Proposed Water Tariffs 2011/12: Department of Water Affairs, National Treasury and SALGA briefings & Water Boards strategic plans and budgets 2011

Meeting report

Department of Water Affairs Presentation
Ms Thoko Sigwaza, Chief Director: Institutional Oversight, Department of Water Affairs, said that Water Boards derived their mandate from the Water Services Act, Act 108 of 1997 and were listed in the Public Finance Management Act as Schedule 3(b) National Government Business Enterprises. The Minister was the sole shareholder of these Water Boards. Documents which needed to be submitted to the Minister included policy statements, corporate plans, business plans and quarterly reports. The Municipal Finance Management Act (MFMA) outlined the process to be followed in regard to tariff increases. The tariff regime as it currently stood was fragmented. There were raw water tariffs set by the Department, bulk tariffs set by the Water Boards and retail components set by the municipalities. No one institution looked into the entire value chain. Section 42 of the MFMA, however, stipulated that a process of consultation needed to be followed between municipalities, Water Boards, SALGA and the National Treasury.

She explained that tariff increases would enable the Boards to finance future Capital Expenditure (Capex) projects and be less reliable on loans. Boards’ Capex requirements were likely to exceed R12 billion over the next five years. A reduction in tariffs would result, short term, in the need for higher levels of borrowing to fund infrastructure development, and this, over the long term, would then require the raising of tariffs in future to unaffordable levels. Operationally, the increase in energy, chemicals, labour and other related costs resulted in higher than inflationary tariff increases.

For the 2009/10 financial year, four Water Boards (Botshelo, Bushbuckridge, Namakwa and Magalies) noted poor performance. This was largely due to capacity challenges, histories of corruption and non-payment by debtors.

Discussion
The Chairperson asked what the policy imperatives for Water Boards to follow when requesting tariff increases were.  

Ms Sigwaza answered that this Section 10 of the Water Services Act noted the procedures and guidelines to be followed when setting tariffs. This Section also stated that the Minister could prescribe the norms and standards to be followed for tariff requests.  

The Chairperson asked where these norms and standards were listed, as it did not appear as though Water Boards were held to any compliance standards when requesting tariff increases.

Ms Sigwaza answered that factors such as input costs (for example labour, chemical and energy costs) and return on investment were looked at in this regard.

Mr Helgaard Muller, Acting Deputy Director-General, Department of Water Affairs, added that in terms of the regulations, Boards and municipalities must take into account the need to recover the costs of the water purchase, overhead, operation and maintenance and capital costs as well as ensuring that all households were provided with services.   

The Chairperson responded that this could result in significant problems as there was no consideration taken of the needs of consumers, but emphasis was placed mainly on the expenses of the Water Boards.

The Chairperson asked what criteria were used to ascertain whether infrastructure projects were deemed important.

A Departmental representative answered that factors such as water loss, the state of pipes and the need to service new customers were considered.

Mr J Skosana (ANC) asked what role the municipalities played in the increasing of tariffs. He asked how existing debt was dealt with, when combined with tariff increases, and why there were such marked differences in the increases requested by the different Boards.

Mr Mohamed Vawda, Director, Department of Water Affairs, answered that the MFMA stipulated that there needed to be consultation with the Department, National Treasury and municipalities. The Department had very little capacity to request increases. In addition, the fact the consultation took place between November and January posed a challenge, as this was a difficult time of year to gather all the necessary information. As there many variables that came into play, it was not advisable to benchmark one Board’s increase against another.

The Chairperson asked for the Department to prepare information on bigger policy issues and to revise and/or concretise the norms and standards to be followed by Boards in their requests for tariff increases.

National Treasury Presentation
Ms Avril Halstead, Chief Director: Sector Oversight, National Treasury, said that, in terms of strategy and operational analysis, the overall finding of the National Treasury (NT) was that Water Boards’ strategic focus was largely on financial and customer concerns, with less emphasis on internal operational performance, learning and growth. The impact was increasing operating costs which in turn threatened long-term sustainability. With regards to solvency, interest cover and current ratio indicated an ability to repay debts and ‘cover’ liabilities with assets. Declining ratios indicated higher risks. Debt collection in the sector overall took 82 days, which was slightly above the acceptable norm of 60 days. The credit payment period was higher, at a total of 108 days. In relation to profitability and efficiency, the overall return on assets stood at an average of 3%, which was adequate.

