Gauteng water shortages: Department/Rand Water briefing; Water Boards on 2014 Annual Reports

Meeting report

Rand Water Presentation

Mr Percy Sechemane, Chief Executive Officer: Rand Water, informed the Committee that the extended area of Rand Water was now including 27 new local councils -- Gauteng, Limpopo (Greater Groblersdal and Greater Marble Hall), North West (Rustenberg and Madibeng areas), Mpumalanga, and Northern Free State - boundary of the Upper Vaal Water Management Area (WMA). Of the 24 district municipalities, the Department had identified for rural water development. Rand Water was assisting at least seven of them by increasing access to water services.

The entity had stepped up its investment in infrastructure by 18% and this amounted to R1, 75 billion. Its revenue grew up by 12%, and this translated to R8.665 billion. New revenue streams had grown by 73% and this had resulted in an amount of R652 million. This would help strengthen and implement strategies for water management in the country. The net income of the entity had increased by 18.16% and this meant it had grown by R1.18 billion. R2.45 billion had been spent on ensuring the maintenance and supply availability of the bulk water infrastructure of the entity. The entity had been experiencing year on year increases. Gross income had grown by 15%. Cash from operations had seen a 22% rise, and capital expenditure had gone up by 40%.

With regard to environmental issues, the Blue and Green drop standards had been achieved. Environmental conservation programmes had been completed, water catchments improved, and wetlands had been rehabilitated.

The organisation had achieved an unqualified audit opinion. There had been no repeat of unresolved internal audit findings. 100% had been achieved on bulk supply agreements concluded with municipalities and other customers. On non-revenue water, 3.5% had been achieved. The organisation had attained 99,65% on compliance with SANS 241 Class 1 and 99, 98% compliance SANS 241 Class 2.

The percentage of staff leaving had been recorded as lower than 5%. The entity had accomplished 92.66% of its BBBEE spending, and had increased the number of new entrants. Against a target of 30, not much had been achieved in enrolling graduates for the Rand Water Academy.

During the 2013/14 period a sum of R31 million had been allocated to the Rand Water Foundation for the following programmes:

• Water and Sanitation
• Environment Conservation
• Enterprise Development
• NGO Support
• Health, including HIV and AIDS
• Education & Training

Furthermore, the Foundation had received external funding to the tune of R35 million from organisations like the Gauteng Department of Agriculture and Rural Development (GDARD), Gauteng Department of Education (GDE), SA Breweries (SAB), SA National Biodiversity Institute (SANBI), Fezile Dabi District Municipality, and the Department of Water and Sanitation (DWS).

Mr Sechemane indicated that the organisation had worked closely with its stakeholders on the development of a new national water pricing strategy. The entity had limited its expenses and contained costs, and had maintained a stable cash generation from operations. The organisation had remained focused on improving its processes and advancing its capital expenditure programme.

Tariff increases of 9.82%, which were effective from 1 July 2014, seem to have been the primary drivers of revenue growth. Total volume increases of 2.4% stemmed primarily from municipal customers. The municipal customer contribution to revenues amounted to 90% of total sales. The organisation was currently working on increasing the size of the Domestic Multi-term Note (DMTN) programme to R10 billion, in order to cater for all future funding requirements.

Tariff increment

Rand Water had received an effective raw water tariff increment of 8,77%. This was an increment from R2.8182 cents per kilolitre to R3.0654 cents per kilolitre for the financial year beginning 1 April 2015. This was composed of the Trans Caledon Tunnel Authority (TCTA) component, which was decreasing by 1% from R2.32 to R2.29. This was an increase from R0,5 cents per kilolitre to R0,77 cents per kilolitre -- an effective 55% increment. The raw water charge was 23 cents.

Mr Sechemane emphasised that non-revenue water among the municipal customers of Rand Water had continued to worsen, rather than improve. In 2005, the national average had stood at around 27%. In Gauteng, the challenge was to improve these water losses to 15%. However, the national average was now standing at 36%.

The strategic priority was to work together with stakeholders in order to empower them to reach their potential. The ability of the entity to build effective and mutually beneficial partnerships with provincial and local governments and communities was of importance to them, and was a prerequisite for investment. The organisation was being streamlined to become more agile and effective in order to improve efficiency. Lastly, the entity would continue to investigate and implement innovative solutions to contribute to more effective and efficient water management and quality standards, and would advocate sustainable multi-year tariffs.

