Interaction with Water Trading Entity, Analysis of Water Boards: Input by Department of Water Affairs, SALGA & National Treasury

Committee: Water and Sanitation

Chairperson: Mr J de Lange (ANC)

Date of Meeting: 17 Apr 2013

Summary

Members interacted with the Water Trading Entity. The primary concern was the levels of debt.  Members were concerned that government departments were not paying their dues.  The Department of Water Affairs was charged to ensure that all debt was collected before the end of the term of office of the current Parliament.  Writing off debt was not an option. Money was needed to develop infrastructure.  Attention to metering was needed as Members felt there were some losses as a result of inefficient metering.  Members were also concerned about inaccurate documentation and the danger posed by unguarded canals through residential areas.

The Department of Water Affairs briefed Members on its opinion of the water boards.  There were twelve of these, of which Rand Water generated more than half of the combined national revenue.  The viability of some of the water boards was questionable.  The water boards set their own tariffs with the approval of the Minister.  Energy costs were an important component of operational expenditure.  Responsibilities for bulk supplies were unclear, as several municipalities preferred to manage their own bulk supplies, although this was the case with only two of the metros.  The Department announced that three of the water boards would be disbanded with their functions absorbed into other water boards.  Members expressed concern over the staff of the water boards to be closed, but were assured that the matter would be dealt with sensitively and no workers would lose their jobs.  Members felt that government should be given a more active role in setting policy for water boards, as this was very much the preserve of the boards of directors.

National Treasury was generally satisfied with the financial position of the water boards.  There was still a large amount of money owed to the water boards by municipalities.  Rand Water accounted for more than half of the total revenue and assets.  There was spending on maintenance.  Capital expenditure was about 69 %of the budget.  There were concerns over the financial position of three of the boards.  Tariff increases were in line with cost increases.  Members suggested that the equitable share grant should be paid directly to water boards, but this might make it difficult for municipalities to balance their books.  This grant was meant mainly for the provision of free basic water.

The Auditor-General had given six of the twelve water boards an unqualified audit report.  Four had received emphases of matter and one a disclaimer.  The twelfth water board had submitted their financial report too late to be considered in this review.  The audit report was done on a sample basis.  A management letter was used to cover the aspects not included in the sample.

The South African Local Government Association felt that some of the water boards had not fulfilled their requirement to consult with all stakeholders on tariff increases. They felt that the increases should be denied for these water boards. In some cases the tariff increases exceeded cost increases, and in some cases the water boards seemed to be budgeting for high profit margins in order to satisfy banks.  Members felt that it was unfair to expect poor people to pay for the infrastructure that should have been in place already, and denying tariff increases would have the same effect.  The Association was criticised for not ensuring that municipalities paid their debts.  Infrastructure needed to be upgraded.  Members felt that some political direction was needed in the setting of tariffs, as the water boards were a law unto themselves.

Rand Water was the biggest water board. They had been asked to take on some of the duties of Botshelo Water. An academy had been established that was open to all in the sector. Although they serviced a predominantly urban area, they had been asked to take on rural development. There was a large capital expenditure programme. Rand Water was in good standing with the Department. Members noted the large salaries paid to Rand Water staff. Although as much internal expertise was used as possible, there was some need for consultants. Members queried the sixty day payment allowed by the Department.  Rand Water was assisting with the project to combat water losses. It was investing in the communities of the area and had taken responsibility for the management of the Vaal River. Acid mine drainage was not part of their mandate even though they were prepared to work on this problem.

Umgeni Water was the second biggest water board. It served a large area of KwaZulu-Natal, including the eThekwini municipality. It had received a clean audit report. Revenue was sufficient to meet operational costs, but grant funding was needed to support capital expenditure projects. 
 

 


Minutes

Interaction with Water Trading Entity

The Chairperson invited Members to ask questions on the presentation of the previous day.

Ms M Wenger (DA) asked if the lack of success in collecting on debts was due to poor documents and a resulting lack of evidence.

Mr J Skosana (ANC) asked about the failure to have proper meters. The Chief Financial Officer (CFO) should write to the CFOs of the departments in debt requesting reasons for non-payment. It would be wrong to write off the debts. The companies involved should pay what they owed. He had some sympathy for customers in the rural areas. In terms of metering, various categories had been defined. For class two, the definition was of self-readers. He asked how the customers would read their meters. Customers might give falsely low readings. The Department of Water Affairs (DWA) needed to have a mechanism to ensure correct billing.

Dr S Huang (ANC) agreed that water was life, as stated in the presentation. A lack of money meant that there would be no water. He did not know if appointing a debt collection agency would help to recoup the debts. It was municipalities that owed money, not individual consumers. He asked how much of the R6 billion was for interest. It would be wrong to write this off, as no bank would do this.

Ms J Manganye (ANC) asked if the farmers were also owing water. Water meant for farmers passed through the townships. These watercourses were often not fenced off, and children could drown in them.

Mr F Rodgers (DA) said that many consumers were not paying for what they got. It was impossible to determine the price of the water if the amount consumed was not known. R4.2 billion was in debts of more than 150 days. The situation was getting worse. He asked why the crisis had not been dealt with earlier. Municipalities were the worst paying of the lot. He would not support any of the debt being written off. The Department of Water Affairs (DWA) needed to investigate how this could be done. 

Mr Skosana said that the plan sought to address the issue of debts, but dealt with companies that were easily identifiable. Farmers were consuming water on a daily basis, and they should be included in the plan. The contents of the report should be made known to the affected communities. The big companies were not metered but the poor were. The farmers had to pay for the water used. 

