The Committee received a briefing on the upcoming Conference on Climate Change (COP 16) in Cancun, Mexico 2010. The Advisor to the Minister of Environmental Affairs presented an overview of the status of negotiations and the political dynamics There was no details on targets as much of the information was still before Cabinet. For climate change to matter, there would need to be legal obligations for countries. However a legally binding agreement was not expected to emerge from Cancun. South Africa would be the 2011 president and host of the next Conference of Parties in 2011 in Durban.
Members asked the Department about their role in global and regional discussions around Climate Change. They were also interested in preparations for South Africa’s presidency the following year. They asked for clarity on the stance South Africa could take and the role it had played thus far. They were particularly interested in differences between developed and developing countries and why agreements were not working.
Trans-Caledon Tunnel Authority (TCTA) provided an overview of its organizational performance, project implementation and financial highlights. The Committee commended its good work. They asked questions about its functionality and organisational set up. Members were particularly interested in its role in relation to the Department of Water Affairs. The various projects it had undertaken were explained and members asked about its capacity to undertake more work in the future.
Conference on Climate Change COP 16 in Cancun, Mexico 2010: briefing
Ms Joanne Yawitch, Deputy Director General: Climate, Department of Environmental Affairs, opened by explaining that they were not in a position to talk about policy for Mexico as the proposed mandate for the meeting was being prepared at the same time they were meeting. This would go to Cabinet in the following week. The presentations would then focus on National Policy, provide an update on the Conference of Parties (COP) in South Africa and its progress. Lastly, there would be an overview of what has happened in Climate Change over the last couple of years with a focus on the processes taking place, particularly since the mandate emanated from this.
She began by explaining the Green Paper that was accessible on the Department of Environmental Affairs website. It was officially open for comment for 90 days. By the end of the week they would also have the Second National Communication available on the website. There would be public meetings in all of the provinces in order to discuss the Green Paper. Depending on the issues that emerge from the public meetings, workshops with experts would be set up in order to begin the process of addressing these. She reassured the Committee that Parliament would be provided with a schedule of the meetings and the workshops. In order to turn the Green Paper into a White Paper they would be creating a comments and response document which would be available to Parliament. Once they had a White Paper it would come before Parliament for consideration. She suggested that Parliament would need to decide if it would like a detailed briefing on the Green Paper. They had kept Parliament involved in the brief and the document related to it thus far.
In parallel with the public comment process, they would also be carrying out a piece of research looking at the economic costs and benefits of low carbon conditions including possible job creation or job destruction and what it would mean for the country. This document would also be taken with them to Cancun. She highlighted that South Africa would be the country that would take over the COP presidency after Mexico, with Durban being the host city. At Cancun they planned to have two stands informing people about South Africa. They had also worked closely with SA Tourism to create a stand in the main arena highlighting the work done in the country around climate change and tourism. People would then be able to come and look at what work was being done in South Africa to address climate change. This would be aimed at addressing and informing the international public. They were also planning to have a ‘flavours of South Africa’ evening highlighting local foods and places. The COP was considered to be as much about tourism as anything else. They were also planning to have an event on 6 December inviting a number of people to South Africa in the following year. They would also be doing work for the future COP in South Africa, looking at the national interest and how to create middle ground for the South African COP. The Committee in Cancun would be working with them.
Mr Xolisa Ngwadla, Advisor to the Minister of Environmental Affairs, presented an overview of the status of negotiations and the political dynamics. Coming out of Copenhagen there was disillusionment from some quarters. There were deep divisions between the developed and developing countries, particularly in terms of climate negotiations. Divisions also existed within the two major groupings. The entire negotiation lost momentum leading up to Copenhagen. They were also approaching the deadline for the Bali Action Plan. He stressed that there was recognition that the COP they were attending in Mexico was not going to deliver a legally binding agreement. Part of the problem was that there no agreement on shape and legal form of the final outcome. Presently they had no idea if they were negotiating one or two treaties or concepts under the Kyoto Protocol (KP). In terms of South Africa’s interest as incoming COP president for 2011, it would be essential that they establish what was required and the future of these negotiations. He noted though that because there was no clarity on the character of legal negotiations there had been momentum in terms of what was referred to as the balance of decisions. This was a situation where some decisions would be made addressing how various items of Climate Change would be dealt with. South Africa and other developing countries were working towards a legally binding agreement although it was evident that this was not going to take place in Cancun.
