Overberg Water Annual Report 2008/09, & Proposed Water Tariffs for 2010/11

Water and Sanitation

17 May 2010
Chairperson: Mr P Mathebe (ANC)
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Meeting Summary

Overberg Water briefed the Committee on its 2008/09 Financial Statements and Annual Report, and Proposed Water Tariffs for 2010/11. Current challenges for Overberg Water included the problem of maintaining the current level of service delivery in the face of increasing economic pressure, rapidly rising input costs such as cost of energy, chemicals, transport and human resources, coupled with the declining ability of clients to pay for services, and the lessened ability to generate income from water sales due to the economic situation. Overberg Water suggested that one solution would be to allow Overberg Water access to grant funding such as the Regional Bulk Infrastructure Grant, or to allow write-off of the loan it still owed to Department of Water Affairs. There was increasing risk if refurbishment projects were delayed, and deterioration of the old infrastructure would result in major breakdowns if not replaced. Overberg Water needed to undertake a R45 million refurbishment programme over the five years, if it were to remain sustainable at acceptable risk levels. Only R18.9 million was presently allocated to refurbishment. Further challenges were posed by lack of agreement with Municipalities, which limited future planning and strategy for cost recovery. Overberg Water suggested that one solution would be a new regional institutional arrangement to perform all bulk water services, but this was postponed by the Ministry for five years, which Overberg Water suggested was too long.

The average bulk water tariff increases between 2006 and 2009 were set out, and the point was made that these were low when the increase of 40% in electricity cost per cubic metre of water sold was taken into account. The sales were also set out, and lower volumes sold were explained by water savings, good rainfall, clients using own sources of water, and the economic situation. The consultation process prescribed by Department of Water Affairs had been followed meticulously by Overberg Water. Although National Treasury had supported Overberg Water’s proposals, South African Local Government Association had not responded. It was not considered viable to increase tariffs much further in the current economic climate.

Members raised questions regarding opportunities for increasing sales, the RBIG, refurbishment of infrastructure and risk associated with lack of refurbishment, and how much of reserve was required to address the challenges associated with refurbishment. They also questioned the delivery of water to the rural communities, the relationship with Municipalities, where the benefits of RBIG would be felt and whether  cross subsidization was being used. Several questions were asked about gender equity in the sector, and at the level of staff and the board of Overberg Water. Members also enquired whether municipalities were paying the water boards, and asked about expansion to other municipalities, and the plans for rural water. 

Meeting report

Overberg Water Annual Report & Financial statements 2008/09
Mr Joe Emeran, Chairperson, Overberg Water, said that Overberg Water serviced the Theewaterskloof, Agulhas, Swellendam and Hassequa municipalities. The distribution network was a branch network with limited capacity. The only possibility for higher sales was through raising efficiency at the level of the end user, and the sliding scale tariff system provided for this.

The retail provision by Overberg Water was unique. It provided small amounts of water over 1 600km to about 850 clients, unlike most other water boards who delivered large amounts over smaller distances.

Overberg Water had commenced with much needed refurbishment of infrastructure to minimise risk and achieve energy savings of up to 16%.

There was financial pressure on the entity, including the problem of maintaining the current level of service delivery during increasing economic pressure. Rapidly rising input costs such as cost of energy, chemicals, transport and human resources, coupled with the declining ability of clients to pay for services, and the reduced ability to generate income from water sales (tariffs) due to the economic situation, posed a challenge.

Overberg Water suggested that one solution would be to allow Overberg Water access to grant funding. The problem, however, was that there was no clarity on the process of accessing Regional Bulk Infrastructure Grant (RBIG) funding and Overberg Water believed that the process, as a matter of urgency, should be shortened and simplified in the interest of service delivery in South Africa.

A further challenge was the lack of agreement with Municipalities, which limited future planning and strategy for cost recovery. This had previously been brought to the attention of the Committee, Department of Water Affairs (DWA or the Department) and South African Local Government Association (SALGA). The obvious solution would be a new regional institutional arrangement to perform all bulk water services. However the Ministry had postponed the process of introducing a new arrangement for five years. Overberg Water took the view that this time period was too long.

Mr Emeran said that the total income was R25.017 million, and expenditure was R22.613 million, leaving a net income of R2.4 million. Income derived from bulk water sales, the secondary activity of retail water sales, and other secondary activities such as implementing agents and reserve activities. The loan from DWA was R1.2 million and changes in working capital amounted to R1 million. The result was that R113 thousand could be added to Overberg Water’s reserve. Capital expenditure for the year was R4 million, of which R2.9 million was spent on refurbishment of the twenty to twenty-five year old infrastructure. Overberg Water would petition to Government to write off the existing loan from DWA.

