Finance and Pricing Strategy and Funding Model: Briefing by Department of Water Affairs

Water and Sanitation

12 April 2010
Chairperson: Ms M Sotyu (ANC)
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Meeting Summary

The Department of Water Affairs identified financial challenges. The unqualified audit had to be sustained. Finance management capacity had to improve more rapidly. There was a lack of skilled resources, and a need for a price strategy review. Solutions were indicated: these included keeping vacant posts to no more than 5% of the establishment, and implementing an integrated management system with the help of the National Treasury. There was underspending because of the inability to fill posts and the late submission of invoices by service providers. These had contributed to the need to roll over funds. The budget was structured around programmes. R5.4 billion out of a total of R7.9 billion consisted of earmarked funds. The Department had asked the National Treasury to reallocate earmarked funds, but such funds could not be shifted. There had been requests for additional funding.

Democratic Alliance Members asked about the Department’s procurement strategy; the financing of skills development; progress with the establishment of the Blue Scorpions; spending on infrastructure; and requests for additional funding. An Inkatha Freedom Party Member asked about the Learning Academy; skills retention strategies; job creation, and rollovers and underspending. An African National Congress Member urged that when dealing with water, politics had to be set aside. Water was life.


The Pricing Strategy and Funding Model briefing presented the review of pricing strategy as a major undertaking and a public policy matter. The Department would assume its envisaged new role as sector leader and policy maker in the process. It was stressed that the process would form part of Government policy. Parliament, Cabinet and stakeholders would have to come on board. Water pricing could contribute to conservation, and socio-economic growth. The problem statement for a pricing strategy review stressed the disparity in tariffs because of an unstructured infrastructure funding model. The project would be championed by the Minister, supported by National Treasury, the Department of Cooperative Governance and Traditional Affairs, and the Department of Energy.

A Democratic Alliance Member remarked that the Department should have been a sector leader and policy maker from the beginning, yet it was only currently being identified for an emerging role. If the Department was not yet a sector leader and policy maker, steps would have to be taken. An African National Congress member remarked that a better understanding of law and policy was needed to make the project work. He asked about disparities of interest. Another Democratic Alliance Member stated that the project would have serious consequences, and had to be viewed against the backdrop of other tariff increases, like electricity. He stressed that the Department and the Minister would have to be upfront, and take the country into their confidence. He asked about the cost of the pricing strategy review, remarks made by a suspended official regarding tariff increases, and loans applied for by the Department. An African National Congress Member advised the Department not to comment on legal issues, however.

An African National Congress Member asked about the pricing and ownership of raw water, and the position of water boards in terms of the Water Act 1956 and the National Water Act 1998. The Department responded that water boards had to be transformed into water users associations under the National Water Act, but that the transformation was being resisted. The Member stated that such resistance could not be tolerated, and that private ownership of water was not permissible. The Department concurred that the Minister was indeed the custodian of water in South Africa.


Meeting report

Finance Briefing
Mr Onesmus Ayaya, Chief Financial Officer, Department of Water Affairs (DWA), outlined the key challenges facing the Department. The Department sought to sustain an unqualified audit. Financial management capacity had to improve more rapidly; the aim was to develop systems that governed money well. There had to be a review of pricing strategy. Inadequate capacity because of lack of skilled resources had to be addressed. The Department controlled extensive infrastructure assets such as canals all over the country. Auditable asset plans were needed.

Solutions were presented: employment of budget controllers to monitor monthly spending by programme managers; keeping vacant posts to no more than 5% of the establishment; implementation of an integrated management system with the help of the National Treasury; formulation and implementation of clear assets management plans; and linking all procurement to business plan during approvals.

 

Mr Ayaya presented reasons for underspending. Unfilled vacant posts in the Department contributed significantly; it was estimated that R110 million would not be spent in the current financial year. There had been a late submission of invoices for services rendered such as Fleet Management Services (Phakisa) and Information Technology (IT) Services (Arivia). An accelerated community infrastructure programme required counter party funding by municipalities. There was a need to roll money over; the Treasury had been asked to roll over R163 million.

