Zero increase impact on water boards; Water tariffs 2021/22; Parliament role; with Ministers

Human Settlements, Water and Sanitation

10 November 2020
Chairperson: Ms R Semenya (ANC)
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Meeting Summary

Video: Portfolio Committee on Human Settlements, Water and Sanitation     Meeting 2

With both Human Settlements, Water and Sanitation and COGTA Ministers present, the two Committees received a virtual briefing by the Department of Water and Sanitation (DWS) on the impact of the 2020/21 zero increase in bulk water tariffs on water boards as well as proposed raw water use charges for 2021/22. In addition, the South African Local Government Association (SALGA) gave its analysis of water board tariffs and municipal debt.

The 28 July 2020  joint meeting of the Portfolio Committee on Human Settlements, Water and Sanitation and the Portfolio Committee on Cooperative Governance and Traditional Affairs (COGTA) had rejected any 2020/21 bulk water tariff increase due to COVID-19. This had led to the Minister ordering a price freeze. The Committee was told that the Minister's order not to increase bulk water tariffs had put a halt to the water boards' cost recovery plans. Due to huge outstanding debts, the liquidity of water boards was at risk. To ensure the sustainability of the water boards, DWS had extended temporary relief funds to struggling water boards to soften the impact of the zero tariff increase for 2020/21 and non-payment by municipalities.  

Despite the zero tariff increase for water boards, a DWS survey showed municipalities have approved tariffs at rates higher than what water boards originally proposed for 2020/21. The debtors age analysis of water boards show the no-increase in bulk water tariffs had no significant impact on settlement of municipal debt. DWS said that raw water is one of biggest cost factors for water boards, a shock applied at raw water tariff level is more sensible to filter down to end-users with less adverse impact on the intermediate levels of the value chain.

Committee members asked why DWS had not extended relief funds to the municipalities that were also struggling financially due to household debt. They complained about the lack of a coordinated approach to the water boards by DWS and SALGA; and the delay in injecting relief funds into the water boards. The Committee was told funding was the responsibility of National Treasury whose position has been that the funds are not available; its view was that the water boards should have increased bulk water tariffs irrespective of the Committee’s instructions. The role of Parliament in this process was raised. Top slicing was also raised. The Committee said it would invite National Treasury to account for its stance. The Committee was disappointed DWS had not consulted it on the determination of 2020/21 raw water charges.

Minister Sisulu concluded that when the Committee insisted on a zero-tariff increase DWS had agreed to this. However, the Committee had not assessed the impact of its suggestion on water boards and come up with solutions for that. The Committee expected DWS to come up with solutions. Treasury had refused to provide the relief funds as it was of the view that the water boards should have increased tariffs despite the Committee's view.

Meeting report

Impact of zero increase of 2020/21 bulk water tariffs on water boards: DWS briefing
Mr Trevor Balzer, DWS Acting Director General (DWS), said Section 27(1)(b) of the Constitution stipulated that everyone had a right to access sufficient water. For this reason, the water boards were critical entities of government and their sustainability was important.

Mr Balzer said key economic development sectors such as mining, manufacturing, tourism, farming, including growth in urban settlements, were more likely to commit large capital investments to areas where water and energy were secure and transport was reliable. For this reason, uncertainty about water availability and constrained funding for water development to meet growing requirements was a problem that had to be addressed timeously and effectively

Funding constraints were becoming a very serious problem resulting in delayed implementation of measures to secure water resource availability. An estimated funding of at least R126 billion was required to finance key water resource development projects in the next 10 years. The R12 billion debt owed to water boards was a key challenge to the sustainability of water boards.

An increase in bulk water tariffs sought to recover the costs incurred in the provision of water services. Cost drivers included increased electricity prices, labour costs and chemicals. A ministerial order not to increase tariffs had prompted the revision of the 2021 financial budget and had put a halt to water board cost recovery plans. Due to huge outstanding debts, the liquidity of water boards was at risk and had an upward effect on the creditor book which was not a favourable condition for the sustainability of the water boards. Four water boards (Lepelle; Bloem; Sedibeng and Amatola) had already needed rescue prior 2020/21 and were worse off with the zero increase. CAPEX for water boards was heavier when directly funded from tariffs. If water boards, due to their financial status, failed to demonstrate the ability to pay off debt, it was going to be difficult to secure loans. All Capex dependent on tariffs for funding could not take-off in 2020/21 and the four water boards were included among those highly impacted. Maintenance costs had been highly compromised in an attempt to maintain a lower tariff all the time. Water boards did not budget at least 8% for maintenance as the required norm and the zero increase made that worse (see document for more details).