During 2010 four formal meetings had taken place in April, June, August and October. The work done in April focused on recovering from COP 15 and the organisation of COP. In June they began to engage with the substance of negotiations. In this session some documents were presented that various parties could start engaging with. In August parties started presenting their own texts and in the final meeting in October they had created a singular text. The document was substantial suggesting that no progress was being made, although the document did suggest that certain issues were falling into place together.
After Copenhagen, due to a lack of trust, parties had started to move back to their original positions rather than their compromised positions. It had become clear in Tianjin [where Environmental Management MoU signed between South Africa and China in August 2010] that the text would not be something that they would be able to agree on in Cancun. Focus has shifted to look at common areas such as the establishment of an Adaption Framework – an institutional framework where adaptation could be dealt with globally - and a new fund. This was a direct outcome of the Copenhagen accord. He stressed though that as much as these common areas were being established, South Africa’s position was that without a legally binding agreement all of this would eventually fall apart.
Issues included the fact that countries such as the USA had not passed its climate change and energy legislation, this meant that it would not be able to enter into financial and legally binding treaties. He highlighted that the majority of countries had signed onto and ratified the KP. The implication of the US’s action, meant that other developed countries who were highly legally bound by the KP were finding it difficult to commit to a Second Commitment Period under the KP, particularly with regards to the reduction of emissions. He suggested that there was a trend forming post Copenhagen where it seemed that other developed countries were threatening to jump ship on the KP. Countries were looking to be part of a legally binding agreement that included the USA. The repercussions of this was that should countries such as Japan, Canada and Australia leave the KP and suggest that they were working towards targets yet to be discussed, the KP would most probably die. If the KP was no longer a legal objective, the climate goals would disappear with it.
Addressing what this would mean for developing countries, he explained that it had become clear that China would not agree on anything legal until it was clear how the USA would be bound. This made progression problematic. In terms of the G77 and China bloc there was an agreement that they would like to see a two-track outcome, with clear differentiation between developed and developing countries and a legal obligation for the reduction of Green House Emissions. The focus would be a two-track outcome as outlined in the Bali Action Plan, creating Kyoto Parties that would take a lead on emission reduction under that particular legal instrument. From the provisions of the Bali Action Plan, they would then negotiate another treaty that would bind the USA. Even though this was agreed at a high level, there was no consensus over the specifics of the legal form. Countries such as the Arab League understood decisions under the convention to be legally binding as well suggesting that there was no need for a treaty instrument to guide emission reduction of the USA and developing countries. South Africa’s perspective was that there was a huge difference between the practical implications of taking decisions under the convention compared to having treaties that were binding. As an example he explained that certain decisions had been taken to deal with small aspects of Climate Change however these had not been materialised. Funds had been established but these were empty because there was no specific legal or treaty obligation. It would be important for South Africa to address legal form in the next COP; they would also be in a watershed moment in terms of climate negotiations moving forward. He stressed that for Climate Change to matter, there would need to be legal obligations for countries.
Addressing Cancun, he explained that the level - if intended reductions amounted to less than 14% based on the 1990 baseline - they would need would be a 25-40% reduction by 2020. This suggested that they were already in a world where they were not going to meet their own objectives of ensuring that climate levels did not rise to dangerous levels. There were three scenarios that had been created in terms of dynamics and what countries had realistically put forward.
In terms of scenarios, if they stuck to the comprehensive package the focus would be a two track Legally Binding Agreement (LBA). Everyone was aware that in Cancun they would not get this kind of treaty. What was important though was whether or not Cancun could take them closer to this. There next option would be to abandon prospects of a LBA and focus on operational decisions being incremental. This was supported by Russia although South Africa had made a strong argument for the continuing of the LBA. The final option was a two step or middle road agreement. This approach would recognise that they would not reach a LBA and instead they should focus on what they would be able to achieve in the short term, working towards the LBA, creating confidence in the multilateral community that they were moving towards an LBA. The trend seemed to be to undertake real climate change programs outside of the official UN tracts. These partnerships were creating real change; the issue in terms of these was that formal processes were taking place in one area while work was being done in another under another set of guidelines.
Under Long Term Cooperative Action (LCA) there had been limited progress in negotiations, the LCA chair had proposed issues for decisions in Cancun would be the adaption committee, the new fund, the technology mechanism, Reduction of Emissions from Deforestation and Degradation (REDD) mechanism, sectoral approaches for agriculture, inscribing targets for Annex 1 and actions for Non Annex parties. He explained that Annex 1 parties referred to developed country pledges to reduction. Addressing pledges, he noted that in terms of KP there had been no change in pledges. Developed countries were arguing for a rule change with regards to land use and land use change rule before they would be able to contribute to the funds. This was based on the fact that a number of the pledges made by the developed countries were not about real reductions in carbon emissions in their economies because a loophole existed that they were using.
