents handed out:
Municipal Infrastructure Investment Unit (MIIU) Annual Report 2001 (MIIU)
MIIU Municipal Service Partnerships in South Africa: Contracts in Implementation (MIIU)

The Committee heard presentations from the South African Municipal Infrastructure Investment Unit (MIIU).  The presenters from MIIU were CEO Ms G. Moloi, Municipal Infrastructure Advisor Mr J. Leigland, and Technical Specialist Mr J. Dohrman.  The presentations involved the broader issues of promoting cost-effective municipal infrastructure investments and the specifics on the Dolphin Coast, Nelspruit Bay and Uthukela Water projects. Each presentation was followed by a question and answer session.

The Chairperson of the Committee, Ms B. Sonjica, commenced the meeting by saying that she was unable to stay and asked Mr D. Maimane (ANC) to take over as Acting Chair.  Mr Maimane agreed and called the meeting to order.  He introduced the presenters from MIIU, Ms G. Moloi, CEO, Mr J. Leigland, Municipal Infrastructure Advisor, and Mr J. Dohrman, Technical Specialist. 

Promoting Cost-Effective Municipal Infrastructure Investments
Ms Moloi began the presentation, “Promoting Cost-Effective Municipal Infrastructure Investments,� by saying that she and her colleagues would divide their subject matter into three parts: (1) the broader issues, (2) specificities of the Dolphin Coast and Nelspruit projects, and (3) the Uthukela Project, the first project where municipalities had formed partnerships between themselves to provide services. 

Ms Moloi explained that both policy rationale and existing legislative framework supported the work of MIIU.  First, the language of the South African Constitution supported the unit.  In addition, white papers drafted by local governments laid the foundation for MIIU design and involvement in municipality coverage.  These were the Local Government Transition Act and Local Government transformation legislation, including the Demarcation Act, the Structures Act, and the Systems Act.  Ms Moloi added, as pending legislation, the Municipal Finance
 Management Bill, the Municipal Property Rates Bill, and the Constitutional Amendment Bills (where they referred to the ability of municipalities to borrow).  She stated that, under the old implementation strategy, sectoral departments drove municipal investment.  These departments included the Department of Water Affairs and Forestry (DWAF), investing in community water projects, Public Works (also heading community-based programmes), the Treasury, and the Department of Minerals and Energy (DME).  She asked, if this was the investment environment, where did the role of the private sector fit in?  Under the new implementation strategy, there was consolidation to support infrastructure, as well as higher private sector, intermediary, and rural focuses.        

Ms Moloi explained that MIIU was created by Cabinet Memorandum, No. 14, in 1997.  In April of 1998, MIIU was established as a private non-profit company with the objective of representing and assisting local governments in locating and negotiating deals with service partners.  According to the Cabinet Memorandum, the guiding principles of MIIU were that it was led by local government demand and was oriented towards capital investment and management (operation and maintenance) improvement.  It was to be focused on “municipal functions� as defined by the Constitution, Schedules 4 and 5.  Its projects were to involve local government cost sharing, open competition on all procurement, and encourage the maximum involvement of South African consultants.  In sum, MIIU's task was to “Facilitate private sector investment and/or management expertise in the provision of municipal services.�

To this end, Ms Moloi explained, MIIU had to meet certain requirements.  These included: (1) to locate an innovative external solution in the broader strategic plan created by local government, (2) to fully justify external versus internal services provision, (3) to consult all stakeholders, (4) to protect employee jobs and benefits, (5) to regulate tariffs and profits, (6) to promote job creation and empowerment, and (6) to incorporate past lessons.  Accordingly, MIIU methodology followed strict design. Broader municipal reform must be considered first.  Comprehensive information was required for all projects, and all options had to be evaluated (e.g. internal vs. external; public-public, public-private).  The company demanded best international practice in contracting and had strong criteria for monitoring and regulating project implementation.  Finally, MIIU assisted with adjustments and renegotiations over the course of the project contract.