Water Supply Interruptions

Mr Sechemane told the Committee that Rand Water had received a petition from residents of Tsakane, Sunnyridge, Symhurst, Bedfordview and Gerdview, calling for an investigation into the cause of water shortages in Gauteng. Mr Mike Waters (DA) was leading the petition.

The presentation indicated that the interruptions could, firstly, be attributed to the full dependency on one electricity supplier. This was pointed out to be a high risk as each of the suppliers -- Eskom and municipalities -- were on record as having supply challenges. There was no energy security and sufficient back up supply. The entity had recommended an investigation be carried out about back-up power supply structures with a view to an independent power supply per site on Rand Water, and energy recovery maximised via co-generation.

Secondly, the interruptions could be ascribed to water losses averaging 35.9% and the continuous demand increase. Rand Water had experienced a 12.7% increase in demand since 2009. This had resulted in reduced redundancy of the infrastructure. Pipelines, reservoirs, water treatment plants and pump sets could not be taken out of service for rehabilitation and maintenance. During the last financial year, municipalities had spent R7.4 billion on water purchases. On that R7.4 billion, a 34,98% loss had been recorded, and about 15% of that had been due to the infrastructure.

The entity suggested that solutions should be around increasing focus on demand management and budget allocation across municipalities, specifically for demand management, with Rand Water to cap water supply to municipalities. It further recommended that the 1% investment be increased, as it was not enough.

Thirdly, the supply interruptions could be blamed on the ageing infrastructure. This had been identified as a common problem across all institutions, from Rand Water to municipalities. Some pipe-work was said to be over 100 years old. As a result, maintenance costs and water losses were high.

Suggested solutions called for the establishment of refurbishment funding, especially in municipalities, to address infrastructure backlogs because the Municipality Infrastructure Grant (MIG) was not enough, and this funding would ensure sustainability of the existing infrastructure. It was recommended that a Gauteng Water Infrastructure planning committee and centralised control room for water be established, and that telemetry at all critical reservoirs feeding information to the control room, be implemented.

Fourthly, the interruptions were attributed to the abstraction licence. There had been an approval at 4 380 MI/d, operating at 4 936MI/d. The demand was beyond the approved abstraction. There was also a general vandalism of air valves and chambers, and thieving of cables. In order to solve this, there was a need to implement strict water demand management processes and cap the allocation per municipality to fit into the abstraction licence provisions. The law needed to be tougher on cable thefts and there should be a coordinated effort by all stakeholders to address this challenge.

Bushbuckridge Presentation

Mr Anil Singh, Deputy Director General (Regulation): DWA, informed the Committee that the Bushbuckridge Water Board had been incorporated into the Rand Water Board following the approval of the institutional reform and realignment processes by the Minister of Water and Environmental Affairs on 15 April 2013. This had resulted in the reduction of water boards from 12 to nine.

Mr Sechemane said that for the year ending 30 June 2014, the Bushbuckridge Water Board had achieved an unqualified audit report. Only 50% of the shareholder compact targets had been met for the period. The entity had made a net income of R15.5 million for the year under review. Revenue streams were standing at R43 million. A surplus of R58 million had been recorded when the entity was incorporated into Rand Water. Cash flow from operating activities amounted to R6, 2 million.

(Tables and graphs were shown to illustrate the budget and expenditure breakdown)

The entity had achieved 92.66% of its BBBEE spend and had increased the number of new entrants. Not much had been achieved in training and skills development. It had achieved 100% on corporate social responsibility initiatives. In its engagement in secondary activities, it had made a profit to the tune of R652 million. On statutory reporting compliance, the organisation had achieved 100%.

Concerning plant improvements, a third raw water pump at Inyaka had been repaired and commissioned. The capacity had increased from 75MI to 100 MI per day. The Marite Package Plant’s operational capacity had increased from 1.4Ml/day to 2.4 MI/day after the repairs to the clear water pumps. The plant was operating 24 hours. The Edenburg package plant had been upgraded from 2MI to 3.5 MI in capacity. Newly reticulated projects were receiving water. New pumps had been installed at Acornhoek raw water plant to increase the pumping capacity.