He suggested that Cancun would probably not arrive at a specific agreement but would set the tone of how climate change negotiations would be done in the future. This would be whether working towards a legally binding agreement or working in an environment where people did whatever they could, running the risk of not reaching the set goals. There were a number of the conditionalities set out by different countries such as the EU’s argument that they would not commit unless the US did. The need would be to clarify the legal form in Cancun. Without it they ran the very real risk of ending up in a fragmented world with fragmented processes.
Mr J Skosana (ANC) asked how far SA had gone as a country in terms of legislation post Copenhagen. He also asked what SA’s impact was internationally in terms of canvassing and lobbying and what the attitude of G8 countries was.
Mr L Greyling (ID) suggested Bali had already set the tone and Copenhagen was a break down of this, Mexico could be a repeat of this but how would they ensure that it did not just fall apart again. He suggested that they would need to push for a legally binding agreement, the green economy and climate financing. He asked for the status of the Clean Development Mechanism (CDM) post 2012 and the fast track funding as agreed in Copenhagen.
Mr Z Luyenge (ANC) suggested South Africa was a leading polluter on the continent. He asked how both the continent and the globe saw this.
Mr G Morgan (DA) addressed the funding commitments and asked if this was something that would be pushed during Cancun. He suggested that in terms of this a lot of the Climate Change action could be taken outside of the legal agreements and treaties. He also asked if they would they be able to push for this funding to be unlocked sooner in order to assist the developing world. He suggested that South Africa had been particularly ambitious since Bali establishing a reputation for itself internationally, this had been positive. Would managing Cancun and the future COP mean changing their stance in order to keep everyone on board. He addressed financial commitments and whether there was a possibility of more voluntary commitments moving forward in order to keep momentum.
Ms D Tsotetsi (ANC) asked about the outcome of the four meetings mentioned. She also raised the number of flights undertaken by the Minister particularly since there was seemingly no clear outcome and would not be in the near future. She suggested these costs had been wasted. She asked for clarity on what had been agreed on and what had been achieved.
Ms H Ndude (COPE) asked for more information on what was happening within the Developing countries, whether or not there were still divisions and what South Africa’s role in terms of leadership was. She asked if South Africa had a strategy or plan for COP 16 in order to achieve a better deal. She suggested that one of the ways to deal with the USA would be to close them out entirely.
Mr Ngwadla replied that South Africa was one of the few developing countries that had been progressive regardless of the international situation; the Green Paper was an example of domestic commitment to climate change impact. South Africa had been accused of punching above its weight in terms of international agreements. Since COP 15 the role of the country had not been diminished but rather strengthened as leaders. The tone he was suggesting setting, was different from Bali. The belief coming from Bali was that they would achieve a LBA by COP 15, this had changed. Cancun would set the tone in terms of answering whether an LBA had traction or not.
The role of the private sector in terms of exchanges and domestic markets would be able to continue outside of whether commitments were made internationally or not. In terms of being viewed internationally and in Africa, he suggested that there had been no change on the continent. As an example a recent SADC meeting was mentioned, even though SADC was not a negotiating bloc, South Africa gave valuable input and was seen as representative of and supported by SADC. Members of the DEA were also on there way back from a meeting in Gambia. He highlighted though that the continent was diverse particularly with regards to the power of oil producing countries. Least developed countries were beginning to see more common ground with Island Development States and oil producing countries were being targeted by the Arab League. These divergences had always existed but South Africa could exploit bigger areas of commonality and had been.
In terms of the 100 billion for developing countries, Minister Manual had chaired a committee looking at the sources of possible finance to raise the 100 billion. South Africa’s major contribution in terms of this had been to argue that the dominant contribution of these finds would have to come from public funds of developed countries to developing. He stressed that what was important about Cancun was the fast track finance of 30 billion and whether developed countries had provided and facilitated this. Looking at strategy he stressed national interest was national interest but they were aware of their responsibility to bring the entire world to convergence on issues of climate change. During the presidency year, convergence would be key but he suggested this was a manageable dual role with their national interest. Turning to voluntary pledges he explained that they were still struggling with how to inscribe pledges already put forward let alone new pledges to be made.
There had been limited progress since 2010. He explained that the information and reports from the meetings were largely useless. The meetings formed the space for discussion over positions. He stressed though that limited progress did not mean they should disengage from the process, progress was low because of the gravity of what was at stake and this was central.
