Portfolio Committee on Water Affairs and Forestry Free Basic Water: Sustainablity, Tariffs and Subsidisation Prepared by Rand Water and the Gauteng Water Services Forum Presented by R Duvel & J Ferreira 30 May 2001

Contents Background Tariff comparisons Tariff concepts Implications Task team objectives Current situation Conclusion Tariff comparisons Tariff concepts Implications Conclusions

Background

Role of Rand Water No tariff adjustment, bulk customers have not requested it Co-ordination of Gauteng municipalities through Water Services Forum Task Team Directly involved in: Odi Retail Water with Tshwane Amanziwethu with Maluti a Phofung Assisting municipalities with actual calculations (Madibeng, Randfontein, Kestell)

Objectives of the Task Team To assist municipalities by showing that Free Basic Water (FBW) could be funded: Within municipalities by cross-subsidisation, and Within the water sector through national or regional subisidies To produce a tariff model To agree on tariff policy principles

Current Situation Metro’s on track for 1 July? District and Local Municipalities are further behind Financial analyses are taking place (realities are coming through) Outstanding issues: At what level do tariffs become too high for the paying customers Infrastructure provision to the unserved

Infrastructure Audit / Requirements -Informal Settlements and Peri-Urban Areas 1 000 000 people in Gauteng with RDP or less service levels, they will not benefit from this policy Illegal connections are causing more than basic level of consumption in poor areas e.g. Klipgat = 70 Kl p.m. Consumption control is necessary Imbalance between water and sanitation can be problematic i.r.o. public health

Infrastructure Audit / Requirements- Urban areas Yard connections in formal areas must be metered Management information and billing systems are not standardised or integrated Lack of zonal ring-fencing (metering and valves) Need for improved efficiencies: water loss management and credit control

Conclusions Rising block tariffs without a basic charge are inappropriate for most municipalities National resource pricing strategy is not assisting municipalities (and under revision – small concessions may be removed) The subsidy from Equitable Share is not sufficient for poorer municipalities Cross-subsidiation within municipalities can provide limited funding If tariff increases become too high to provide the balance of the funding, large users will reduce consumption. Sustainability problems.

Tariff Comparisons

Tariffs: Monthly Bills Am’wethu

Tariffs: Rising Block Am’wethu

Tariffs: Reducing Block Am’wethu

Tariff Concepts

Tariff Structure Tariff Structure is a local decision: “Who pays for what?” Average Tariff (for each customer) Effect of tariff policy on various customers Larger, non-indigent households, industries Very high Average Tariffs will require regional or national subsidisation additional to current Equitable Share

Tariff Structure Issues: Definitions Tariff block: The range of consumption volumes at which each kilolitre is charged at the same tariff Economic volumes: Non-free kilolitres that are charged at non-zero tariffs to ensure income from customers Economic customers: Those customers that contribute towards the cross-subsidisation of others by being billed for their non-free volumes Break-even consumption: The consumption at which a customer starts contribution towards the cross-subsidy [where average tariff starts exceeding average cost]

Average Tariff (to customer) A consumer’s monthly bill Kilolitres used in the month Average Tariff = Average tariff: The average tariff (R/kl) a customer is charged on his full monthly bill [His total monthly bill divided by his total monthly consumption]

Average Cost Average Cost = Full cost plus non-payment Total Kiloliters sold Average Cost = Average cost: The average cost for the service provider to provide services [The total cost of water services to be recovered through the tariffs divided by the total volume of billed sales (R/kl billed)]

Economic Tariff Economic Tariff= Full cost plus non-payment Total No of “non-free” Kilolitres Economic Tariff= Economic tariff: The theoretical average tariff at which all non-free kilolitres should be charged to neutralise the effect of free kilolitres [The total cost of water services to be recovered through tariffs divided by the non-free volume of billed sales (R/ non-free kl billed)]

Tariff Structure Definitions: Average Cost & Economic Tariff Break-even point (28kl/m) Economic Tariff (R5-20) Average Cost (R4-00) Average Tariff (Varies)

Implications

First Implication Strict Credit Control/ Cost Recovery FBW provides for people’s minimum requirements Consumers must pay for water consumed above FBW Failure to do so will make municipalities bankrupt = failure to deliver services Municipalities and their service providers need to be ruthless on consumers who do not pay for amounts consumed in excess of FBW volume

Second Implication: Maximum Income Tariff This is the maximum economic tariff that can be effectively applied in an area This will bring in the maximum income for the municipality At a higher tariff consumers will reduce consumption thus reducing the municipality’s income A lower tariff will bring in lower income as consumption will not increase It varies from consumer to consumer, but there is an average for an area

Maximum Income Tariff Kilolitres Tariff Income High Tariff Kilolitres Low tariff Kilolitres Tariff Maximum Income Tariff

Maximum Income Tariff and Subsidy If Maximum Income Tariff is charged And, The municiplaity cannot cover the costs of providing the service It cannot obtain more income by increasing tariffs It needs another source of income = Subsidy

Third Implication Calculate the economic tariff and compare it to the Maximum Income tariff If the economic tariff > max Income tariff The difference will be the subsidy required by the municipality If the economic tariff < max Income tariff The difference will be the subsidy that can be provided by the municipality to another E.g. Tshwane’s max tariff = R5.00 and Welkom’s = R10.00. Perhaps the metro can assist towns like Welkom by increasing its tariff

Fourth Implication FBW for ALL FBW for ALL domestic consumers Second Block (6 – 12 Kl) you pay for the Kilolitres used above 6 Third block you pay for all water consumed including first 6 Above third block you pay extra to create subsidy

Fifth Implication % of FBW to Total Water Billed Percentage fo FBW consumption to total consumption The higher this figure is, the higher the tariffs and/or the subsidy must be This is the most important ratio in determining subsidy requirements It can be used to compare all towns from metros to villages

Fifth Implication % of FBW to Total Water Billed Average cost: R 4-00 /kl billed Policy: Free volume= 6kl to all households: This amount is the FBW Determine the FBW as a percentage of total water sold, e.g. say it is 29% 71% of volume must now ensure full income Economic tariff: R 7-02/ non-free kl billed [= R4/(1-29%)]

Metro vs Small Town Free / Non-free Volumes

Maximum Realistic Tariff Additional subsidy Maximum Realistic Tariff Cross-subsidy Includes Equitable Share already Ave Cost to Municipality – no FBW

Conclusion

Conclusion – Enforcing Payment FBW provides a mechanism to meet the minimum needs of people People must pay for the water they consume in excess of FBW If people abuse the basic right – they forfeit it. This means they can be cut off or restricted

Conclusion – Tariff Structures Rising block tariffs may result in very high tariffs for the larger consumers – unaffordable (if regulations are promulgated this will be compulsory) Other tariff structure options have to be considered, like reducing block, two-step (economic) tariff and basic charges. Sustainability and affordability will require regional or national subsidies for marginal municipalities and districts

Conclusion- Sustainability and Tariffs Average cost influenced by losses non-payment subsidies (Equitable Share, etc) received subsidies payable by water to other municipal services Sustainability is influenced by: Percentage fo FBW consumption to total consumption Tariff structure itself Break-even point between being subsidised and contributing towards subsidy Highest average tariff charged to customers Availability of additional subsidies to avoid excessive tariffs

Conclusion- Prerequisites for Implementation Need for metering Need for improved efficiencies National subsidisation required where economic tariff exceeds the maximum income tariff

THANK YOU

Contact Details Rowan Duvel Retail Water Operations Manager Rand Water Tel: (011) 682-0809 Fax:(011) 432-5302 Cell:(082) 886-7012 Rowan@randwater.com