The Department’s budget was structured around programmes. From a total allocation of R7.9 billion, R5.4 billion consisted of earmarked funds. Treasury had been asked for reallocation of earmarked funds, but funds could not be shifted. Under earmarked funding for 2010/11, Working for Water amounted to R668 million; Working on Fire R207 million; Bulk infrastructure R 893 million, and Water Services Operating Subsidy R807 million.

Under requests for additional funding for 2010/11, refurbishment of Infrastructure amounted to R1 billion, and regional bulk infrastructure to R1.3 billion. Financing was needed for the strategic plan.

Discussion
Ms A Lovemore (DA), referred to slide 7 of the presentation. She asked what was meant by the phrase “not just procurement for the sake of procurement”, that Mr Ayaya had used.

Mr Ayaya replied that procurement had to be driven by a business plan. For vacancies to be filled there had to be a business plan.The Attorney General would be reporting on this to Parliament. When there was spending on consultants, for example, it had to be justifiable in terms of business planning that had preceded it. Whatever did not speak to the business plan had to be deferred.

Ms Lovemore asked for clarity about the category “Households” under slide 16.

Mr Ayaya answered that it referred to the domestic situations of people who left formal employment.

Ms Lovemore noted that with regard to Departmental capacity, the budget was programme-oriented. There was a water sector skills gap. She enquired where money would come from to address it.

Ms J Manganye (ANC) asked if earmarked funds could assist municipalities who took water as a priority, and also sold it. Such municipalities had a lack of skilled people to cope with that. Would the Department help municipalities to train people?

Ms Nobubele Ngele, Acting Director General, DWA, replied that money set aside for skills in the water sector was supported by donor funding that would be replaced. The Department relied on the placement of its own staff in the local government water boards, to close the skills gap. She said that funding for skills development was lacking, and in addition there was uncertainty about the kind of skills required. One percent of the budget had to go towards training, but it was a struggle to identify skills required. Local governments had to become more willing to absorb people from the labour market.

Mr Ayaya added that bursaries for university training formed part of skills development.

Mr G Morgan (DA) asked about the Blue Scorpions.

Mr Ayaya replied that R5 million had been set aside to launch the unit. Earmarked exchequer funds were needed for the unit.

Mr Morgan enquired about requests for additional funding. Had projects not been finished?

Mr Ayaya responded that needs had to be accommodated, hence the Department would take the initiative to start work, and would then report on progress made in order to request additional funding.

Ms Manganye asked for more detail about the Learning Academy.

Ms C Zikalala (IFP) asked with reference to the Learning Academy, if unfilled vacancies had led to underspending. Why did skilled people leave? She asked if the Department had a retention strategy.

Ms Ngele replied concerning the Learning Academy, that the Department could only absorb roughly a quarter of those it had trained. Local governments and water boards had to indicate how trained people could be absorbed. A first group of engineers had been trained, and they had to be placed in the Department first. Retention was a global issue, seeing that there was only one labour market. The private sector paid better, and so did local government. She remarked that “everybody wants to leave”. The Department kept to the strategy of being selective about retention. It was first of all important to retain people who were particularly valuable. But the money needed for retention was not always available within the budget.

Ms Zikalala asked about the kind of jobs created by the Department. She remarked that against the background of unemployment, anything that the Department had to offer was bound to be exciting.

Ms Ngele responded that working for water and fire as job creation, had to be seen against the background of social security measures. Yet it could at least provide 2 to 3 days employment per week for many. That was seen as value added industry, and could also serve as a water conservation tool. Infrastructure had to be created. It was an opportunity to create labour-intensive jobs on a considerable scale.

Ms Zikalala enquired about the cause of rollovers, and underspending.

Mr Ayaya replied that overspending was seen as financial misconduct. When funds could not be spent for some reason, they were rolled over, and had to be requested to remain part of the budget in future.