Lepelle Northern Water Board Presentation

Mr Phineas Legodi, Acting Chief Executive Officer: Lepelle Northern Water Board, told the Committee that his entity had achieved unqualified audit reports for the past five financial periods. The only major finding was always around outstanding debts. As of 30 June 2014, cash at hand was standing at R310 million and was going to be ploughed back into to capital investments and refurbishment of infrastructure.

The entity had made a surplus of R17.799 million for the year under review. Income statements indicated that R99.943 million went to electricity. Employee costs amounted to R106.039 million. The operating expenditure was standing at R272.117 million. Cash generated from operations was R6.994 million, and cash from operating activities had amounted to R25.046 million.

(Tables and graphs were shown to illustrate budget and expenditure breakdowns)

He noted that strategic challenges were around ageing infrastructure, deteriorating raw water quality, default on payment by consumers, and unauthorised or illegal connections. The lack of effective cost recovery, water conservation and demand management, lack of maintenance and ageing internal reticulation infrastructure, were also cited as challenges.

The entity was owed a total sum of R388 million by the Mopani, Capricorn and Sekhukhune District Municipalities on bulk water. A debt collector had been appointed to assist in the recovery of the debt. The money was expected to be recovered by the end of February.

In his conclusion, he indicated that the organisation had committed itself to supporting municipalities with regard to cost recovery, water conservation and demand management. The entity was beefing up its capacity for the retention of skills and succession planning, and to rehabilitate and maintain infrastructure.

Mhlathuze Water Board Presentation

Mr Sibusiso Makhanya, Chief Executive Officer: Mhlathuze Water Board, told Members that his entity had received an unqualified audit opinion for the 2013/14 year. All internal controls were considered as relevant. The entity had maintained strong operating surpluses. The overall profit for the year was R79.1 million, and reflected an increase of 16% from the previous year. Bulk water volumes had increased by 8% due to the increase in raw water volumes.

Revenue had increased by 10% for the year under review, mainly due to the 42% increase in implementing agent (IA) fees. Energy costs had increased by only 3%, due to savings. Mhlathuze Water was operating on an Enerflex tariff option from the City of uMhlathuze for the Nsezi water treatment plant (WTP). Maintenance costs had decreased by 8% from the prior year. In the previous year, once-off ad hoc maintenance on plant breakdown had been done. For the current year, Mhlathuze Water had implemented a preventative maintenance programme which had reduced the breakdowns experienced in the prior years.

Chemical costs had decreased by 17%, mainly due to the minimum of chemicals being used because of lower raw water turbidity from the Mhlathuze River, and purification process optimisation initiatives to reduce purification costs/chemical dosages. Depreciation had increased by 1% compared to the previous year. Other operating expenses had remained constant for the year.

Capital expenditure had seen an increase of 437% from the prior year, due to the acquisition of assets. The three major projects that had contributed to the increase were:

• Upgrade of intake pump station and band screens amounted to R35 million;
• City of uMhlathuze pump upgrade, costing R25 million;
• Re-route B-line to C-line, amounting to R12, 3 million.

(Tables and graphs were shown to illustrate budget and expenditure breakdowns)

The borrowing limits for the period 2013 to 2015 had been approved by National Treasury in concurrence with the Minister of Water and Sanitation, and published in the Government Gazette. The borrowing limit had been based on the borrowing requirements of uMhlathuze Water Board and the funding needed to ensure that the consumer demand could be met.

It was also highlighted that the entity had exceeded most targets in areas like job creation, corporate social responsibility initiatives, BBBEE spend, bulk supply agreements with customers, employment of people with disabilities, and engagement in secondary activities.

All quarterly reports had been submitted to all stakeholders. No fruitless and wasteful or unauthorized expenditure had been incurred during the period. Internal audits had been conducted as per the annual plan. Enterprise risk management activities were in progress.

Mhlathuze Water had complied with the Municipal Finance Management Act (MFMA) in the consultation process with consumers for the 2015/16 tariffs. A tariff consultation meeting had been held on 28 November 2014 with the City of uMhlathuze. The tariff increase proposal had then been submitted on 28 November 2014 to the National Treasury and the SA Local Government Association (SALGA), and a recommendation had been received during January 2015. The entity had responded to the National Treasury and SALGA comments. The consumers had accepted the tariff increase of 8.4%, and this would be tabled in Parliament in March 2015.