One of the biggest mistakes of COP 15 in Denmark was that countries tried to make history happen. This lead to failure. As COP president, South Africa would need to see what would come out of Cancun and then act accordingly. Excluding the US was not an option on the table.
Mr Skosana asked what the Department’s plan was to inform the public about Climate Change.
Ms Tsotetsi asked if there were like-minded countries across the divide of developed and developing nations.
Mr Greyling asked if South Africa had clear guidelines moving forward and whether they had ironed out issues raised in Copenhagen in order to bring the Africa group with them.
Mr Ngwadla answered that the Green Paper contained a comprehensive stakeholder engagement process; this would create a cascade to various tiers of government.
Ms Roopa Singh, DEA Director: External Communications, added that they were engaging with the media, producing publication, exhibition and public participation programs.
Mr Ngwadla explained that as developing countries they needed support, funding and an inclusive international agreement – these were the only way forward. He suggested there was no other possible means to succeed if all countries did not sign on. There were trade issues and financial and economic interests. There was a definite need for agreement. Addressing the issues in Copenhagen, he suggested that South Africa continued to hold a credible status within Africa. There were people who were attempting to dominate the process for personal glorification but this was not the case generally.
The Chairperson requested that someone from the Department appear before the Committee to brief them before their appearance in Mexico.
Trans-Caledon Tunnel Authority
Dr Snowy Khoza, Chairperson, Trans-Caledon Tunnel Authority, explained that the presentation would be dealing with both there current status and issues raised by the Department in their last meeting. The Trans-Caledon Tunnel Authority (TCTA) was established in 1986 as a Special Purpose Vehicle (SPV), to go out into the market in order to raise funds for the Lesotho Highlands Water Project (LHWP). They were understood to be a non-profit organisation regulated as a schedule 2 public entity, which reported via the Minister to Cabinet and Parliament. The value chain had remained the same, they continued to provide infrastructure for bulk raw water. Their mandate was received from the Department itself, through the ministry.
Looking at their operational model she explained that they received their mandate from the Minister. Once this had been received they carried out due diligence in order to understand what would be required of them with regards to implementation and funding. >From here they set timelines dealing with the beginning and the end of the project. Designs for projects were optimised in such a way as to ensure that they would be able to include a social component. She explained this as the idea that they did not only want to provide water for commercial end users but also for the communities in the area.
Once this had been carried out the project would be rated in terms of its risk and then competitive funding would be accessed. Most of the time the funding came from local banks and international money markets. They focused heavily on following proper procurement processes. She noted that the last time they had come before the Committee transformation and BEE matters had been raised. In terms of this they had focused on using local products and local people. Skills transfer and the employment of local people as a means to address job creation and poverty were understood as key. Members would be receiving a program report about this.
Funding was off balance sheet, meaning that TCTA as an SPV did not have a balance sheet and did not receive funding from Treasury. Their funding relied on the implicit guarantee given by Treasury (although with the LHWP they had received an explicit guarantee from Treasury as it was their first project). In terms of processes all the projects were ring fenced, meaning that no cross funding was allowed. Debt repayment was funded through water tariffs over 20 years - this was done to ensure that the tariff was not too high for the end user. The deficit was intended to ensure on-going affordability for end users. The deficit reversed after a few years, this was not related to TCTA’s feasibility as a going concern.
Addressing risks and risk management, she explained that they normally undertook stakeholder agreements where the end user would have to sign an off-take agreement, a construction agreement would also be signed with constructors and finally an implementation agreement would be signed. Within this process debt management would be done. Revenue collected through the Department of Water Affairs would be used to pay back debt. They focused on project management ensuring that the project would be delivered at the right time. As the board they focused on continuing to provide strategic oversight, ensuring that the TCTA continued to provide effective leadership, based on an ethical foundation, for the effective governance of risk. Central to this mandate was the belief that the building of infrastructure would have to benefit communities.
Mr James Ndlovu, Chief Executive Officer, Trans-Caledon Tunnel Authority, said the TCTA was comprised of five strategic objectives. These included delivering to all mandates provided by the Minister, in accordance with specifications and within the agreed timelines and budget. The second was facilitating social transformation and building sustainable communities by providing jobs and empowerment. The third strategic objective was focused on ensuring that the business projects and processes were operated in a cost-effective manner. Fourth, they aimed to build the knowledge and capability of the organisation in order to generate lessons for project improvements, in pursuit of greater efficiencies in water delivery. Lastly they aimed to ensure the continual availability of high-calibre human capital for delivering on organisational mission into the future, while remaining a value-adding agile entity.