Capital expenditure was at 79% of budget and was generally in line with Capex for the sector. Low expenditure was attributable to insufficient cash flow. With regards to expenditure on maintenance, most Boards were not allocating sufficient funds to maintenance, with most spending less than 1% of asset replacement costs on maintenance, per annum.

She outlined the annual increases for the major costs, as 9% for raw water, 10% for staff costs and 25% for energy. Most Boards’ proposed tariff increases were in line with their internal inflation increases, though there were some anomalies. One example of this was the introduction of a capital unit charge by the Department for the building of Spring Grove Dam in Umgeni. The establishment of an Independent Economic Regulator in the water sector was important to interrogate the cost structure of Water Boards. However, the quality of information received in the tariff proposals varied, with some Water Boards submitting adequate information while others submitted little or no financial information.

In relation to municipal debt as at March 2011, the total debt owed to Water Boards stood at R1.832 billion, R1.003 billon of which was in arrears. The majority of arrears (78% or R781 million) were more than 120 days old.

A strategic focus would be required to address operational challenges around raw water quality, ageing infrastructure and low expenditure on maintenance. Although finances were generally well managed, there were concerns around short-term liquidity risks due to low cash flows and low maintenance expenditure. Tariffs had a major impact on Water Boards’ sustainability and needed to be cost-reflective.

Discussion
Mr G Morgan (DA) asked what set the Spring Grove Dam project apart from other projects, and made such a significant tariff increase in Umgeni Water Board.

Ms Halstead answered that the project was not completely unique, as there were other areas where similar charges were included in the tariffs. However, in this project, the charge became effective for the first time in this year.

Mr Vawda added that the project was a TCTA project, and was therefore not funded through the fiscus.

The Chairperson asked who had been the signatories to the project contract.

Mr Vawda answered that the contract was signed with the municipalities.

Mr Morgan asked whether this would result in further significant increases in the future.

Mr Vawda answered that if there were more schemes to be built, then this would result in further increases, although nothing out of the ordinary was expected.

A Department of Water Affairs representative added that municipalities had raised certain concerns, and there would be further consultations. The Department would also look into the implications of current budget structures, especially as this affects poorer communities.

The Chairperson noted that there were evidently major political issues which needed to be addressed.

Mr Morgan asked whether the increase was designed to ensure full cost recovery of the dam building. He said that there appeared to be no logical reason for having involved the Umgeni Water Board.

The Chairperson concurred. As this was a capital cost, the matter should have been dealt with differently. It reflected poorly on the Umgeni Water Board.

South African Local Government Association (SALGA) Presentation
Mr William Moraka, Director: Water Services, South African Local Government Association, reiterated that there were three tiers of tariff setters, being the Department, bulk providers and municipalities. The latter two were not regulated. There was thus a need for an independent Regulator. As many Water Boards had not provided adequate information in their requests for tariff increases, it would be beneficial to consider the standardisation of proposals.

Raw water was a significant cost driver, largely due to the deteriorating quality of water which necessitated the addition of additional chemicals. He added that Eskom’s tariff increases were factored into the applications, sometimes illegitimately above the 24% increase, claiming that retail rates were demanded by municipalities.

Challenges included the fact that there was no common understanding of the approval process, that the timelines for the tariff consultation were not optimal, that different tariff methodologies were used, and lack of standardised proposals led to proposals varying in quality. The absence of an independent economic regulator was a further challenge.

SALGA therefore recommended that 2011/12 tariff increases should be in line with its own recommendations, alternatively should be inflation related plus 3%. A panel of experts should be appointed for 2012/13, to oversee the tariff increase process and make recommendations. The sector should focus its energies over the long term on the establishment of an independent economic regulator. The sector should also explore the development of a sustainable funding strategy that incorporated common tariff methodologies.

Discussion
The Chairperson said that the Department and National Treasury should engage on reworking the timeframes, norms and standards, to try to reach some common increase across the board. If any Board desired a higher increase, it should then motivate for it.