The Chairperson noted that the plan was for a four year period. He asked when the class one metering would start. Once the officials knew that the debt would be written off, it would be difficult to motivate officials to try to recover the debts in the interim. He wanted to see DWA putting in a concerted effort to recover debts. This matter was so serious as to warrant recalling the DWA after the meeting the previous day.

Mr Mpho Mofokeng, Acting CFO, Water Trading Entity (WTE), was not saying that they were relaxed.  The Auditor-General of South Africa (AG) had audited the statements fro the previous year. The AG wanted to see the history of the customers involved. Nothing had been written off, and this was not the intention. Letters of demand had gone out in the first two months of the year. A company had been appointed to follow up on the debt.

Mr Mofokeng said there was documentary evidence available. Invoices were normally sent monthly.  Some customers complained that the addresses they had provided themselves were incorrect. Some customers did not agree with the accounts presented. The tariff was determined early in the year, normally during April. There were sometimes complaints on volumes. In some cases there were discrepancies between the amounts submitted by customers and DWA's measurements. The role of DWA would be to ensure that meters were in place, and the Department would conduct spot checks to assess the accuracy of the self-readings. Technology would be introduced to read the meters remotely.  Big companies were metered. Ownership of the meters was a problem.  DWA did not want to depend on customers. The tender process had not yet started.

Ms Zandile Mathe, Acting Deputy Director-General (DDG): National Water Resources (NWR), WTE, said that the tenders for meters should be issued within the following three months. DWA was still looking at the various technologies on the market. The problem was not the pricing strategy. Where there was no meter, DWA could use the registered volume. Farmers would register the number of hectares to be irrigated during the year. In some cases farmers might use less than expected. The figures were not a thumb-suck. The big conglomerates were all metered. It was imperative that they should pay their accounts. 80 % of revenue came from meters. Some 6 500 companies were metered. About 80 % of users were farmers, and their dues were determined on a volumetric basis.

Mr Mofokeng said that blacklisting municipalities was not being considered at present, but DWA was considering restricting the amount of water supplied until they paid. He agreed that interest should not be written off, but in some cases there had been errors in recording dates of payment resulting in erroneous interest being applied. These errors would be corrected. DWA would look to recover debts from farmers.

The Chairperson acknowledged that WTE had moved from a disclaimer to a qualified report.  he situation was improving. His grandmother had been a very deliberate lady who took her time over everything. The DWA was even slower and was lifeless in their approach. Some fire was needed at WTE to get the process moving. The development of the country's water infrastructure was being delayed due to money being outstanding. Some R11 billion was being withheld from the water infrastructure programme.  Government departments at various levels were generally the culprits. He referred to the list provided of debtors, and instructed DWA to provide copies of the letters of demand. This process had to be completed within one month. He wanted bi-monthly reports from WTE on the progress on receivables and on metering. The tender process had to be expedited without cutting corners. It seemed the DG already knew what meters were needed. Diligence was commendable, but DWA must not waste further time on the tender. He wanted updates on the process. If anything was to be written off, a report must first be made to the Committee. This information must be interrogated by Members before any agreement was made to write off debts. Any political decisions had to be agreed to by the Committee. In 2014 he did not want to hear of any outstanding debt, as this would be the last year of the current Parliament. He understood the problems DWA faced, but some of the outstanding debts were unforgivable. There had to be some sanction in place. Companies were one thing, but political interventions were possible where government departments were at fault. Debts must not be allowed to prescribe. He was holding Mr Mofokeng and the CFO personally responsible.

Ms Mathe said that DWA had started fencing off canals around the country. The challenge was that fences disappeared as soon as they were erected. Some watercourses were classified as national key points. 

The Chairperson had seen some improvement in the water boards. Others were virtually defunct. They could be a useful tool to government. Poor payment in certain areas was retarding their work.

Department of Water Affairs Comments on Water Boards
Ms Thoko Sigwana, Chief Director: Institutional Oversight, DWA, said that there were twelve operational water boards in the country, varying in size. Rand Water had operating expenditure of about R15 billion.  The figures for one board had not been included as their Annual Report was late. The Minister appointed the water boards for four year terms. The board should consist of experts. There was legislative compliance. Policy statements needed to be produced every five years together with annual business plans and shareholder compacts. Ten of the twelve had received unqualified audit reports.

Ms Sigwana said that 75 % had submitted shareholder compacts, 54 %of them with good content.  In terms of revenue, R10.5 billion had been generated in the 2011/12 financial year (FY). The cost of raw water sales amounted to R3.5 billion. Water boards had done well in terms of job creation.  R1.9 billion had been spent on this aspect. 

Ms Sigwana said that there had been a profit of R87 million. Some boards had under spent, and some had gone over budget. Rand Water accounted for 61 %of water usage. The situation was improving with some boards. Only Amatola and Bushbuckridge had run into a deficit, but that of Amatola was less that that incurred in the previous financial year (FY). At Bushbuckridge there were ongoing problems.

Ms Sigwana moved on to tariffs. This was a critical area. The revised increase in electricity tariffs had delayed DWA in setting a suitable tariff for the coming year. The boards had been requested to adjust their tariffs accordingly. The interpretation of the 9.63 % increase granted for electricity tariffs was confusing, coupled with the environmental level. It would take up to a month to determine the tariffs.  Cost drivers such as raw water, chemicals and staff remuneration had been considered. Salaries were determined in the bargaining chamber, and as with the electricity tariff, DWA had no control over these costs.

The Chairperson asked what was meant by 'average tariff'. 