The Acting Chairperson referred to underspending due to posts not being filled. He suggested that where additional funding had not been approved, rollover money that had not been earmarked could be used to fill such needs.

Mr Ayaya responded that unfilled posts were of a technical nature, and the Department had to compete with the demands of 2010. This had led to underspending. The Department could create a position, but could not expect it to be immediately effective. His own appointment was followed by an eight month period needed to get directors on board. Such delays contributed to expenditure. In the rollover process, the policy was to stick to the initial earmarking. There was little opportunity for moving funds around.

Mr J Skosana (ANC) remarked that the budget was in line with the strategic plan. He urged that the Department and the Portfolio Committee work together. Obstacles had to be addressed. Petty issues like the late submission of invoices had to be attended to, to prevent underspending. He stated that the Committee would support the Minister. Rural areas had to wait for service delivery. Such concerns had to be looked into. He said that when dealing with water, politics had to be put aside. Water was life. 

Ms Manganye noted that most of the municipalities were not the responsibility of the water authority, or else lacked capacity. She asked about the position of municipalities as water authorities.

Ms Ngele replied that there were indeed ailing water service authorities, and that money was needed for local government support. Local governments had to identify skills needs and to use local government support programmes. Some skills had to be privatised. There had to be performance monitoring.

Mr Morgan asked what was spent on the building and maintenance of infrastructure, across the budget.

Mr Ayaya responded that the bulk of R1.2 billion requested was for infrastructure on the ground. Currently, not more than R340 million was available, whereas the Department estimated the need at R1 billion per year for 10 years. The aim was to raise money from users to fund infrastructure through a pricing strategy.

Pricing strategy and funding model and raw water pricing strategy briefing
Mr Ayaya stated that it was a public policy matter. It represented a major undertaking in South Africa, and it had to be part of Government policy. A prevailing crisis had led to the need for a pricing strategy. There were steps that the DWA wanted to take for which it needed the support of Parliament.

The DWA wanted a price strategy funding design. Even Cabinet and relevant stakeholders had to come on board. Pricing review was seen as a Government matter. The DWA saw itself as having to move from its current position as custodian, to one where it would be a sector leader and policy maker. The review had to culminate in a public policy document, of which democratic institutions had to approve. There had to be a review of the Catchment Managing Areas (CMA). Bureaucrats had to become willing to take risks.

There were 240 schemes based on the auditable asset register. The question was whether costs could be recovered from the water user. Water could be conserved through pricing.

Mr Ayaya emphasised that it was a process. If Parliament approved it, it could be implemented.  

The Water Trading Entity (WTE) was currently the custodian of an infrastructure with a replacement structure of some R123 billion. The National Water Act allowed for full cost recovery from registered users. The Public Finance Management Act (PFMA) 1999 provided for the economic use of resources.

Water pricing could be employed for socio-economic growth. Problem statement included disparities in tariffs due to an unstructured infrastructure funding model, and the need to review the pricing strategy in a stakeholder-driven process, supported by key water use sectors and stakeholders. The relative socio-economic value of water had to be reflected.

The project would be championed by the DWA Minister supported by key strategic Ministries (National Treasury, Cooperative Governance and Traditional Affairs, and Energy).

Discussion
Ms Lovemore referred to the distinction drawn between current and future roles of the Department (Slide 11). It was stated that the DWA saw a future role for itself as sector leader and policy maker. She remarked that the Department should have been exactly that all along. If the DWA was not already a sector leader and policy maker, steps would have to be taken to remedy the situation. The Department had to be clear about the implications of a pricing strategy. Would it double or treble the price of water? There had to be a clear statement of problems. Lack of municipal oversight had to be addressed as part of the review process.

Ms Ngele replied that she agreed with Ms Lovemore about the emerging role of the Department. She conceded that the DWA had been prone to raising challenges only, without saying enough about what was actually happening, like the relationship with water boards.