Ms Moloi explained the internal versus external provisions and provided project examples.  Internal provisions included management improvements, with the example of Richards Bay Airport and on-balance sheet borrowing, as carried out by Jnb & Durban Bonds.  External provisions included corporatisation, like Eastern Cape IT, operation and maintenance (O&M), as done by Harrismith, O&M plus capital investment, as was the nature of the Nelspruit contract, and divestiture, as in the case with Metro Gas.    She identified where the external partners fit into the equations.  Nelspruit Water and Richards Bay Airport were public-private contracts; Harrismith Water and Maluti a Phofung Water were public-public projects; and Pietermaritzburg Solid Waste was a public-NGO project.  She pointed out that each of these projects ultimately fell under the jurisdiction of MIIU.

Ms Moloi continued with MIIU projects that had focused specifically on water services infrastructure development.  These were all projects that had been initiated since 1999 and included Nelspruit and the Dolphin Coast, Harrismith, Maluti a Phofung, Johannesburg Water Utility, uMhlathuze, Plettenburg Bay, Kwa Dukuza, and Uthukela MJMSD.  She stated the lessons the company had learned from South Africa.  Foremost, private service provision was “Not a panacea, but can improve/extend services to all.�  The “playing field� needed to be levelled with respect to local government assistance.  Projects needed to be driven by good political and administrative leadership.  Extensive pre-bid information was essential, and there was definite need for a strong legal and regulatory framework.  Finally, MIIU needed to consult with organised labour and community groups and anticipate all stakeholder benefits and costs.  

Ms Moloi summarised her presentation by saying that MIIU was a solution for helping local governments gain access to private sector financing and management expertise.  She stated that the company was demand-driven and user-friendly, it had 50 active projects, most of which operated in core services, and, to date, the total value of all concluded contracts was R5 billion.

The Chairperson thanked Ms Moloi and asked the Committee for questions.

Questions and Comments to Ms Moloi
Mr M. Masala (ANC) informed Ms Moloi that, as a Member of Parliament, he had not known that MIIU existed.  He wondered whether municipalities were aware of the company and its activities. 

Ms M. Ngwenya (ANC) stated that the Committee had listened carefully and that she, personally, had never been interested in the above issues until the presentation.  She said that she was most interested in the rural municipalities.  R5 billion was an extremely high figure, so she wondered if Ms Moloi could explain where and how this was spent. 

An ANC Member asked whether the constitutional amendment that allowed municipalities to borrow referred to municipalities or metros. 

Mr J. Van Wyk (ANC) asked what lessons had been learned from projects that had resulted in job losses and, along a different vein, whether the presenters thought government under-spent in rural areas.

The Chairperson asked Ms Moloi to clarify where the private sector interest came from.

Ms Moloi explained that the South African legislation resolved that municipalities could handle the borrowing issue on their own.  She said that she did not want to comment on job losses.  Rather, she wanted to leave the Committee a pleasant surprise in the next presentation. 

Ms Ngwenya asked how long municipalities allowed private companies to stay with them before they said, “Okay, now we are fine.� 

Ms Moloi responded that this depended on the stipulations of contract.

Mr S. Simmons (NNP) asked whether municipalities approached the MIIU for assistance or if MIIU approached them.

Mr Van Wyk asked what legislation oversaw public-private partnerships. 

Ms Moloi stated that she did not mention the legislative aspect because it would be too overwhelming.  However, that did not mean that there was not problematic legislation.  She said that MIIU dealt most often with the Water Services Act, the Environmental Act, and the Systems Act.

Mr Van Wyk suggested that it would be helpful to know what was problematic about the Water Services Act, since they were the Portfolio Committee on Water Affairs and Forestry.