Proposed 2021/22 raw water use charges: DWS briefing
Mr Balzer touched on the legislative process for raw water charges, types of raw water charges and the raw water charges determination process. The charges recommended for approval by the Committee of the following types of raw water charges were outlined: water resource management charge, water resource development charge, water discharge levy and water research levy.  In addition, tables were shown illustrating the implications of capping/concessions, as well as summarising key stakeholder comments on the recommended charges.

Mr Balzer concluded about the 2020/21 price freeze:
- Relief efforts need to be based on quantitative facts for sustainability.
- DWS continues with temporary relief for the water boards seriously troubled while searching for a permanent solution.
- While local government receives assistance to sustain through the pandemic, water boards should apply credit control policies without hindrance to collect revenue.
- Raw water is one of biggest cost factors for water boards, a shock applied at raw water tariff level is more sensible to filter down to end-users with less adverse impact on the intermediate levels of the value chain.

SALGA analysis of water board tariffs & municipal debt
Ms Khomotso Letsatsi, SALGA Chief Officer: Municipal Finance, Fiscal Policy & Economic Growth (SALGA) spoke about SALGA's efforts to support municipalities with municipal debt. SALGA proposed an investigation into the merit of drafting a bill to repeal household debt in municipalities. Potential trade-offs between municipalities and consumers will be considered such as installation of pre-paid meters in exchange for debt write off as well as funding requirements for the infrastructure of such projects. SALGA also sought to investigate the merit of an amendment to the Tax Administration Act, where consumers (taxpayers) that were due tax refunds by SARS were obliged to produce an up-to-date municipal account and where monies are owed to municipalities such amounts could be offset and paid over by SARS to the relevant municipality. It also proposed procurement regulations stipulating that no organ of state may transact with an entity whose directors and the entity itself are not up to date with their municipal rates and tariffs.

SALGA understood that the debt owed to municipalities and by municipalities could not be addressed without addressing the underlying systemic and structural matters. For this purpose, a Multidisciplinary Revenue Committee (MdRC) had been established to continue implementing the recommendations from the Inter-Ministerial Task Team (IMTT) and to proactively address inefficiencies in the revenue value chain. The Committee consisted of CoGTA, Public Enterprises, Public Works, Department of Rural Development and Land Reform (DRDLR), Department of Human Settlements, Water and Sanitation (DHSWS), Treasury, Eskom, SALGA, Department of Mineral Resources and Energy (DMRE). The overall objective of the MdRC was:
- Address revenue value chain shortcomings that increase inefficiencies in the municipality
- Stop the increasing debts owed to Eskom, municipalities and water boards
- Transform financially distressed municipalities into “smart and financially sustainable municipalities” and use technology as a critical enabler for change.

The following recommendations have been made about water and electricity debt:
- Installation of smart prepaid solution
- Rollout of a National campaign on the culture of payment
- A process to deal with municipalities that default on their financial obligations
- Restructuring the debt owed by municipalities
- Fixing municipalities to ensure the sustainability of services, good governance and sound financial management practices.

Ms Letsatsi showed a table illustrating municipality debt to water boards and their payment agreements and spoke about SALGA oversight of bulk water tariffs. The analysis conducted by SALGA was to ensure that the proposed tariffs by each water board were reasonably justified. In the analysis, SALGA took into consideration that bulk water tariff increases were required to ensure that water boards remain financially sustainable. However, SALGA was also cognisant of the need to balance these increases to ensure that bulk water remains affordable to all municipalities and, ultimately, the end-users.

Some policy and operational principles that SALGA deemed a challenge were:
- An inconsistent approach to cross-subsiding schemes when determining their bulk water tariffs.
- A need for a three-year medium-term tariff projection to make planning consistent and promote stability and predictability of tariffs

SALGA proposed an independent regulator for bulk water tariffs, multi-year bulk water tariffs and guidelines on drought tariffs as solutions to the challenges. In addition, SALGA proposed a bulk water tariffs modelling tool to improve the assessment of tariffs (see document).