Ms Sigwana explained that this was the actual tariff compared to the previous year. Some water boards operated more than one scheme, and different tariffs might be levied for each. DWA was continuing to work on tariff determination. The process was not perfect year. There was a raw water pricing strategy in place together with other projects to build capacity. Viability remained a challenge with some boards.  Rand Water was now acting as a caretaker in Botshelo.

Ms Sigwana said that water boards were owed R4 billion, of which R1.5 billion was old debt. There were disputes with Bushbuckridge and its customer municipalities. The Minister had established a task team, and a strategy had been developed to deal with the issue of outstanding debt.  Interventions were being put in place.

The Chairperson said that a list was needed urgently for the municipalities that were in debt.

Mr Helgard Muller, Acting DDG, DWA, said the information was available.

Ms Sigwana said that Treasury would include this information in their presentation. A database was being compiled which should be ready by 1 July 2013. New performance measures and targets were in place.  These targets were reflected in DWA's strategic plan.

The Chairperson pointed out that the boards would thus have to meet their targets in order for DWA to meet theirs.

Ms Sigwana said that the National Development Plan (NDP) supported the initiatives of DWA to reform the water structure. There were weaknesses in the supply chain in many municipalities. There were unclear responsibilities for bulk supplies in some areas. The mandate for regional bulk was not well defined in legislation. The municipalities and boards were both responsible for bulk supplies. Where boundaries were crossed the responsibilities were unclear.

Mr Muller said that water boards typically served more than one municipality. This was where the unclarity arose.

Ms Sigwana said that with some regional schemes, control had been given to municipalities. DWA was trying to solve this problem. Some water boards in urban and mining areas were more viable than those in the former homelands. The regulatory framework was not effective. Many water boards were operating in urban areas and metros. The greatest need was in rural municipalities, where bulk supplies were most needed.

The Chairperson was stunned that metros were served largely by water boards. He thought the opposite would have been the case. Rand Water probably made up a big slice of this, as other large cities such as Cape Town and Port Elizabeth were responsible for themselves.

Mr Muller confirmed that these were the only two metros that were responsible for their own supplies.

Ms Sigwana said that the total staff of all water boards was over 6 000. On a regional scale, water boards had infrastructure of a total value of R165 billion. Local government controlled the majority of these assets, while the boards operated at a regional level.  DWA was respecting the mandate of local government. They did want to institute the DWA regional mandate. Economies of scale had to be observed.

The Chairperson did not want to undermine local or provincial government, but where they were failing measures had to be taken. It was clear that some reform was needed.

Ms Sigwana said that DWA wanted to introduce incentives. The water boards that could not raise capital could no longer be regarded as water boards. Often the case in the regions was that subsidies were needed.

The Chairperson asked how it had been decided that metros would either manage their own affairs or use a water board.

Mr Muller said that it was a historical issue. The landscape had not changed for many years.

The Chairperson would like to know how the historical trends had developed.

Ms Sigwana said that under-performing water boards should be consolidated. The Minister had agreed that the number of boards should be reduced from twelve to nine. The main proposal was that the two board to be closed would be Botshelo and Bushbuckridge. Botshelo would be split into two, one area going to Sedibeng and the other to Magalies. The area covered by Bushbuckridge would now fall under Rand Water. The other water board targeted was Pella Drift, which would be incrementally incorporated into Sedibeng. There were mines in the area. 

The Chairperson confirmed that this was still in the planning stage. Amatola was close to a big city but was mainly responsible for the smaller municipalities in the area. He asked what would be done with other non-viable boards.

Ms Sigwana said that a new rural water support facility would be introduced. There were some areas that needed water boards, such as in the Eastern Cape, where the municipalities were weak. Substantial initial funding would be needed. A rural water subsidy would be needed for this.  The area of Amatola would be expanded to include the old Transkei. 

The Chairperson asked what was stopping Amatola from offering its services to the municipalities in the Transkei. There were big Municipal Water Infrastructure Grant (MWIG) allocations to finance the provision of infrastructure. It was a question of a service being offered to the municipalities. There were no water boards in the areas most needing the service. 

Mr Muller said that some municipalities did not want to use water boards generally, and sometimes only on a temporary basis.

The Chairperson said that that MWIG funding could be diverted to the relevant water board to improve the infrastructure. MWIG would open many doors.

Ms Sigwana said that Umgeni Water would include areas formerly covered by the Tugela Board. There would be huge investment in Lepelle Northern Water Board. This should be expanded to cover the whole of Limpopo.

The Chairperson felt that the Overberg water board was not viable, despite it being well run.  Municipalities in the Western Cape were generally in a sounder position than in other provinces. Its activities could perhaps be expanded to parts of the Eastern Cape. It was currently too small.

The Chairperson found some of the charts amazing. He thanked the DWA for a good presentation.  He was glad to see just one qualified report. He offered his congratulations. Water boards were an important asset to deal with service delivery in this area. He felt that the boards of the water boards were creating problems.

Discussion
Ms C Zikalala (IFP) congratulated the Umgeni Water Board for what they had done for the people of Mpunga. The people there now felt spiritually free as they could now get clean water rather than having to draw from polluted rivers. A number of areas in KwaZulu-Natal (KZN) were being serviced. She wished the DWA well with their plans, as this would help mankind. She waved a bottle of water around, as water was essential to life.

Mr Rodgers echoed the words of the Chairperson. There was a problem in the rural areas. Other income was reported as 27 % higher than budget, and other comprehensive income was 49 %. He wanted clarity on these figures.

Mr Skosana said that there had to be a swift follow-up on the proposals tabled regarding expansion. The amalgamation of challenged water boards was welcomed, but the process had to be handled with care.  Operations should not be effected. 

Ms Manganye had not understood many aspects of the operation of DWA in the past. The Committee supported the Department. DWA was working hard.