Reflecting on directives issued to date, he touched on the projects the TCTA had funded and implemented. These included the Lesotho Highlands Water Project (1986-2002), Berg Water Project (2002) and the Vaal River Eastern Subsystem Augmentation Project (2004). Coming to more recent projects projects, he highlighted the Mooi-Mgeni Transfer Scheme - Phase 2 taking place in November 2007, the Olifants River Water Resources Development Project, the Komati Water Scheme Augmentation Project and in 2009 the Mokolo Crocodile Water Augmentation Project. The organisation had moved from a single to a multiple project environment, including simultaneously raising finance and managing projects and associated knowledge.
In terms of achievements, the organisation had been platformed on a multi project system. They had done well in terms of this as evidenced by the numbers. Most of the projects adhered to the protocols of environmental sensitivity. They had institutionalized knowledge management within the organisation. Despite the challenges of the recession the organisation had carried out effective human resources management. In 2010 they had achieved an operating surplus of R2 026 million, this was compared with the R 1 756 million for 2009. They had also received an unqualified audit report. This was important to funders.
They had begun to focus quite strongly on strategic transformation and community empowerment. This was being done by carrying out preferential procurement processes ensuring that each project empowered black companies. Big companies participating in projects would be forced to assist these smaller companies sitting at level six and level seven. After a period of time it was believed that these companies would double there turn over and be able to operate at more or less the same level as the traditional white companies. Enterprise Development was also emphasised in terms of local procurement and the use of local labour. They were focused on growing the economies where projects were situated ensuring skills development. He noted though that this was also a new and experimental process for the TCTA.
Addressing Community Empowerment the TCTA had recently transferred the Pietersdal Office Block to Free State Provincial Government; the local community and local government would use this. They were also focused on social programs linked to health and people’s livelihood and had been involved in the establishment of the Charl Villiers Victim Empowerment. In terms of local economies and dams he stressed that they were of the belief that dams would need to give back to communities and be catalysts for economic growth. In the Berg Water Program (BWP) they were busy implementing the Sustainable Utilization Plan in conjunction with the winery and the local community. TCTA had gone to market to raise R100 million to bring in tourism, businesses and agri-business around the dam. This would assist the dam in giving back to the communities. This process was far advanced. They were currently talking to Woolworths who it was hoped would be able to assist with buying from agri-farming. In order to address education and learnerships, they had implemented Project Naledi. The project consisted of two arms. The first was focused on interns; these interns were in the organisation on a paid basis for two to two and a half years. They came from across the country and then either stayed with the organisation or were assisted in their career path into other organisations. The second arm was the learnership program. The TCTA sponsored four years of training for a number of learners across the country.
In terms of their Broad Based Black Economic Empowerment (BBBEE) scorecard, TCTA had moved from 68 points in 2009 to 80 points in 2010. They had also moved from a level four to a level three contributor. In conclusion he added that the TCTA was a highly solvent long-term organisation with no risk of being unable to fulfil its mandate in the near future.
Mr Johann Claassens, TCTA Executive Manager for Project Management and Implementation, unpacked the projects of the TCTA. He explained that they currently had seven projects running - these were either completed and in maintenance phase or at various levels of near completion. Beginning with the LHWP, he explained that water went from the Katse Dam, located in Lesotho, through a Hydro Power station and into South Africa. To manage the dam the Lesotho Highlands Water Commission (LHWC) was established with representatives from each country. The LHWC was accountable to both countries and focused on ensuring the project was correctly administered. The Lesotho Highlands Development Authority was responsible for the implementation of the project within Lesotho’s borders while the TCTA serviced the debt. The LHWP continued to deliver water into the Vaal System. Debt for this was being repaid in the form of royalties from the Vaal system. In 2008 Cabinet approved Phase II of the project - this would provide more water to South Africa and Lesotho would be researching how they could improve their hydropower. They expected to conclude the agreement by the end of the year, with project implementation happening in early 2011 and water delivery by 2020. The TCTA would be responsible for raising funds: the feasibility estimate was R8 billion based on 2008 price levels.
Turning to the Berg Water Project, the project was inaugurated in March 2009 and had attracted four awards for construction and environmental excellence. The project was operated and maintained by DWA as part of the Western Cape Water Supply System. It continued to deliver water to the City of Cape Town as part of Western Cape Water Service (WCWS). Operation of the dam continued to meet environmental requirements. It was the first dam in SA that fully complied with the World Commission on Dam’s Guidelines for Ecological Reserve. During the year revenues from water sales amounted to R173 million. They expected the outstanding debt of R1.3 billion to be fully repaid by 2028. Part of the social element of the project has been the construction of eighty houses for the village of La Motte. These were in the process of being transferred to the community.