Mr M Mashego (ANC) said the presentations by SALGA and DWS reflected a lack of coordination between DWS and SALGA. What was the rationale for the DWS decision to provide relief funds to the water boards and not municipalities? The decision was likely to affect end-users. What was SALGA’s view on this? SALGA had to explain the 13% tariff increase at Ekurhuleni municipality. The Committee had given instructions that there should be a 0% increase. Previously, SALGA had complained about tariff increases that were above 6% by Rand Water. Ironically, it had taken the decision to permit increases of 6% by the municipalities.

Ms N Sihlwayi (ANC) said the presentations did not demonstrate coordination between DWS and SALGA. This was regressive as the Committee had to repeat its previous recommendations. There was need for coordination between DWS and SALGA to effectively tackle the problem.

Human Settlements, Water and Sanitation Minister, Lindiwe Sisulu, replied that consultations between SALGA and DWS were ongoing. The presentation by SALGA showed progress in respect of the consultations. However, the time frames for the SALGA proposals were concerning. The problem at hand required urgent solutions. SALGA had shown a slide with the phrase “Parliamentary approval” in inverted commas. What did this mean? This would shed light on certain misunderstandings between DWS and the National Treasury. For example, Treasury and DWS disagreed on the role of Parliament in its business or responsibilities. A response to this could help bring Treasury on board.

Ms F Muthambi (ANC), Chairperson of Portfolio Committee on Cooperative Governance and Traditional Affairs,  pointed out that in a previous meeting the Committees had requested collaboration between DWS and SALGA. The water boards were in need of support from government’s COVID-19 stimulus package. The stimulus package was critical for the implementation of the zero-tariff increase policy. The water boards did not receive government subsidies compared to other government institutions. The water boards had not received funding to cope with the zero-tariff increase policy. The difficulties resulting from this meant that households were not going to benefit from the 0% tariff increase.

A debtor age analysis of the water boards had showed that the 0% increase policy had no impact on the municipalities. A zero-tariff increase sought to afford room for municipalities to settle their current and historical debt to water boards. For this reason, the objectives of the policy had become questionable.

Ms R Mohlala (EFF) recommended DWS litigate municipalities as a last resort. In the case against Madibeng municipality the judge ordered Madibeng to pay DWS R32 million for water use charges and R13 million for water research levies. Had DWS recouped this money? It appeared as if the water industry would be better managed by an Independent Regulator. However, in South Africa, this presented some challenges. There was need for insights on the viability of an Independent Regulator in South Africa.

Mr B Luthuli (IFP) asked if the tariff increment was calculated against the backdrop of the municipal debt or not. If so, why was the National Energy Regulator of South Africa (NERSA) not part of the consultation between government entities including SALGA and DWS?

Mr L Basson (DA) said DWS had no choice but to bail out the water boards. Minister Sisulu had rightfully pointed out that there was need for an urgent solution. Failure to resolve the matter urgently could result in the collapse of the water boards. This had a ripple effect that would result in the collapse of the water infrastructure in the country. COGTA’s intervention into municipal debt to the water boards was not going to yield any results. For example, Madibeng municipality was not going to pay the R32 million it owed to the water boards. There was no water in Madibeng since the municipality was already struggling with maintaining infrastructure. In his view, it appeared wise to assist the water boards since the municipalities were not going to pay.

Ms S Mokgotho (EFF) asked how DWS and SALGA had intervened to assist the municipalities to pay their debts. The majority of the consumers of water had lost their jobs and could not afford to pay for water. The primary aim for revision of the raw water pricing strategy and water tariffs norms and standards was to provide an enabling framework for financial assistance provision and to ensure and foster water pricing predictability and stability in the water and sanitation sector. Had DWS done the revision process? Had it identified an explicit need to balance debt and equity finance for investment? Given more clarity on the diversion of cash into short term investments as applied by water boards, has DWS considered a line item which incorporates cash equivalents and short terms investments? Could DWS provide more clarity on the policy including impairments as an operating expense?