Dr Huang said that the three water boards to be disbanded had about 500 staff. He asked what positions would be made available to these persons.

Ms Sigwana said that no staff would lose their jobs. A change management process would be followed, but she did not foresee any issues. DWA had undertaken to form a national steering committee to guide the process. Some water board members would be retained in the current positions due to their knowledge of the areas of operation. The 27 % increase and 49 % referred to the core business of providing bulk water supplies, while the secondary activity was supporting municipalities in operational issues.  She would provide the Committee with a fuller answer later.

Mr Muller said that Water Boards were constituted in terms of the Water Services Act. The Minister had to approve the shareholder compact. The Minister had announced the previous day that there would be a policy review. Appointments at present were governed by two acts, and there was a feeling that the two functions should be combined.

The Chairperson felt that the accountability of government to the people for service delivery was being eroded, and was totally opposed to this. Where boards were responsible for policy there were layers of boards of directors who might have conflicting policies. Business plans were signed off by the directors, not by government. Often the board members were interested parties. This was a recipe for disaster.  The whole community should be part of the structure if there was to be democracy in the process.

Mr Muller said that there should be distinction between policy making and day-to-day business. The Minister had instructed all boards to amend policy to cater for MWIG funding.

The Chairperson was still trying to find a provision for government policy to be adopted by the water boards. 

Presentation by National Treasury
Ms Sarah McPhail, Director: Water Oversight, National Treasury (NT), said that there had been an overall improvement amongst the water boards.  About 75 %of targets had been achieved. Total revenue was R10.3 billion. Over a four year period, net profits had declined before increasing in the last FY.  Capital investment was increasing steadily, totalling R2 billion in 2012. This was 69 % of budget. Only seven boards had debts, amounting to R2.9 billion. The water boards without debt were funding capital expenditure (capex) from their revenue. Water boards needed the approval of the Minister, in concurrence with the Minister of Finance, to take out loans.

The Chairperson was worried that the debt was about double the profit.

Ms McPhail said that the water boards concerned had taken loans based on the lifetime of the asset.  Reserves totalled R9.7 billion, mainly held by Rand Water, which also held more than half of the R15 billion in assets. The replacement value was R100 billion. Some of these figures were calculated methodically while others were more guesswork. There was an impact on maintenance expenditure, which was about R500 million. This was a significant increase on the previous FY, but was still not enough. This was an ongoing concern both in this and in other sectors. Maintenance was a discretionary expense, and was often the first target when budget cuts were needed.

Ms McPhail said that NT supported the proposed tariff increases, as they were in line with costs and historical trends. Three of the boards were under-recovering. In Bloem Water, there was a dual tariff system. In Amatola tariffs were kept low because of affordability concerns. Umgeni was working on a long term cost recovery strategy.

Ms McPhail presented a table of 2012 tariffs. The increase had been 13 %. The municipalities had increased their tariffs by between 7 and 15 %, depending on usage. The 13 % increase only affected those companies using more than 30 kilolitres per month. Water made up 1.1 %of the total consumer price index (CPI) basket. This was a small contribution to household costs. Consumers spent between 1 and 1.5 %of their income on water.

Ms McPhail said that the arrears payments owed by ten municipalities to four boards was R1.4 billion.  The total billing was R1 billion per month, but municipalities had 30 days to pay their accounts. The backlog had declined. Three municipalities alone were responsible for 65 %of the debt, including interest.  Much of this was old debt. On average, 63 %of debt was paid within 60 days. In the last FY, 94 %of current debts had been collected.

Ms McPhail said that there were concerns over operations at Botshelo and Bushbuckridge, but otherwise NT was satisfied. NT was happy to see the reform to the water board structure. Any increase in capex should be matched by an increase in maintenance spending. Long term contracts with municipalities should make for more stability. Small water boards paid the same tariff as the bigger ones. It was unfortunate that there was not enough funding for everyone, and often went where there were no boards.  Municipalities in these areas often lacked the capacity to spend allocated funds.

The Chairperson said that there was nothing stopping the clever use of MWIG in Transkei and Limpopo to create infrastructure and capacity. 

Ms McPhail said that a greater focus was needed on bulk infrastructure. Risk management strategy was needed.

The Chairperson said that the DWA strategic plan should embrace the recommendations made by NT.

Ms McPhail presented a list of the water boards, with their assets and liabilities. Ten municipalities provided the vast majority of the outstanding debts. The total debt was R2.3 billion, of which R1.3 billion was old debt. Of the current debt of R1 billion, only 6 %was not being paid.

Discussion
Mr Rodgers noted that the financial situation was healthier than it had been. He asked if this was due to increased tariffs or better financial management. Three boards were not covering their costs in their tariffs; however, two of the three were still returning a profit. The portion of the equitable share grant to municipalities was often treated as a slush fund. He asked if this could not be paid directly to the water boards.

Mr Skosana asked if increasing tariffs was a solution where companies and individuals were already battling to pay their debts.

Ms McPhail explained that people still used water regardless of the economic situation. While Umgeni might be reporting profits, they had a tight cash flow. On the equitable share proposal, this matter had been discussed at length the previous day. This allocation should only cover the free allocation. The municipalities might struggle to balance their books if this proposal were to be implemented.

Ms McPhail said that the data showed that water tariff increases had an insignificant effect on inflation.  The boards were taking different approaches on how to keep tariff increases as low as possible, but often the maintenance budget was used.

The Chairperson felt that a large portion of the equitable share went to the water boards. Many municipalities suffered high losses. While the equitable share might have been designed to supply free water, it did not always work out in practice. Water tariffs were sometimes used to subsidise other services.