He reported that the total bulk water sales sold to Municipalities and farmers declined by 2.1% from 2006/7 to 2007/8, and by 0.6% from 2007/8 to 2008/9. This decrease in water volume resulted in higher monetary value of bulk water sold to Municipalities and farmers, of 4.5 % in 2006/7, and of 7.1% in 2008/9. This was attributed to the tariff structure that enhanced more efficient use of water allocation. The average bulk water tariff increased by 6.5% in 2006/7 and 7.7% in 2008/9. This was low, taking into account the increase of 40% in electricity cost per cubic metre of water sold. Lower volumes sold were due to water savings, good rainfall, clients using own sources of water, and the economic situation.

The infrastructure refurbishment programme for the following five years amounted to R45 million. There was a total reserve of R24.9 million, of which 3.6 million was retained as working capital. R18.9 million was allocated to infrastructure refurbishment. However, this amount was inadequate to carry out the required infrastructure refurbishment programme. The shortfall in implementing the programme would be determined by future tariff increases and reserves, and whether Overberg Water could access funding, such as RBIG. There would be a risk in deferring projects.

The bulk tariff was R3.42 per cubic metre, based on estimated consumption. To this were added a basic fee and consumption calculation, as well as a drought component. When the dam level dropped by 40% an amount of 25% was added to the tariff for consumption above 15 cubic metres per household, thereby encouraging water-saving. There was a basic upfront availability fee of 30% of allocation and a sliding scale tariff, which supported water conservation and demand management (WC/DM), based on the number of households supplied by and agreed with the Municipality. The effective cost of water was essentially in the hands of the Municipality and the cost could be lower if WC/DM was correctly in place.

The consultation process as prescribed by DWA had been followed meticulously by Overberg Water. Municipalities had not been enthusiastic about the Overberg tariff proposals, but municipalities’ responses had always been that water was too expensive, irrespective of the fact that Municipal water efficiency determined the price of water. Overberg Water concluded that the situation would only be corrected once a new regional service provider was instituted to handle all bulk services. National Treasury had supported Overberg Water’s proposals but unfortunately SALGA had not responded within the prescribed time. It was not considered viable to increase tariffs much further, due to the economic situation.

Discussion
Mr G Morgan (DA) asked what opportunities were available to find new clients and increase sales and asked if the increase in sales depended on expansion of infrastructure. He also asked if there was interest from other municipalities to buy from Overberg Water.

Mr Emeran said that because the infrastructure was in such dire need of refurbishment, much of the planned expansion could not be done, due to risks associated with infrastructure. RBIG funding would lead to expanded capacity and additional clients were waiting for services to be supplied.

Mr Dries Potgieter, Chief Executive Officer, Overberg Water, said that the issue of new clients was interesting. He gave an example of a farmer applying for a certain allocation, which would then be reserved for the farmer. Overberg Water expected 80% to be used. However, farmers tended not to use their allocation. The net result was that Overberg Water efficiency was 65-70%. Overberg Water therefore designed its tariff structure so that if an allocation was not used, it was taken away. Overberg Water planned to accelerate that principle, whereby farmers would be penalised for not using their allocation correctly. The branch network structure was fully allocated (105%) and it was expensive to build new infrastructure, especially since Overberg Water distributed small quantities over long distances. The aim was to use water more efficiently.

Mr Morgan asked for more explanation on the RBIG and what Overberg Water envisaged with the desire for a more regional system.

Mr Emeran said that the entire evaluation had been postponed five years. However, Overberg Water needed to implement the infrastructure programme within five years. Overberg Water still very much in favour of RBIG as it wished to pass on experience, expertise and capacity to the surrounding regions and not just the Overberg area.

Mr Potgieter said currently the conditions for bulk provision to rural areas were confusing and there was little technical capacity, standards and systems. It was impossible for the DWA to regulate systems and attend to problems. A new regional system to co ordinate and plan in a systematic way was critical to attend to and prioritise regional bulk water services, including sewerage, in the country. Programmes that had been implemented were helpful, but would not resolve the situation in five years. He suggested that a focused discussion on regional issues with the Committee would be interesting.

Mr J Skosana (ANC) asked what were the challenges in delivery of water to the rural communities.