Councillor Bheki Stofile, SALGA National Executive Committee (NEC) member, replied that the presentation was informed by the correspondence that SALGA had received from the Committee. It responded to specific questions asked by the Committee. SALGA’s response was forward looking because it understood the importance of not remaining in a stagnant environment. Progress was key. All government institutions occasionally required assistance to effectively conduct their business. The South African government was responsible for its citizens and it was important to find solutions on the problems under discussion.

SALGA acknowledged that the Committee had requested coordination between DWS and SALGA. SALGA had welcomed the zero-based tariff increase but was careful to point out that the policy had some shortfalls going into the future. The water boards projected that there should be a 15% increase. For this reason, there was a need for government intervention. The government’s failure to intervene would result in communities drifting to rogue forces that were closely monitoring the situation. As stated by Chairperson Muthambi, it was important to conduct a political debate on water pricing and not litigation. Litigation won battles and not wars

There were challenges faced by municipalities and subsequently communities. The municipalities were selling water without a price mark up.  This had a devastating impact on the municipalities since they were not getting income. This had to be assessed at a political level.

Ms R Semenya (ANC), Chairperson of Portfolio Committee on Human Settlements, Water and Sanitation, said the municipalities had gone against the Committee's advice not to increase tariffs. The municipalities had increased tariffs by varying percentages. As Ms Mohlala noted, the idea of contracting an Independent Regulator had become important. The Committee had to continually engage all relevant entities including National Treasury for solutions on the municipal debt owed to water boards.

There had been a proposal on top-slicing municipal grant allocations to pay off debts owed to other entities? In a meeting with the Inter-Ministerial Task team, it had been agreed that National Treasury would assist with top-slicing. The Committee had not received an update on this and it was worrisome.

The Committee had delegated DWS to implement the Committee recommendations. However, DWS had come back with the same questions.

There was need for commitment from the municipalities to start settling their water board debt.

When the Committee ordered the decision not to increase tariffs, the municipalities had already adopted their budgets for the next financial year. What was the way forward? Were the municipalities going to take the same decision that had been taken by the water boards?

Ms Muthambi reiterated that the Committee had taken a resolution to reject the proposed tariff structure. Minister Sisulu had proceeded to instruct a zero-tariff increase on bulk water to provide relief to households. What was the impact of the zero tariff increase on the salaries of water board employees?

The decision not to increase bulk water tariffs sought to prevent tariff increases by municipalities. A tariff increase by municipalities had an impact on households affected by COVID-19. Was the decision still serving its purpose since the municipalities had already increased tariffs?

On why DWS had not offered relief funds to municipalities, Mr Balzer, Acting DWS DG, replied that it was not the DWS responsibility to provide relief funds to both water boards and municipalities. This was the responsibility of National Treasury in terms of the Division Revenue Act. However, DWS had decided to provide relief to the water boards because if they were to stop operating, the Minister had to answer. Therefore, the relief funds were temporary and sought to assist the water boards to remain afloat.

Mr Balzer asked to provide a written response on whether DWS had recouped the R32 million from Madibeng.

Mr Balzer replied that there was need for a longer discussion on contracting an Independent Regulator.

On whether water boards had investments, Ms Matshidiso Nyembe, Rand Water CFO, replied that investments were part of Rand Water’s operational structure. Rand Water made projections of cash flows being generated. Additional cash inflow was invested appropriately such as through buying an instrument that could be quickly liquidated in case of financial emergency.

As part of its funding model, Rand Water took into account revenue generated through tariffs with especial consideration of external debt. Rand Water looked at external debt to ensure there was enough revenue to support capital expenditure, as well as maintenance and other expenditure. Rand Water ordinarily utilised externally-raised debt to fund capital expenditure for new investments.

Rand Water’s financial books were not good. Increased debt from customers was threatening its business. The debt had become so large that there were limited chances it could be recovered. For this reason, as a last resort, Rand Water had to recover debt through tariffs. There was no guarantee from municipalities on how they were going to service their historical debt.

Ms Khomotso Letsatsi, SALGA Chief Officer: Municipal Finance, Fiscal Policy & Economic Growth, replied that SALGA had recently added water boards to its Multidisciplinary Revenue Committee. This Committee looked at structural challenges in the revenue value chain. The Committee had made the proposal for top-slicing and this required the involvement of National Treasury. The structuring of the work of this Committee was still work in progress and SALGA was not in a position to provide detailed comments.