The next project was the Vaal River Eastern Sub-system Augmentation Project (VRESAP), which would provide water to two key strategic industries, namely Sasol in Secunda and the Eskom Power Stations in Mpumalanga Province. Water delivery commenced in June 2009 when DWA had declared the project operational. The project was operated and maintained by DWA. Revenues from water sales amounted to R145 million and the project debt of R3.2 billion was expected to be repaid by 2028. He noted that there had been a termination of contract due to poor performance, the replacement contractors had been successfully appointed. Regardless of this, final costs were expected to be within the approved budget of R2.7 billion. The project was expected to reach completion by June 2011.
The next project was the Mooi-Mgeni Transfer Scheme Phase II. The aim of the project was to augment the Mooi-Mgeni system in KwaZulu Natal (KZN) for water supply via Umgeni Water to eThekwini, uMgungundlovu and Msunduzi Municipalities, essentially the KZN economic hub. The Project was comprised of a dam in the Mooi River and a water conveyance system. The estimated budget was R1.7 billion. It was in its final preparation stages with the hope that construction would be able to begin in the first quarter of the following year. In terms of this they were finalising their tender processes, he acknowledged that they were twelve months late but that this was due appeals taking place.
The Komati Water Supply Augmentation Project aimed to augment the Komati System from the Vaal Eastern Sub-System with 57 million m³ pa to supply water to Eskom’s Duvha and Matla power stations and later the new Kusile Power Station all in Mpumalanga Province. The project was dedicated to Eskom. Infrastructure included a pump station next to Rietfontein weir and 68 km of pipeline. The budget for this was R1.7 billion. This project was also in its final stages of preparation. Construction was expected to start in January 2011 and water delivery by October 2012.
The main beneficiaries of the Olifants River Water Resources Development Project Phase II was that of social needs – this was the responsibility of the DWA and mining development in the Limpopo area. The social portion would be funded by fiscus and commercial portion off-budget by TCTA. Total estimated cost was approximately R8 billion with water services costing a further R7 billion. In terms of funding constraints, he explained that this was the project where the TCTA had encountered the most issues. This was due to the mines’ reluctance to sign unconditional off-take agreements due the financial and economic meltdown. To rectify this, the DWA and TCTA approached National Treasury for financial assistance. They were still awaiting an outcome. Should everything go according to plan they were expecting to begin construction in September 2011 with water for social delivery happening in 2012
The final project was the Mokolo-Crocodile Water Augmentation Project. The main beneficiaries would Eskom’s Medupi Power Station, Exxaro and Lephalale Local Municipality. The project would be comprised of a 46km pipeline and pump station and acquire existing infrastructure. This would transfer water from Mokolo Dam. Construction for phase one was scheduled for mid 2011. There were further phases to it but these were dependant on decisions on coal power stations going through. In light of this they had suspended the design of phase II.
Ms Halima Nazeer, TCTA Chief Financial Officer, presented the financial report, reiterating that each project was ring-fenced. Costs of infrastructure were reflected as assets until the debt was fully repaid, these were then handed back to DWA (although the LHWP was reflected as an intangible asset reflecting their right to receive water). The TCTA’s model worked on a full cost recovery basis from end users and off takers. She stressed they were not based on profit. They had a constant tariff in real terms, which increased with the Consumer Price Index annually. Projects may need to increase borrowings in the first number of years after completion to maintain a constant tariff. This was done to ensure feasibility for end users hence he spreading of debt over a twenty year period. In terms of payment, they attempted to ensure that it was not longer than the economic useful life of the asset.
In terms of project financing approach, the first number of years of a project were designed to result in a shortfall in interest costs, hence the deficit. She noted that they had encountered a surplus but this operating surplus was before interest or finance costs, which would then turn it into a deficit. She reiterated that this meant that they covered all their expenses in the first number of years except the interest costs. This meant that the deficit was anticipated and this was explained as allowing the debt to grow to ensure an affordable tariff. This was the first year that they were showing a surplus in terms of LHWP, meaning that they were reaching the turning point in the project. For the Berg Water Project they would begin to see a turn in 2011. This would continue for the rest of the repayment period.