The Dolphin Coast and Nelspruit Bay Projects
Mr Leigland introduced his presentation by saying that he would focus on the Dolphin Coast and Nelspruit Bay projects.  MIIU had entered both of these operations in their last phases; however, they felt ownership over them because of their role in their follow-up.  Dolphin Coast had come under contract on 29 January 1999 with Siza Water, sponsored by SAUR International.  Nelspruit had entered contract on 21 April 1999 with Biwater. 

Mr Leigland stated that, following its 1994 amalgamation, Nelspruit Bay experienced a population increase from 24 000 to 230 000.  The residents per pipe length exploded to over 600%.  The total town income, after enduring a ten-fold population increase, improved by only 38%.  At this time, the municipality estimated the immediate investment need to be R250 million.  The situation in Dolphin Coast was similar, though less dramatic.  Mr Leigland informed the Committee that, after Dolphin water was taken over in 1996, the town suffered from poor public infrastructure, and over 50% of the informal areas had no service at all.  Neither technical nor management support staff had been transferred to the site.  The options considered in both cases were (1) the status-quo plus plan, involving either borrowing or corporitization, and (2) partnership plans involving either service contracts, management contracts, concession, or sale.  Mr Leigland explained that, with the exception of concession, none of the plans would bring in capital investment, and all of them would still require operation and maintenance. 

Concession Contracts were thirty-year terms, and they covered O&M, investment and customer care.  He said that the assets remained public property, and contract terms identified performance targets.  Sanctions, or tariffs, were reviewed every five years.  Mr Leigland provided a visual for the Committee, stating that the Nelspruit Bay contract was 600 pages in length, so thick it resembled a “phonebook.�  The most important characteristic of a concession dealt was that municipalities received revenue from the operations even though private firms ran them.

Mr Leigland informed the Committee that over time the contribution to Nelspruit Bay would be R700 million.  He stated that he wanted to correct what he saw as negative press on the projects.  He insisted that the Dolphin Coast had performed well.  This statement was validated by the rapid rate at which underserved areas had been upgraded, and the fact that no jobs had been lost.  In fact, since the project began, there had been a 36% rise in employment.  In Nelspruit Bay, all water and sewerage treatment in the area had been refurbished, a new treatment works had been built at Matsula, 4800 people had been connected to water, and 1245 temporary jobs had been created in the process.

Mr Leigland articulated some of the challenges that MIIU and investors were facing.  Dolphin Coast had experienced a cash flow problem that analysts attributed to an unexpected slow down in population growth that was the result of a number of factors.  As a result, there had been a tariff increase.  Nelspruit Bay experienced inconsistent payment practices.  There was confusion over the concept of “free water,� what it was and who was eligible for it, and there had been public agitation over the issue.  The problem was being addressed through attempts to clarify city policy on free water and launch community communication programs.

Mr Leigland concluded that there were over 200 public-private partnerships (PPPs) in the developing world and 100 more in the developed economies.  Some failed due to lack proper preparation and monitoring, but many more succeeded.  He emphasized that all long-term contracts faced challenges and needed amendment over 30-year terms.  The Nelspruit Bay and Dolphin Coast contracts were “state of the art,� in his opinion, better than the Buenos Aires contract that received much international attention, and better than most in Latin America and Eastern Europe.  He said that MIIU was extremely frustrated by the bad press and misinformation that had been spread on the contracts.  He explained that MIIU projects made financial sense for South Africa's infrastructure development.  What set the private companies that they recruited apart from the municipalities was their ability to endure losses for extended periods of time before they made a profit.  He said that it was estimated that neither Nelspruit Bay nor Dolphin Coast would earn a profit before 2012.

Questions and Comments to Mr Leigland
Mr Van Wyk asked how MIIU dealt with local agitation over the free water issue.

Ms Ngwenya stated that, in reference to the tariff increase that Dolphin Coast had experienced, people were afraid of projects that were heavily subsidized by private sector actors.  She asked the presenters if they saw people's real fears and reactions to tariff imposition where they operated.