National Treasury had been tasked to ensure that all state departments pay municipalities for water and electricity services. SALGA was monitoring the process to ensure it worked towards the alleviation of pressure around debt owed to municipalities.

On the servicing of tariffs, there were challenges from a process point of view. Some municipalities were able to absorb the increase through the step-up approach of the stepped tariff system. However, there were inconsistencies in application. SALGA was assessing this and ensuring the benefit accrued to households.

On infrastructure management, SALGA sought to discuss this at the special Local Government Budget Forum lekgotla where Eskom and the water boards were also on the agenda.

On revenue under recovery, SALGA had seen revenue recoveries of up to 30% in the metro municipalities. In the lower municipalities there were recoveries of up to 50%. The municipalities were struggling to connect under the operating environment. This had to with funding which was a big challenge in local government.

Deputy Minister of Water and Sanitation, Mr David Mahlobo, said DWS presentations were limited in scope. In the last joint meeting, the Committees had appealed to the Minister to reconsider the decision to increase tariffs. The Minister had reversed the decision to increase the bulk charge tariff. There were three types of tariffs: water resource tariff, bulk tariff and retail tariff. The user-pay principle was important for any service being rendered by an organization. The service included maintenance of infrastructure and labour.

The ANC government had always cushioned the poor from excessive service costs. The government had a free basic water and electricity policy. However, those benefiting from the free basic policy over-consumed services which was problematic.

The Committee had complained about being consulted last on tariffs. Despite the Minister Sisulu having the final say on tariff determinations, the Committee had an important contribution to make. For this reason, it was important to determine at what stage the Committee came in during the consultation process.

The Committee had complained that its request for a zero-tariff increase had not been adhered to. Deputy Minister Mahlobo said the request had been partially adhered to. There had been a 0% tariff increase on bulk water. Only retail tariffs had been increased. For the water boards, there had been unintended consequences which were felt mostly by the water boards supporting rural provinces. There was going to have to be a deferment and postponement of some capital projects. For this reason, the Minister had been looking for strategies to support the water boards in the interim. The Ministers of DHSWS and CoGTA had convened a joint MINMEC to formulate strategies. The Ministers had agreed there was a need to support municipalities to pay their debts otherwise there was going to be dire consequences.

The IMTT was looking into the matter of an independent regulator.  However, water regulation was not the same for electricity which was regulated by NERSA. Even with an independent regulator, the intervention of Parliament was required at a certain point.

On top-slicing, DWS had not prepared for this discussion. However, DWS agreed with the Committee that this was an important matter.

The debt owed to municipalities and water boards presented challenges. DWS was devising a strategy to resolve this.

Deputy Minister Parks Tau, CoGTA, said water was an important resource. For that reason, the task to ensure its availability required the coordination of all stakeholders in the entire value chain. The absence of coordination was likely to present challenges to the entire country. The Committee had advised against a tariff increase by water boards. The message of zero tariff increase had not been taken further down to the municipalities. Consequently, there had been a tariff increase that had an impact on consumers and not municipalities. The fact that municipalities had factored in increased bulk water charges that had not happened had to be considered. The financial position of water boards presented risks to the entire industry and country. The financial viability of water boards needed to be protected.

The municipalities had to meet their obligations. Not all instances of default by municipalities were explicable. There are municipalities that can meet their obligations. Some municipalities were failing to meet their bulk water obligations due to mismanagement. These municipalities had to be held accountable.

The joint MINMEC had agreed to a process of reporting to political principals to ensure they remain up to date on the financial crisis. A political task team headed by the Deputy President had been established. The Multidisciplinary Revenue Committee created to deal with Eskom debt by had been extended to water boards. This Committee had started to report to the Political Task Team headed by the Deputy President. He hoped that details could be shared at the right time on a comprehensive response.

CoGTA Minister Nkosazana Dlamini Zuma said she was covered by the Deputy Minister. She added that the matter of departments not paying municipalities was under discussion. However, it would help to include National Treasury. Only National Treasury could take the decision to top-slice departments and even provinces. These matters are complex but they are attending to it with their joint technical teams.