The statement of comprehensive income showed a comparative between 2009 and 2010, revenue had increased this was due to the fact that they had begun to receive income from VRESAP in 2009, and they had increased output and tariffs for LHWP and BWP. They had also recovered R5 million from La Motte in 2009. This amount had been recouped over a three year period. Royalties had increased to the Lesotho government due to the fact that in 2010 more water had been delivered into South Africa. There had also been increased activities on new projects, as these projects had gained momentum. All administration costs not directly attributable to construction had to be expensed. VRESAP had also seen a depreciation of works for the first time. Finance costs had mainly come from VRESAP, which until 2009 had all its costs capitalised to the asset. In 2010 for the first time all the costs related to it were taken to the balance sheet, affecting the bottom-line number.
Project capital projections for the next twelve years showed and anticipated spend of R30 billion for all the projects mentioned. Returning to the statement she reiterated that the TCTA was a going concern. All of its income agreements allowed for the CPI to be adjusted on an annual basis as well as automatic triggers. Meaning that if demand or interest rates increased they would be able to increase the tariff. Debt would be repaid over the planned repayment period. The External Auditors had confirmed that TCTA was a going concern. For 2009/10 financial year they had an operating surplus of R2 billion and deficit of R152 million.
Mr Skosana stated that the presentation was clear but what was not clear was how employees benefited, considering it was a non-profit company.
Mr Morgan highlighted that they were aware that there was a massive infrastructural backlog. He asked what was stopping the TCTA from taking on even more project builds moving forward, particularly since they were well managed and had skills which was in stark contrast to the Department of Water.
Ms Tsotetsi suggested that in the previous presentation they had indicated a number of challenges in terms of human capability. This seemed to be different in this presentation. Addressing LHWP she asked for more information on the R8 billion funding and how this would be monitored. She also asked how much they had lost in terms of poor performance. Addressing the repayment of debt over twenty years, she raised the issue of practicality particularly with regards to widespread unemployment. She noted the mention of surplus continually and warned against the savings in place of service delivery.
The Chairperson applauded the change in terms of accommodating smaller companies within bigger companies but he noted the lack of information in terms of break down. He also recognised the bursary program but asked how information about it was disseminated and what the provincial spread of the internship and learnership programs was.
Ms P Bhengu (ANC) asked about the Nandoni dam and the TCTA’s role in the completion of projects.
Ms Khoza, TCTA chairperson, explained that they were created as an SPV because government had become aware that it did not have enough fiscus to address infrastructural issues. TCTA was given the mandate to go out into the money markets to raise reasonable funding to ensure water would be delivered to industries but as government the decision had been made to ensure that the water benefited the local communities. They carried out due diligence and then approached commercial entities to ensure that if a dam is built these entities would buy water from them. In the first phase of the project, the dam would not have any money coming in, this precipitated the need to spread the debt over twenty years.
In terms of development she explained that they focused on building infrastructure to provide water, to ensure the activity of socio economic parties, in turn providing jobs and thereby alleviating poverty.
The TCTA was unique because it was small, lean and dealing with massive budgets. She stressed that there were no benefits to the organisation - they were using a small amount of human capitalisation to reach their goals.
Mr Claasens, TCTA, addressed the VRESAP project and profit. He explained that in roder to make a profit they would need to charge people more than what it would cost to render the service. This was not how they operated. The cost of resources was recovered from projects on a cost basis, they did not add any mark up to their direct costs. In terms of VRESAP he began by explaining the way they contracted. In every contract they created a performance bond this was accessible when the contractor did not perform. First prize was a contractor performing, second was termination. In decisions of termination they had to take into consideration what would cost more continuing or terminating. They were then able to implement their performance guarantees to defray the costs of the action incurred. Answering the question over the R8 billion. He explained that the project underwent a feasibility study and R8 billion was the final cost.
Ms Khoza explained that from the lessons learnt over twenty years they were of the belief that they could do more as a model but they had issues with their structure. She explained that tweaking the model of the TCTA would allow it do more regardless of this they had moved from a one model project to multiple model project. It was also highlighted that they had received four directives to implement simultaneously something which had never happened before. They had also begun to undertake knowledge management in order to learn and assist the Department in the form of advisory. She informed the Committee that they were already involved in assisting with infrastructural issues with new projects in the Department. Some of this knowledge would also influence policy and assist in improving service delivery.