Mr Skosana said that the Department needed to ensure that all relevant sectors were provided with accurate information in order that there be proper engagement and debate around the issues affecting them.

The Chairperson added that the Department should also look into the possibility of establishing a model which would assist in addressing issues effectively. It needed to draw on expertise from all the relevant sectors. It would also be desirable to get standardised reports from all Boards.

Rand Water Board Presentation
Mr Percy Sechemane, Chief Executive, Rand Water Board, outlined that some of the challenges of Rand Water included the lack of a sustainable tariff structure, ageing infrastructure, the need to maintain and improve its credit profile, and to address deteriorating raw water quality. He agreed that there was a need for an independent economic regulator.

The increasing cost of energy led to an increase in the costs of providing water. Rand Water was looking into whether it could use its own pipelines to generate electricity.

He noted that this Board had followed a consistent rationale for increasing tariffs, which was based on assessing its internal rate of inflation. Factors which affected demand growth included population growth, inward migration, service backlogs and system losses. Capital expenditure investment for the year amounted to R910 million.  

Discussion
The Chairperson asked how Rand Water was ensuring that it prioritised the delivery of services to poorer communities.

Mr Sechemane answered that that the solution was institutional realignment as well as cross-subsidisation.  

Umgeni Water Board Presentation
Mr Andile Mahlalutye, Chairman, Umgeni Water Board, said that the Board’s projected revenue for the 2011/12 financial year was R1.8 billion, and its projected and costs were R800 million. Its borrowing limit, as set by the National Treasury, had decreased to around R1.8 billion. However, it did not think it would need to use this, because it had reserves. Its capital expenditure programme was focused largely on augmenting existing capacity and expanding to rural areas in need of its services. Key priorities thus included enhancing rural development capital expenditure, supporting economic development, ensuring the maintenance of current infrastructure, and enhancing livelihoods. In identifying municipalities that needed prioritising, this Board looked at those which were most water-stressed, and not necessarily those which could prove to be financially lucrative.

Discussion
The Chairperson asked from it where this Board received its mandate to build the Spring Grove dam.

An Umgeni Water Board representative said that this had been approved by the Department. The building of smaller dams did not fall under the Department’s mandate.

The Chairperson said that there was an urgent need for the Department to engage with the political leadership in KwaZulu-Natal to get adequate infrastructure in place.

Mr Morgan asked to what extent the Board was concerned with the quality of the bulk water supply in the province, and to what extent this drove up purification costs.

An official answered that poor water quality was a reality and that raw water quality monitoring was provided. The Msunduzi municipality was accepting waste water, which was not in compliance with its own standards. It had decided to increase the capacity of water works so as to mitigate the effluent that made its way into rivers.

The Chairperson asked whether the Blue Scorpions looked into this issue.

Mr Muller noted that the DWA was currently undertaking legal action against other municipalities on this issue, although this municipality had no action taken against it at the moment.

The Chairperson said that there needed to be more effective enforcement in this regard.

Mr Morgan asked to what extent the Board either commented on or objected to developments that it ultimately paid for.

A Water Board official answered that there was a unit dedicated to this matter.

The Chairperson said that there was a problem around the poor spending of budgets. He reiterated that political intervention was therefore urgently needed.

Overberg Water Board Presentation
Mr Yusuf Emeran, Chairman, Overberg Water Board, said that over 90% of this Board’s income came from water sales. In relation to cash flow, most of the reserve funds were reserved for working capital, infrastructure, refurbishment,  and furniture, equipment and vehicles. The Board currently had no bad debt and had a very tight financial regime. Its strategic objectives included ensuring access to safe, potable water, the management of financial affairs to meet its current and future obligations, the operation, maintenance and refurbishment of infrastructure, empowering and developing employees and being an aligned and effective institution.

When calculating its tariff increases, it considered historical water consumption, normal operation costs, change in working capital, the repayment of loans and infrastructure refurbishment needs.

This Board’s projected income for 2011/12 stood at R31 million. Although labour costs made up 37% of its expenses, this figure had been reduced since the previous year. The total infrastructure replacement costs for the year ahead stood at R530 million.

Discussion
The Chairperson said that the Board should engage with the Department around the issue of ageing infrastructure as this was not sustainable.

The meeting was adjourned.