Mr Emeran said that irrigation channels were losing up to 50% of the water fed through them and that the challenges were huge. Asbestos piping had to be replaced.

Mr Skosana asked for clarification on the manner in which Overberg Water addressed gender issues.

Mr Emeran said that Overberg Water was working constantly to achieve a good gender balance. On the previous day, the South African Women’s Engineering Group had asked Overberg Water to speak at their conference, addressing careers for women in the Water Services industry. Overberg Water itself had several women staff members at the level of operation superintendents.

Mr Skosana asked why the municipalities were reluctant to comply with Water Board tariffs, whether they owed money to the water boards, if they paid on time, and how Overberg Water dealt with these matters.

Mr Emeran said that all municipalities paid on time. Overberg Water was more concerned about the completion of the contractual arrangements between Overberg Water and the municipalities, which was crucial to the entity, as R45 million could not be spent on the refurbishment programme without a guarantee of whether and from where costs would be recovered. The delay was due to the Section 78 investigation, which had been continuing for over a year. 

The Acting Chairperson asked if Overberg Water would pass the benefit to the client should it be given the RBIG, and how it would do so.

Mr Emeran said that the advantages would be for the benefit of the client and not Overberg Water.

The Acting Chairperson asked whether Overberg Water had considered cross subsidy arrangements between its various clients, so that the more wealthy would subsidise the poor.

Mr Emeran said that cross subsidisation had been implemented in the past, but it had gradually been phased out. Overberg Water would look at finances and consult with DWA and SALGA whether it was advisable to reintroduce it.

Mr Skosana asked how many women were in senior positions on the Water Board.

Mr Potgieter said that there were currently not enough women in the water sector. Currently there were four senior members of Overberg Water, three men and one woman. He agreed that the gender composition should at least be equal and the board was addressing this issue over time. Overberg Water, through an equity programme, was actively pursuing the training of women for water controllers and maintenance, and when recruiting was looking for women to fill positions.

Mr Morgan asked if Overberg Water was suggesting that legislation would effectively assist with increasing the client base, and whether it was suggested that amending legislation was needed in the following year. He also asked for a figure of how much Overberg Water needed, to grow its reserves so that it could address the challenges as outlined in the presentation. He asked what needed to be done with regard to maintenance of the current infrastructure, and what the risks were with not being able to immediately address maintenance.

Mr Potgieter said that in order to remain sustainable at acceptable risk levels, Overberg Water needed to undertake the R45 million refurbishment programme. An increase in reserves by another R5 million per annum would suffice. Accessing RBIG would assist in this regard, as would writing off the DWA loan. Namaqualand had been allocated R43 million in RBIG for refurbishment. He reiterated that deterioration of infrastructure, such as the asbestos and steel pipelines, would result in major breakdowns if not replaced. A loan could be used for expansion but attending to the current infrastructure was more important. A loan would also be more expensive in the long run. Overberg Water reserves could have been more, but in the past Overberg Water was a government scheme and did not build up reserves. Only when Overberg Water became an autonomous Water Board did it start to build up reserves.

Mr Morgan asked if National Treasury had expressed any problems with tariff increases, given that SALGA had not responded, or if tariffs were set in terms of what municipalities and farmers were able to pay.

Mr Potgieter said that Overberg Water was of the opinion that clients could afford to pay more. 90 % of rural clients had asked for more water, knowing what the tariffs were. A study showed overwhelmingly that the economic value of water was much higher than the current tariffs reflected.

Mr Emeran said that Overberg Water had taken the matter up with the formerly named Department of Provincial and Local Government, which had found that Overberg Water had followed proper procedure and that there was no excuse for SALGA and the local municipalities not to respond.

Mr Mathebe said that the presentation touched on the 2006 to 2009 financial years. He was under the impression that a new tariff proposal for 2010/11 would be presented.

Mr Potgieter said that the 2010/11 tariffs were presented graphically on page 24. They were comparable with tariffs of all other Water Boards presented by DWA, although they should have been higher, due to the intrinsic nature of Overberg Water’s business where smaller quantities of water distributed over longer distances necessitated a higher tariff.

Mr Emeran added that DWA ultimately decided on what the tariff would be. Overberg Water could argue for and justify a tariff increase, but tried to keep it as low as possible.

The Acting Chairperson asked how many people were on the Board and how many were females.

Mr Emeran replied that including himself, the Board consisted of six members, five appointed by the Minister, and the Chief Executive Officer serving ex-officio. There were two out of the five appointees who were female. 

The meeting was adjourned.

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