Minister Sisulu said they had been at this for a long time and would continue to still be at this for a long time. She did not have answers at this time to most of the questions asked by the Committee but they were attending to all the issues that had been raised. The Committee had the power to make suggestions. In the previous meeting it had suggested a zero-tariff increase by water boards and DWS had agreed to this. However, the Committee had not assessed the impact of its suggestion on water boards and come up with solutions for that. The Committee expected DWS to come up with solutions. The fact that the Committee was always demanding answers without suggesting solutions was concerning. Treasury had refused to cooperate because it was of the view that the water boards should have increased tariffs despite the Committee’s proposals.

Follow up comments
Ms Sihlwayi said the Committee had received responses to its questions. The Committee wanted to know the state of affairs and the delegates had delivered.

Mr Mashego said the Committee served the people of South Africa and not the system. For that reason, the Committee had to speak against tariff increases regardless of what the system required. There was need for a debate on the political consequences of water tariff increases. The municipalities had increased water tariffs; hence distressing the water boards.

Chairperson Muthambi said the fact that National Treasury had refused to cooperate on the critical issue of water was concerning.

Councillor Stofile said the Committee was offering solutions contrary to what Minister Sisulu had said. The Committee had advised against a tariff increase after special consideration of the socio-economic conditions in South Africa. The Minister had advised that a zero increase would distress the water boards unless government created a buffer to ease loss of income. This solution required the intervention of National Treasury but it had refused to cooperate. Who informed the politics and the programme, National Treasury or government? Who reported to whom? The South African government system was centred on cooperation. The refusal by National Treasury to cooperate was concerning.

Chairperson Semenya requested the Ministers work together and come up with solutions. In addition, SALGA and the departments had to work together.

Chairperson Muthambi said National Treasury had to explain to the Committee why it had refused to cooperate.

Mr M Tseki (ANC) said the departments had to submit a report to the Committee before 5 December when Parliament closed.

Ms Sihlwayi said there was a sense of déjà-vu when one listened to the raw water presentation. It touched on points that the Committee had previously raised. When government was confronted with challenges it carefully considered how to deal with these. The presentation had been delivered to the Committee at a time it was tired as there had been two meetings that day. The presentation required further deliberation.

Mr Mashego said DWS had consulted with stakeholders and a decision on raw water tariffs was already in place. The role of the Committee had become unclear. What contributions did DWS expect from the Committee? Whilst it was commendable that DWS had consulted with the Committee prior to the adoption of its raw water use charges, it was unacceptable that it perceived the Committee as only a compliance watchdog.

Chairperson Muthambi agreed with Mr Mashego. In the last joint meeting, there had been a strong sentiment that Parliament had no meaningful role in the determination of water tariffs. The decision by the Minister to halt a bulk water tariff increase showed that Parliament had a meaningful role. For that reason, the Committee had to be duly consulted.

Chairperson Semenya asked for the increment baseline for water tariffs.

Councillor Stofile said DWS had to invite SALGA when consulting with its member municipalities. DWS had not consulted with the Association and this was in violation of the Intergovernmental Relations (IGR) framework.

Mr Balzer replied that SALGA had been consulted.

On the baseline, Mr Balzer said DWS determined tariffs from a zero-based budgeting point of view.

On the consultation process, Mr Balzer said the Committee should advise on how to conduct these going forward. Ordinarily, the process was once Parliament had approved the raw water pricing strategy, DWS had to use the policy to calculate tariffs. The outcome of the calculations and negotiations with stakeholders would then be presented to the Minister. The Minister would then engage the National Treasury.

Deputy Minister Mahlobo said consultations on 2021/22 raw water charges were ongoing with different water users. DWS was still receiving comments. In addition, there had been interaction with SALGA.

Ms Sizani Moshidi, DWS Chief Director: Economic and Social Regulation, agreed with Mr Balzer that DWS had consulted with SALGA and it did not object to the raw water tariffs. There were over 400 components of raw water tariffs and DWS was going to send this to the Committee.

Chairperson Muthambi said National Treasury’s conduct was unacceptable. National Treasury had to explain its conduct to the Committee.

The meeting was adjourned.

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