Amatola Water Board Presentation

Ms Nothemba Mlonzi, Chairperson: Amatola Water Board, focused her presentation on the performance and operation review, and financial stability of the entity. The board had received an unqualified audit opinion for the year under review. 10% of water losses had been recorded against a target of 12%.

The organisation had supplied 110MI/day of potable water compared to the 85MI/day target. Compared to 2012/13, the entity had recorded a surplus of R29 million and had improved financial ratios. Against a target of 98%, 98.9% had been achieved on the availability of water supply. A revenue split of 71:29 on primary and secondary business had been recorded against the 55:45 target ratio. On SA National Standard (SANS) 241 quality water, 98.4% had been achieved against the 98% target.

A sum of R8.7 million had been spent on the R26 million capex programme. The organisation had recorded a 63% achievement of scorecard targets, compared to the 75% target. The 13% staff turnover had been higher that the 6% target. Labour costs were standing at 39% of the cost of sales, which was higher than the 38% target.

R500 million had been secured to upgrade Amatola Water schemes to supply 750 litres/household/day by providing an additional 87MI/day capacity to existing schemes. A Municipal Water Infrastructure Grant (MWIG) programme was being implemented in the OR Tambo District Municipality. Major contracts were in progress in the King Sabata Dalindyebo, Mhlontlo, Senqu and Ndlambe municipalities with an Medium Term Expenditure Framework (MTEF) combined amount of R1, 752 billion supporting the Strategic Infrastructure Project (SIP)18. The Makana Five-year Right Of Use (ROU) contract had been signed to stabilise and upgrade the Grahamstown water supply.

Bulk potable sales had increased by 4, 6% while losses had been reduced to 10%. Pumping efficiency had improved from 0.861 KWh/m3, to 0.78 KWh/m3. The entity had achieved 0.9 in the Disabling Incident Frequency Rate (DIFR) against the 0,8 target.

Ms Mlonzi said that water resources that supplied the Amatola infrastructure had retained 98% assurance of supply. Support services had assisted the Amathole District Municipality to improve its overall Blue Drop and Green Drop scores from 55% to 70%, and 15% to 56%, respectively over the past three years.

Concerning human resource matters, the Learning Academy concept had been finalised for launch during the 2014/15 period. 13 artisans had been assessed in the mechanical, electrical and painting disciplines. 26 employees had received financial support to further their tertiary education. Three technicians had been supported to register professionally with the Engineering Council of SA (ECSA). Gender bias and transformation at senior levels remained the transformation focus in the coming years.

On corporate governance, the Board governance structure was in place and effective. Now the primary focus was on King 111, Public Finance Management and the Water Services Act compliance together with other relevant legislation. Compliance to King 111 principles was standing at 88%. The integrated reporting approach based on the Global Reporting Initiative (GR13) has been undertaken for the first time.

The entity’s financial surplus had increased from R25 million to R29 million. The liquidity position had improved to R122 million from the R106 million of the previous year. R500 million had been invested in abstraction, treatment and bulk distribution capacity, and was planned for implementation in the following two financial years. There had been a strategic shift to source the bulk of revenue from primary business, and this was gaining in momentum. Debtors’ days on secondary business remained a risk, though there was on-going interaction with customers in order to resolve the problem. Tariff increases were up by 9%.

(Tables and graphs were shown to illustrate budget and expenditure breakdowns)

Ms Mlonzi concluded that the entity was working hard to accelerate institutional reform and realignment in order to create regional water utilities, and was working on completing the establishment of Amatola Water in terms of the original Government Gazette in respect of asset transfer. Outstanding payments from municipalities would be collected.

Discussion

Rand Water Presentation

Mr T Makondo (ANC) wanted to know how far the entity had moved in terms of transformation to assist small black businesses in the sector.

The Chairperson made a follow-up on this question, and enquired if there were any big black businesses that competed directly with big white companies.

Mr Singh explained that a bit had been done on matters related to BEE. The big white companies had black partners they worked with. I had to be remembered there were procurement issues the Department had to follow that governed the awarding of tenders.