Mr Skosana remarked that the Committee and the Department were law makers and had to uphold policy. Law and policy had to be understood. Processes of consultation were of utmost importance. Institutions that owed money, had to be dealt with. He asked what would be done about municipalities with large debts. The briefing had referred to stakeholders and communities involved. How would disparities of interest be addressed?

Mr Ayaya responded that disparities would be defined. It was a matter of deciding whether farmers from Pongola and Komati would pay the same price, for instance. The position of irrigators had to be examined. With regard to debt, he said that the question was how peer funding could work for the DWA. Municipalities owed R800 million. The question was how that could be made to work for the Department. The assistance of the Portfolio Committee would be required.

Mr Morgan remarked that the pricing strategy was bound to have serious consequences for South Africa. The Department and the Minister as champion of the process would have to make every effort to be upfront. The country had seen dramatic tariff increases relating to such services as electricity. A process leading to water price increases would have to be managed effectively. South Africa had to be taken in confidence. He asked about the cost of the review process and its implementation. An independent regulator would have to be established. How would it be budgeted?                                                             

He referred to the hearing related to a suspended water official who had disclosed that the review process was under way, and that water prices would be 18 times more, in some instances. The defence had suggested that the figures were already in existence. There were reports that the Department wanted to secure a R50 million loan. The Department had refused to comment. He asked if the matter was sub judice.

At this stage, Ms M Sotyu (ANC), the regular Chairperson, had joined the meeting. Mr Mathebe remained in the chair for the remainder of the meeting.

Ms Sotyu advised the Department to refrain from comment about legal issues.

Mr Ayaya replied that he agreed about the need to be upfront. The Minister’s approval would be needed for any rise in price. With regard to cost and budgeting, he said that an expert paper on the subsidy of water was needed. Whatever funding could not be obtained from the water user would have to come from the exchequer. There was an undocumented subsidy of agriculture, to the amount of R800 million. Subsidy to the second economy had to be determined.

Ms Sotyu referred to the pricing of raw water. She asked about the position of the water boards in that regard, and where they obtained water. She agreed with Ms Lovemore about the emerging role of the DWA as sector leader and policy maker. Water boards were one of the problems that had to faced to make that a reality. She asked to whom irrigation boards were accountable. Did they interact with the Department? They were serving water to farmers. Ownership of water came into play. The Government was rightly the sole owner of water. She asked which Act steered the water boards. Was it the National Water Act 1956?

Dr Cornelius Ruiters, Deputy Director-General, DWA, replied that the Minister was the trustee on behalf of Government. Water boards were provided for by the Water Act of 1956, but in terms of the National Water Act, those had to be transformed into water users associations. Notices had been placed under the National Water Act, but not all water boards had been transformed. The question had to be asked what the National Water Act required in terms of implementing transformation. Transitional measures were in place, but there was resistance from the water boards to transformation. He concurred with Ms Sotyu that there could be no private water owner in South Africa. The 1956 Water Act allowed for private ownership of water, but the 1998 National Water Act did not. The Minister was the custodian of water.

Ms Sotyu stated that resistance to transformation could not be allowed. The DWA had not brought that up before. There were too many who were involved in water, who did exactly as they liked. The Portfolio Committee was hampered in its ability to monitor water issues, by its responsibility to attend to environment issues, and be present at major conferences.

Ms Lovemore remarked that the probability of a pricing strategy had been mentioned the previous year. At that juncture, it was said that it would be instituted by 2011. Currently, that date had shifted to 2013. She asked for clarification about timelines.

Mr Ayaya replied that the process would kick in as soon as Cabinet had approved. That would be in February 2011.

Ms Lovemore asked why the project would only be launched in December 2010. Why did it have to take a year to launch?

Mr Ayaya replied that by December 2010, conceptualisation of the project would be completed. Road shows could then be held to inform work streams. Information still had to be collected for the 2010 report. There was a need to analyse questions about the irrigator, and others. Central to the problem statement was what the DWA wanted to see in the work stream.

The meeting was adjourned.

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