Mr Simmons asked the presenters, judging from their experience in the field and taking into account the poor capacity of many local governments and municipalities, how long would it take to catch up on the backlog of South Africans that did not have access to basic water services.

Mr Leigman said that he wanted to address the concerns over the cost of project water.  The water tariffs were designed to increase annually, in accordance with the rise of inflation.  However, they also took into account ability to pay.  Credit controls existed in the bylaws of the contracts.  Moreover, Nelspruit Bay had not actually cut anyone's water service yet.  This was in part because of politics, in part because of the controversy over free water, however the contracts were being negotiated.  The tariffs imposed by both projects were very low.  He added that, unfortunately, both areas were served by Mugeni that had recently increased bulk tariffs.  That was outside of project control.  Still, it was important to note that Dolphin Coast still paid less for water than residents and industries in nearby Durban. 

Mr Leigman said, in response to the question about municipality awareness of MIIU, that MIIU went out and introduced itself to local governments and communities.  In addition, the Unit provided “diagnoses� for communities at no cost.    He stated that, where they oversaw projects, they ran community education and outreach programs at R1 million annually.  The investment companies also ran literacy and basic education programmes for employees and enjoyed positive results. 

In reference to South Africa's backlog, Mr Leigman stated that he wished PPPs were the answer, but they weren't.  The backlog existed in areas of the country that needed grant funding to overcome infrastructure needs.  These areas were too rural to attract concession projects.

Uthukela Water
Mr Dohrman said that he would speak briefly on Uthukela Water, a Multi-Jurisdictional Municipality Service District (MJMSD).  Uthukela Water involved three district partners in KwaZulu-Natal: Amajuba, Umzinyathi, and Uthukela.  The creation of the MJMSD came out of a water board recommendation in 1999 and a stakeholder meeting the same year that announced that the water board was not a total solution.  Analysis showed that 60% of the population in the above-mentioned area either had no service or fell below RDP standards, and the situation was recommended for further study.  A reference group was organized, made up of fifteen regional municipalities and key stakeholders, and a working group was put together consisting of ten of these contributors plus MIIU technical assistance.

The three-district partnership officially formed on 21 September 2001, and Mr Dohrman said that a more formal ceremony would take place in January 2002.  The MJMSD was the first of its kind in South Africa, and it had drawn ideas from American design models.  Because it was a public-public partnership, it met conditions of the Water Services Act and the Systems Act.  It focused on full water services and service delivery, was locally based and locally controlled, and adhered to bottom-up processes of design, implementation and O&M.  Mr Dohrman showed a spreadsheet that calculated a water services budget by municipality, district, and, for comparison, showed the actual budget of the MJMSD.  If the municipalities were to run individual projects, the total cost would be R184 000.  The sum of three individual district budgets would amount to R170 000.  In contrast, the total MJMSD budget was only R143 000.  Mr Dohrman stated that the MJMSD was potentially the institutional answer to municipal capacity problems. 

Questions and Comments to Mr Dohrman
The Chairperson asked who supplied the funding for the MJMSD.

Mr Dohrman said that DWAF was very interested and was fully supporting the project.

Mr Van Wyk said he was unclear as to whether the MJMSD was a provider or an authority.  He then asked whether the creation of something like a MJMSD indicated a movement away from central control over water services.  He asked if the implication was a lesser role for the Minister and the Department.

Mr Dohrman responded that there was some confusion, but they were creating a provider, not an authority.  He said that this had not been entirely sorted yet and there was significant debate over the body's functions and definitions because, while it was a provider, it performed some of the responsibilities of an authority.  In conclusion, Mr Dohrman stated that there was a movement to decentralize.  The Department was already doing this to some extent, and the MJMSD could be helpful for gauging the viability and effectiveness of this initiative.

Chairperson Maimane thanked the presenters for educating the Committee on the role of the MIIU in South African water services development, and the meeting was adjourned.

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