Mr Ndlovu, TCTA CEO, stated that they currently had nine bursary students, four were females and five were males. He suggested it was not about balancing these ratios but the need identified. The bursary covered a number of needs to allow the student to pass. They also employed the students during holidays to allow on the job training. They were hoping to extend the approach to high school children participating in water projects. In terms of spread there were three from Limpopo, one from KZN, two from Gauteng and two from Mpumalanga. He noted the need to further themselves into deeper rural areas. The broader strategy going forward would be to produce engineers and accountants because they were very difficult to find in the market.
The previous year had largely been about preparation for projects, which they were now embarking on. Out of the five new projects they were hopeful that each project would reflect two new African contractors. In terms of gender, he highlighted that equality was key and that there was participation particularly in terms of South African Women in Construction (SAWIC).
Ms Khoza added that the list was available and could be shared.
Mr Kevin Pietersen, Director Water Resource Management, Water Research Commission, addressed the question about Nandoni. He explained that the matter was now sitting in sub judice legal action in terms of the pipes. They had relocated the money from the budget within the Department for the pipes. They were hoping to supply water to the communities by the end of 2011. They were now involved in appointing contractors and suppliers. One of the challenges the Department was facing with infrastructure in South Africa was the current pricing strategy. As an example, 60% of water in the country was being used by agriculture yet they were not repaying this entirely. The cap on agriculture was adversely effecting this situation. They were also not being charged for depreciation. This meant that the Department was not receiving enough income to deal with the backlog. Water for infrastructural backlog would cost approximately R11 billion. Treasury had stressed that they needed to get the pricing strategy right, this issue was causing difficult negotiations with some water users in the country.
The Department was also looking closely at institutional realignment and the institutions it did have in place in terms of water delivery in the country. They had requested external help to assist in this process. They were still discussing what the correct type of institution would be to facilitate water distribution and development in the country. A national water economic regulator would also need to be considered, particularly because this was a policy matter and it would have a wider impact on the way water was handled in the country. This was a key issue for the Presidency. The Department needed to add to the asset base of water infrastructure in the country to ensure the economy of the country could keep running.
The Chairperson noted all of this and added that they were well aware that the Department was providing support to the TCTA but that it should give the TCTA the opportunity to speak for itself.
Mr Ndlovu explained that during the financial crisis they thought they would lose some of their skills including engineers, accountants and project managers but they were able to maintain their skills. An enabling environment had been created in the Department influencing their decisions to stay. He also noted that they were dealing with fairly young and growing individuals who were still excited to provide contributions. Their limited numbers meant that they could direct money at projects. He stressed that there was no value in their making the tariff unaffordable as this would kill projects.
Mr C Huang (ANC) asked for clarity with regards to operating expenses.
Mr Skosana asked if the company was established as a unique company or was it characterised by different companies. More information was requested on how the directors were appointed and whether the members overlapped with other departments or companies.
Ms Tsotetsi explained why she had asked about the twenty years and the contingency plan in place. She stressed that end users were unreliable and that answers with regards to feasibility studies were unsatisfactory. All of this was important for oversight.
Mr Ndlovu explained that the organisation was designed in such a way so that each and every project was a stand-alone project. The reason for this was because they did not have a balance sheet. This meant that every project would pay backs its own debt. In turn each was referred to as an organ but they were all understood to be part of the TCTA.
Ms Nazeer, TCTA CFO, replied that the income showed a specific amount for expenses, the presentation showed the royalty items separately. If this was subtracted from the expenses, they would return to the original total.
Mr Ndlovu explained that the board was managed through the Department and it followed government protocol. The Minister appointed the board and the guidelines came from the Ministry and the Department. They did have shareholder representation in terms of officials from the Department and the Treasury that sat on the board.
The Chairperson asked what would happen if a shareholder was suspended from his department position and whether he would still be able to serve as a board member
Mr Ndlovu replied that in these situations they would write to the organisation and wait for a reply.
The Chairperson clarified that he was specifically asking about Mr Ayaya*.
Ms Khoza replied that when a member of the board was suspended in any capacity they were no longer considered to be a member of the TCTA board. In the case of Mr Ayaya, should he be suspended he would no longer be able to serve on the board. This was the same in cases where board members had resigned.
Ms Nazeer explained that income agreements and water supply agreements for every project clearly indicated where the risk of the revenue lay. This was passed on to the Department. She also reiterated the explicit and implicit guarantees provided by Treasury.
Mr Haung suggested the answer given was not clear.
The Chairperson suggested this could be handled after. He thanked the TCTA and adjourned the meeting.
*[Department of Water Affairs on 1 November 2010 put its Chief Financial Officer, Mr Onesmus Ayaya on precautionary suspension pending an investigation into irregular procurement practices.]
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