Presentation by Auditor-General of South Africa
Mr Tshepo Mutwanamba, Manager, Office of the AG, said that the Botshelo report was signed off on 18 March 2013. At face value, there did not seem to have been much movement between the 2010/11 and 2011/12 FYs. He explained the methodology in categorising the reports as qualified.

Ms N Mhlongo, Manager, Office of the AG, said that Lepelle had moved to an unqualified report. There had been a significant improvement at Magalies. The majority of the boards were looking good, and were in the unqualified category. Bushbuckridge was still in the unchanged categories due to compliance issues.  Botshelo had a disclaimer in 2010/11 and this was still the case. Two of the boards had regressed. 

Ms Mhlongo said that ten of the boards had no material errors in their financial statement. Magalies had been able to correct some reported errors, while Rand Water had not made the required corrections. Six boards had received unqualified reports. Four had compliance issues, while one had a disclaimer. The issue with Botshelo was problematic due to poor financial records. There was a discrepancy over property ownership. Errors from 2010/11 had been corrected, but AG could not satisfy itself that the information was now correct.

Discussion
Mr Skosana said that the water boards concerned needed to explain the issues raised by AG.

Ms Wenger asked what had been contained in the management letter.

Mr Mutwanamba said that a management information letter was needed to cover some of the aspects not investigated by AG.  Auditing was done on a sampling basis.  AG did not do complete investigations, but only reported on those matters which came to light during the audit process.  The letter from management covered those aspects not chosen for sampling.

Presentation by SALGA
Mr Abe Pekeur, South African Local Government Association (SALGA), introduced the delegation.

Mr Mthobeli Kolisa, Executive Director: Municipal Infrastructure Services, SALGA, said that SALGA was concerned over the extent of engagement when tariffs were calculated. There had been a significant improvement.  Often not enough information was provided for municipalities to make informed comment.  He did not think that water boards took sufficient notice of the comments that were made. Two of the water boards had not complied with the legal obligation to consult with the communities, and SALGA suggested that their application for tariff increases should not be granted. In some cases the requests were more than inflation.

Mr Kolisa said that DWA had not engaged with SALGA on tariffs. He questioned the role of Parliament in the setting of tariffs, as the figures were those presented to Parliament by DWA. He presented the proposed tariff increases for each water board for 2013/14.

Mr Kolisa said that most of the water boards had tariff increases of around the inflation index. An analysis of the components covered in the tariff showed discrepancies between the relative amounts the boards paid for various aspects such as staff remuneration. Some boards were seen to be making excessive profits. Increases were sometimes more than increases in costs and this would impact on service delivery. The increases in energy costs was a factor in tariffs, and there should be greater energy efficiency. Chemical costs were an issue. Water boards should have more of a say over these prices.  More information was needed to determine tariff increases.

Mr Kolisa said that the regulator should look more carefully at applications to increase tariffs. Labour costs had to be considered.

Mr Kolisa said that capex plans were often not supported by growth projections. Despite ring-fenced funding, failures in the secondary roles of water boards often impacted on their primary roles. SALGA was proposing that with six of the water boards, their requested tariffs should be lower. Rand Water was suffering huge water losses. Better efficiency could reduce the magnitude of the increase.

Mr Kolisa presented SALGA's recommendations. The regulator needed to intervene on interest cover in order to curb growing reserves. Some water boards budgeted for high profit margins in order to satisfy the banks. Policy guidance was needed on inter-area subsidisation of social development costs. A continued focus was needed on debt management. The task force should share ideas on best practice and innovative solutions in respect of energy and chemical use, and other efficiencies.

Discussion
The Chairperson said that it was unfair for people in underprivileged areas to pay for the infrastructure to be upgraded to match the more developed areas. He hoped that the review of the price strategy would lead to a more uniform tariff. At the moment, the poor people of the area such as Transkei had to foot the bill for infrastructure upgrades. The National Energy Regulator of South Africa (NERSA) was a prime example of the point, as six individuals made decisions which affected the nation. These decisions should be made by government. There was a need for some expertise to investigate these issues. SALGA and the water boards could link up with these experts. There were poor municipalities without capacity, supported by weak water boards. This was a recipe for disaster. The MWIG money would be targeted to those areas. The capacity of the municipalities and the water boards had to be increased. A fair tariff then had to be determined. Government had to have the ability to play a role in tariff increases.The system was fragmented. Many political decisions were needed.

Mr Huang wanted to know why some regions had not addressed their tariffs for three years. Some of the boards were making big profits, with margins of more than 15 percent. The top ten municipalities in terms of debt had been identified, and five of these fell under the boards in question. These boards were budgeting for a high profit margin in order to curry favour with the banks. He asked what comment SALGA had on the proposal to reduce the number of water boards to nine. Municipalities under SALGA still owed water boards large amounts.

Ms Wenger asked if there was any mechanism to ensure that the equitable share was paid fairly, and that the funds were channelled in the right direction. In the AG report, it was clear that many municipalities had unqualified audit reports. This differed with some aspects of the SALGA report. She did not see the need for a regulator. She asked if the debts of the water boards had been considered and how their loans would be repaid. 

Mr Manganye said that when the staff at Magalies went on strike, they shut off the valves supplying water to the community.

Mr Skosana said that incremental increases would happen. How it happened should be controlled. This should not be an issue that would cause SALGA and the water boards to fight with each other. There were statements showing that the parties were at loggerheads over tariff increases. Engagement was needed and not fighting.  Increases should be based on facts. SALGA had not talked about the debts of the municipalities. He asked what turnaround strategy would be followed. All water users must pay their dues. He wanted to hear a clear statement on this issue.