Mr Sechemane said that Rand Water had asked National Treasury for exemptions so that the entity could engage with black businesses that were in the water sector. Treasury had told Rand Water to align its policies to those stipulated by the National Treasury. His organisation was still focusing on the matter through other activities, because some projects required big budgets that require big companies. However, whatever the entity did, it still went back to the Department.

Ms J Maluleke (ANC) wanted to find out of the challenges the entity was experiencing, considering its irregular expenditure.

Mr Sechemane replied that some instances had not necessarily involved financial losses. The main issue was that the Auditor General (AG) had pointed out deficiencies in procurement. The audit committee was currently trying to address the concerns of the AG. As a result, the Board had reviewed the procurement policy document so that it met the requirements of the AG.

Mr Makondo asked what the entity was doing to address water leakages, because it had come to the attention of the Committee that the water losses were between the community and the municipality, but not from the side of Rand Water.

Mr Singh replied that the main issue was to how to get the contractors on the ground to address the situation. There were programmes in place to make use of the youth to work on the leaks in communities.

Mr Sechemane said that Rand Water was dealing with many municipalities. Resources were a determining factor and there was also the issue of sanitation that the entity had to address. When Rand Water assisted, it did not mean the problem was going to be solved but extra money had to be transferred. This meant the entity had to work with other stakeholders. Some of the Rand Water infrastructure was underground, so to fix some problems, the entity had to fork out money to access the underground infrastructure. People were looking at tariff hikes, not at the infrastructure problems that needed to be addressed first.

The Chairperson commented that it was easy to say South Africa was a water scarce country, but it was difficult to account for the amount of water the country has. It looked like no one cared about what was to be done about the scarcity of water.

Mr Singh suggested that the Committee should allow the Department to make a presentation on the issues of water ownership, licensing and grants.

Mr L Basson (DA) requested Rand Water to respond to Mike Waters regarding the petition.

Mr Sechemane said recommendations from the Committee on how to go about dealing with the matter would be appreciated. It was not clear who was responsible for conducting the investigation, but the report of the entity on the challenges and interventions was convincing.

The Chairperson enquired why entities were not reporting at the same time -- that is, by end of March as required by law.

Mr Singh explained that the reporting misalignment was being addressed. The Department had inherited sanitation. So a proposal would be made to the Cabinet to formulate legislation that addressed both water and sanitation.

Mhlathuze Presentation

The Chairperson asked why the entity was using gas instead of diesel in its operation.

Mr Makhaya replied that the issue was caused by a temporary inconvenience. The problem had to do with Eskom. That was why they had had to use gas in the meantime.

Ms Z Balindlela (DA) remarked that there were places like Xholorha which had been without water for 20 years, and asked if the problem could be attributed to the fact that those communities were located in the mountains.

Mr Makhaya said they did not know whether to engage the Department in order to find innovative ways of supplying water to those communities. It was worrying to learn that people and learners in those areas were sharing contaminated water with animals.

Mr A Mpontshane (IFP) wanted to know if the recertification the entity had retained referred to individuals who had the right to water in terms of monopoly.

Mr Makhaya elaborated that it did not refer only to individuals. The entity assessed all institutions and individuals to see if they were doing what they were supposed to do with water in a manner that was compliant.

Ms M Khawula (EFF) asked what the Department was doing regarding mines that used water illegally. In the Ilembe district, people did not have drinking water and the Department should consider visiting those waterless areas.

Mr Singh said it was the duty of the Department to impose fines on mines using unauthorised water. Regarding the Ilembe visit, he said the Department was willing to meet the leadership of the affected areas and chart a way forward.

Mr Makondo wanted to find out why the Mhlathuze water tariffs were very low when compared to other Boards, and why the entity was considering increasing them.

Mr Makhaya made it clear that historically the tariffs had been lower because Mhlathuze gets water from within its area, not from outside.

Mr Singh added that Boards were always on a cost recovery drive. Tariffs were based on a pricing strategy developed some years ago. The strategy indicated that one could build infrastructure and use government resources, or one could build it and rely on borrowing. So, if one relied on borrowing, the tariff was going to be high, whereas when one relied on government, it was going to be low. The main reason the entity wanted to increase tariffs was that the entity had not been giving its infrastructure a facelift. The money would be recovered from the end-user. There were exceptions for indigent communities. He further noted that the tariffs were not bad.