Ms P Bhengu (ANC) asked about the working relationship between SALGA and the boards given the dispute over tariffs.

Ms Wenger raised a project that had been started in 2006, but had since been abandoned and looted.  She asked how many engineers were being provided to municipalities.

The Chairperson said it was an issue that SALGA had no criticism of the municipalities that owed money to the water boards. There was no dispute over the debts themselves. Where the Committee needed SALGA to play a more meaningful role, it seemed that they were silent. This might be an incorrect perception. The problems were in the poorest areas. An input from SALGA to such municipalities would be valuable. One of the reasons for chemical costs rising was because municipalities were not treating water, creating more of a pollution problem. There was no justification for spending money set aside for water infrastructure on other purposes. This practice must stop. It was disappointing that SALGA did not seem to be addressing the problems within municipalities.

The Chairperson found it unacceptable that water boards were not consulting properly. Strong action was needed. Views must be heard. Strong reprimands were needed where this was not happening.  Withholding the tariff increase was not the way to address the problem as it would punish the people. If some water boards could comply with the Act, then the rest could as well.

Mr Pekeur felt he could not answer all the questions but he would consult with the Chairperson.

The Chairperson said that there had been a strong engagement with NT. The funding model would have to be changed if the allocated funds were not spent. While the majority of municipalities were cooperating, there were three that were not playing ball. SALGA had to be in the forefront of solving the problem.

Mr Kolisa undertook to address the problem in the new year.

The Chairperson was not satisfied. There was already a huge debt and this had to be addressed.

Mr Kolisa said that there was a high level of water losses. Old infrastructure needed to be replaced.  There was a historical context to this. SALGA was leading the discussion on addressing the issue.  Municipalities were not able to go to the market for funding. There was a lack of skills. SALGA was looking at a programme of introducing skills.  Only four of the fifteen functions assigned to municipalities were covered by the equitable share. In many cases, this was the only source of funding for municipalities. This only covered about 20 %of their financial needs. There was a need to review the funding model.

Mr Kolisa said that the relationship between SALGA and the municipalities was good. SALGA was part of the Ministerial task team on municipal debt. The intention was to understand the issues and cooperate with the municipalities. Some of the debt stemmed from problems arising from the establishment of the municipalities. Decisions were needed on who was best placed to provide services. Once these decisions were made there must be long term agreements. There were huge consequences.

Mr Kolisa said that the Minister was sharing his thinking with SALGA. Bulk infrastructure arrangements had been used. Outside of the metros, bulk services were the responsibility of the district municipality.  SALGA was trying to broker solutions. There had been a decision that no bulk service increases would be allowed if they were not presented in Parliament.

The Chairperson said that neither the Minister nor Parliament could enforce a change to tariffs. Only the water boards could do this.

A SALGA official said that there was a programme in place regarding water pollution. Training programmes were in place to assist municipalities to attain green drop status. Six sessions had been held to date. There were conditions to the Municipal Infrastructure Grant (MIG). Municipalities could not spend the money as they wished. There was a consolidated report to address some of the questions raised by Members. This could be made available. The quality of the submission made by Pella Drift was such that SALGA could not form an opinion. Because most of their supply went to mines, they did not satisfy the requirements for a water board.

Mr Kolisa said that the debts incurred by water boards were mostly repaid from revenue. Increases should not be as a result of servicing debt.

Presentation by Rand Water
The Chairperson reminded the delegations that although the Committee could not alter the tariffs levied by the water boards, they could reduce the salaries of their members. He asked presenters to skim over some of their presentations. He would advise them of the information that needed to be presented, and what Members could read in their spare time.

Adv Mosotho Petlane, Chairperson, Rand Water Board, introduced the presentation. There were two issues that needed to be raised. Rand Water had been given money to do some of the work of the Botshelo Water Board. Rand Water could do a better job in supporting the communities. One of the highlights of the previous FY was the establishment of an academy. Labour was mobile, so the trainees would not necessarily stay in the sector.

Mr Percy Sechemane, Chief Executive, Rand Water, apologised for changing the presentation in response to the increase in electricity tariffs. Attention was now being paid to bulk sanitation as the board started to look wider than simply at water supply. Responsibilities were spread over a number of departments, but Rand Water felt the need to bring things together. The Minister had asked Rand Water to look at rural development, even though their area of operations was predominantly urban. Rand Water did not make use of many consultants and rather used its own people to address challenges.

Mr Sechemane presented a chart of the pumping network. This was energy intensive. The status of each board was different. Scale of economies made a big difference in costs. There had been an unqualified audit opinion. The number of disabled employees was 4.5 % and females 36 % although some females would soon be promoted. There were a number of positive ratings.

Mr Sechemane ensured Members that the product was of the highest quality. Employee satisfaction was above 80 %. There was alignment with political objectives.

The Chairperson acknowledged that Rand Water had achieved the majority of their targets.

Mr Sechemane tabled figures of jobs created. He provided a brief summary of some of the projects being undertaken. Rand Water offered job opportunities to unemployed graduates. All municipalities serviced by Rand Water were blue drop status. On sanitation, Rand Water was now working towards green drop status.

Mr Sechemane presented the capex programme.  The goal was to deliver 1.6Ml a day. The supply route was long so water had to be cleaned. He presented the stations in use and their capacities.  This was used to analyse future capital expansion. There were two approaches. One was to do a massive upgrade all at once, while the other was to introduce improvements on an ongoing basis. This had an impact on funding. Systems should be robust to last a long time.