Mr Basson commented that a problem lay with the collection of money. The municipalities had to develop mechanisms to collect money and pay for water, so the equitable share should be applied. Municipalities receive equitable share, and entities dealing with municipalities should deduct that money before they transfer it to municipalities, because municipalities were known for not paying the entities their money.

The Chairperson asked if Water Boards were first choice service providers for municipalities, compared to private companies.

Mr Singh replied that the entities reported to the government. Whether they were more competitive than private companies was something the Department had to find out by doing a comparative study.

Mr Makhaya added that entities were not always the preferred service providers, because they also tendered for the supply of water. A private company had been supplying the municipality and other areas with water before. Then, because there private company was not delivering excellently, Mhlathuze had pitched for the business and had been awarded the contract.

Ms Khawula enquired if the Mhlathuze municipality had a database that indicated the figures of areas that had access to water.

Mr Singh responded that this was a joint responsibility of the Department and the entity, and the extent to which that infrastructure was maintained.

Mr Mpontshane remarked that Mhlathuze used to serve Jozini and Ilembe, but now those areas were waterless.

Mr Makhaya said that Mhlathuze provided a variety of services in those areas as a Water Board. However, in terms of operations and maintenance, it was the role of private companies because those municipalities preferred to use the services of private companies.

Mr Singh suggested furnishing the Committee with a written response on the issue of private companies rendering services to the mentioned municipalities.

Lepelle Presentation

Ms H Kekana (ANC) wanted to find out what the Department was doing in addressing the amount of money the municipalities owed the entity.

Mr Singh said there were processes prescribed and that the National Treasury had to intervene through certain mechanisms. The Department had already started to assist Water Boards like Sedibeng because it was owed a lot of money. Municipal managers had been dealt with, and the Department had approached the Ministers of Cooperative Governance and Traditional Affairs (COGTA) and Finance about the possibility of an equitable share. A report was being awaited from the Ministers concerned. He noted that a judgment had been made in the Free State where the Machabeng municipality had for a long time not paid Eskom, and the municipal manager had been jailed.

Another issue was that of infrastructure. The one who owned the infrastructure should maintain it. The Department was working on putting systems in place to make owners maintain the infrastructure.

Mr Legodi explained that the debt had started in 2005 when the district municipality had been instructed to take over water services from local municipalities. Both local and district municipalities had refused to take responsibility for the debts. It had finally been agreed that Phalaborwa and Mopane should pay their debts. An intervention had been brought in the form of debt collectors to collect the money on behalf of Lepelle, and he indicated that the equitable share strategy appeared to be the approach that had been employed.

The Chairperson, commenting on the 27% of budget spent on electricity, enquired why the entity was not leveraging on the environment it was in, and try to come up with green energy.

Mr Legodi answered that alternative energy services were being investigated, so as to take lessons from Limpopo.

Amatola Presentation

The Chairperson commented that the Committee would welcome a review of the BBBEE by the National Treasury. The Committee would like to discuss how it could be key in this process. He further indicated that municipalities must be the first to say that Water Boards be given first preference as service providers.

Ms Balindlela asked what was being done to help water-scarce towns like Molteno and Fort Beaufort.

Ms Mlonzi indicated that Amatola Water did not operate in those areas because they had not been allocated to them. The entity was operating in all its areas on a contract basis. In other areas, it operated as an implementing agent. Even if the entity was not operating in certain areas, it still assisted when it was asked to do so. Amatola Water was busy negotiating with the Nelson Mandela Bay and Coega industrial development zone (IDZ), but the talks were still at a sensitive stage.

Mr Makondo asked the entity to comment on the forensic investigation it was involved in.

Ms Mlonzi said they had been reluctant to do it, but the unions had insisted. It had now been discovered the investigation had not yielded the expected results.

Ms T Baker (DA) wanted to know why one continued to hear and see water quality related problems, whereas the River Health Programme had been going on for a long time.

Mr Singh explained that the water quality problem was of great concern to the Department. Consequently, it had been elevated to the top five priority area. In the middle of March, the Department would come to the Committee and report on sanitation.

In closing, he indicated it was good that the presentation had highlighted growth, and that it was the Board of the entity that had accounted for it. The Department would have a series of talks with the Amatola Board, because it was doing very well.

The meeting was adjourned.