Mr Sechemane said that for some time there had been massive pollution in the Vaal River. Rand Water had managed to improve the purity of the water considerably. They were looking at multi-hydro projects.  It was a small scale project at present, generating 46MW, but it was a learning experience. He hoped that the situation regarding waste water would be turned around.

Mr Sechemane said that Rand Water also had a presence in other African countries. They had to be careful not to use money generated in South Africa for these projects. Profitability was not just about tariffs. 

The Chairperson said that it was clear that Rand Water was the dominant water board given their levels of investment and revenue generation.

Mr Sechemane said that when looking at the infrastructure plan, cash flows had to be considered.  Profits generated were ploughed into infrastructure projects. This accounted for most of the cash reserve.

The Chairperson wanted to see where the surplus was.

Ms Mashidiso Nyembe, CFO, Rand Water, said that about R1.5 billion had been raised from the reserves.  This has been supplemented by funds from external providers. 

The Chairperson was still concerned that a false surplus was being declared. Money was raised for a particular project, but this was never built. SALGA was questioning the tariff increases because of the surplus. If the money was used for future capex, then this was helping the country.

Ms Nyembe said that the declared surplus had already gone into capex, supplemented by loans.

Mr Sechemane said that NT was an independent structure which analysed the plans.

The Chairperson still felt it wrong that there was no political oversight. Decisions on utilisation of funds could not be left to an independent body.

Mr Sechemane said that the value of property, plant and equipment stood at about R7.1 billion. Should the infrastructure have to be duplicated, the cost would be over R80 billion. DWA should be looking at replacement values instead of historical value. It was easy to set a target for cash reserves. Rand Water felt it better to have access to credit rather than cash holdings. There was a liquidity buffer of R600 million.

Mr Sechemane gave an analysis on the cost of raw water. The year-on-year increase was about 9 percent, but this had reached a plateau. Sufficient chemicals were needed to treat the water. While activities had increased, Rand Water had managed to keep energy usage constant. Variable speed pumps had been installed in order to pump water out of peak times.

Mr Mofokeng said that Rand Water was a good customer, despite owing about R600 million. There was a 60 day payment period.

Mr Sechemane said that the tariff increase requested was 11.3 %, but this had come down to 9.82 %. The reason for the increase was the implementation of the environmental levy and increased energy charges.

Mr Sechemane was surprised to see different figures presented by SALGA. R2.5 billion was budgeted for capex. The projects had already started. There were some strategic issues. Licensing issues were holding Rand Water back on some projects. Gender main-streaming was needed in the water sector.  Permanent solutions were needed. Plans needed to be drawn up in good time. The Minister had asked Rand Water to look at rural development. They had started to engage with some distressed municipalities both in Gauteng and in other provinces. Rand Water had assisted with a mine where there was acid drainage. There was no need for academies all over the sector as that of Rand Water was open to all.  There was some engagement with Lesotho, but DWA should handle this. Some municipalities had passed on a tariff increase of 13.5 %. Rand Water had suggested a fund that would assist with alleviating this situation. Regarding the fencing of waterways, the fluctuating price of steel had to be considered. A positive credit profile had to be maintained. If any major customer defaulted there would be serious consequences. Rand Water had made an offer to DWA to treat water on their behalf.

Discussion

Dr Huang noted that the salaries paid to senior members of Rand Water were more than those paid to the Minister and even the President. It was no wonder that they had such broad smiles.  Rand Water had been in operation for over 100 years.  He had heard that no consultants were used, and yet there was a figure of R14 million in the annual report.  The two month repayment period to DWA was very favourable and should be reviewed.  R600 million would draw a considerable amount of interest.

Mr Skosana asked if the academy was for the employees of the board, or if it was accessible to the public. He asked if there was funding to finance underprivileged students.

Ms Zikalala asked if Rand Water had projects that would help poor communities. She asked what was really happening. She congratulated Rand Water on their employment equity record. There was a 45 % figure for females in management positions. Rand Water was ploughing the money back in many ways. 

Mr Rodgers noted the project on sanitation. The Mfumeli local municipality had been helped.  This fell within the Committee's brief on Environmental Affairs. He asked if it was the only municipality impacted in the area of operations.

Ms Bhengu asked what was happening with acid mine drainage (AMD).

Dr Huang noted that one or two water boards would now be merged into Rand Water. He asked if the members of their boards would be incorporated into Rand Water.  These water boards had some of the most heavily indebted municipalities under them.

Mr Sechemane said that consultants were only used when absolutely necessary. Where they could they did what they could themselves. Rand Water was currently negotiating with DWA on how the contract could be restructured. He realised that they should move to a 30 day payment period. However, the timing of bills to municipalities might have to change accordingly.

The Chairperson said that he did not have a problem with the 60 day period, but there should be a different way to account for this.

Mr Sechemane said that bills were paid monthly. There was a limitation on what could be done by the academy. The challenge was funding. On the current programme, there was a joint programme with NT.  There were bursaries available, although there was a limit on the available funds. On Project 15 percent, this was a project from Gauteng province to reduce water losses to about 15 percent. As the bulk supplier, Rand Water should be part of the solution as well. The Minister had asked Rand Water to incorporate rural development due to their size. At present 5 %of net profit went to corporate social involvement (CSI) projects. Other municipalities and schools had been assisted with some projects such as solar power and boreholes. The right skills had to be attracted. Rand Water would be the implementing agent in these projects. Services could be provided in rural areas.

Mr Sechemane said that the Save the Vaal group had taken a local mayor to court over dumping of waste into the river. Rand Water had taken the project over. They were looking at the whole Vaal River and were trying to sort out the water management issues. A effluent treatment plant would be set up. DWA still had to pronounce on AMD. This was not part of the mandate of Rand Water, although they had refurbished a small treatment plant on the Vaal River.

Mr Sechemane said that part of the solution of cross-subsidies was the use of water utilities. Some bench marking and cross-pollination was needed. Rand Water was working with other water boards.

Presentation by Umgeni Water
Mr Chabane Zulu, Umgeni Water, introduced the presentation and apologised for the absence of the chairperson of the board.

Mr Cyril Gamede, Chief Executive, Umgeni Water, said that Umgeni Water was the largest in KZN and the second largest in the country.  There were six main customers, of which eThekwini metro took 80 %of the supply. Msunduzi Local Municipality (LM) took a further 10 %. The remainder went into the rural areas, where there was a greater need. Their area of operations stretched from the Tugela River to the Drakensberg and in the south to the Mtamvuma River.

Mr Gamede said that growth was at about 11 %. Some expenses were growing faster than income.  One of the important reasons was that the organisation was being geared to assist with district municipalities (DM), which needed a lot of help.  There had been a surplus of R591 million in 2012. The forecast for the current year was a surplus of R428 million.

Mr Gamede said that the area was characterised by low growth. There was a significant capex programme, much of which depended on the Regional Bulk Infrastructure Grant (RBIG). Revenue was R1.8 billion. R485 million, or 82 %of the budget, had been spent on Capex in the previous FY. In the past spending levels had been around 40 %. In 2013 the budget for capex was R881 million. Surpluses were being used to fund projects. There was a big project in the lower Tugela area. RBIG funding had been delayed, and so the project had been broken down into smaller pieces. Existing capital had been used.  This had caused a delay to the project. The Promotion Access to Information Act  (PAIA) and Promotion of Administrative Justice Act (PAJA) were used to appeal against tender decisions. Contractors tendered for business, but were liquidated after being appointed. 

Mr Gamede said that the expected surplus for 2013 would be R391 million. Growth was slow in the area.  When non revenue water was reduced, this reduced the amount of water supplied. The net effect was that revenue was not increasing. SALGA had said that Umgeni Water should not be spending additional money as their revenue was not increasing. An attempt was being made to reduce losses.

Mr Gamede said that there were a number of cost drivers. Chemical costs were increasing faster than other costs. Much of the energy supplied came from eThekwini. There had been small but steady tariff increases. The tariff increase requested for 2014 was 8.3 percent. This took the increased energy price into account. The cost of water supplied was R4.23, but eThekwini's rates to residents was about R13.  This was a challenge. 

Mr Gamede said that cash flow determined tariffs, not profits. Cash was a reality. A 30 year model was used. About R600 million was needed annually to supply water. The projected shortfall for 2014 was R903 million.

Mr Gamede said that about half of capital projects were targeted on rural areas. About 82 %of the Capex budget was spent. Fortunately eThekwini paid its bills on time, but others had to be persuaded.  R4.8 billion had been budgeted for capital projects, of which R2.3 billion would be spent in the rural areas.

The Chairperson noted that Umgeni Water owed DWA R83 million, of which R63 million was older than 150 days.

Mr Gamede said that some of these amounts were subject to disputes. The money was there to pay, but they first wanted to see the invoices. The amount disputed was about R50 million.

Mr Gamede listed a number of projects. The lives of about 1.5 million people would be improved by these projects. About 1 000 jobs had been created during 2011/12, and another 400 to date in the current year.  A number of temporary jobs had also been created. Umgeni Water was involved in skills development.  There were also learnership programmes. There was a bursary programme involving more than ten students.

Mr Gamede said that Umgeni Water had received a clean audit in 2012. Financial performance was positive.  Sufficient funds were on hand to meet operating and capital expenditure. The tariff increase for 2013 was 5.6 %as a result of cost containment. There was sufficient bulk water infrastructure investment. The development plans were aligned to the NDP and provincial strategy. Half of the projects were in rural areas. Grant funding was essential for these projects to succeed. This would have an impact on the economy of the region.

Discussion
Mr Skosana said that a report had said that Umgeni were not making enough money to cover their costs.  He asked for clarity on this.

Mr Rodgers said that the budget was geared for assistance to rural municipalities. He asked if these projects would be funded internally. The water services backlog eradication table were expressed in percentages. He wanted an explanation. There were challenges with both Msunduzi and Ugu DMs in terms of both water and sanitation.

Mr Gamede replied that the gap of under-recovery was breached.  There should be increases of between 8 and 9 %going forward. Umgeni was adjusting its tariffs to close the gap. A number of the rural projects would be funded internally. In Sesonke, there were many challenges. At Ixopo there was both a water treatment and sewerage works. These had been rehabilitated. The sewerage water ran into a dam and had to be treated. Many interventions had been made. Sometimes there was no capacity to undertake these projects. The municipalities only came to Umgeni when the needed assistance. 

Mr Gamede said that there was a similar challenge at Ugu. Umgeni operated the north part and Ugu the southern.  Sewerage was pumped into the sea. There were severe floods in 2012, which damaged roads and bulk infrastructure. Umgeni fixed their part of the works, but had to assist Ugu with theirs. At Ilembe, Umgeni had been asked to take over. There was now an adequate water supply to Bolitho. In terms of the backlogs, the percentages were the number of persons with access below RDP levels.

The Chairperson felt that the presentation was good. The boards were trying to put the surplus back into infrastructure. It seemed that the problems being raised were solvable. He suggested that Mr Muller meet with Umgeni and Treasury. KZN was the most populous province, and yet there were infrastructure problems. There was money and good intent, but problems with funding availability were hampering progress. RBIG funds were not coming through in time. The remaining water boards would make their presentations the following day.

The meeting was adjourned.