Rand Water TARIFF CONSULTATION PROCESS 1

2 PROCESS AND IMPORTANT TIMELINES DWS / TCTA raw water pricing9 th October 2014 Customer consultation and information sharing14 th October 2014 Submission to Treasury and SALGA for input14 th October 2014 Customer notification8 th December 2014 Submission to DWS for Parliamentary approval25 th January 2015 Parliamentary approval15 th March 2015

DRIVERS 3 Municipal Finance Management Act: 6 months advance notice National Treasury & SALGA: 40 days for consideration Bulk Water Supply Contract: prior consultation and information sharing DWS must table tariff increases to Parliament on or before 15 th March 2015 Implementation on 1 st July 2015

OVERALL INTERNAL INFLATION 4 The projections provided by the Bureau for Economic Research (BER) show that CPI will remain very close to the upper limit of the key CPI range of 3 per cent – 6 per cent. In 2014, CPI is projected at 5.9 per cent and 5.7 per cent in 2015, both very close to the upper limit.

RAW WATER TARIFF INCREMENT 5 Rand Water received an effective raw water tariff increment of 8.77 per cent. This is an increment from R cents per kilolitre to R cents per kilolitre for the financial year beginning 1 st April This is composed of the TCTA component which is decreasing by 1% from R2.32 to R2.29. The DWS component introduces a new element, i.e. AMD. Therefore this is an increase from R0.5 cents per kilolitre to R0.77 cents per kilolitre, an effective 55% increment. The raw water charge is 23 cents as shown in the table below.

RAW WATER TARIFF INCREMENT These projections place a challenging consultation process in front of Rand Water. The effective tariff increment of 8.77% is way above the inflation range of 3 – 6%. It is important to remember that raw water constitutes above 47% of Rand Water’s cost structure. The additional challenge is that over the years, this has varied wildly, as shown below. This makes any multi-year tariff exercise extremely difficult. 6

CHEMICAL COSTS An important component of chemical costs is that some of the chemicals are imported. Therefore, the strength of the Rand with regards to chemical cost projections is important. There is an expectation that as the US economy continues to recover, this will put more pressure on the Rand. If the Rand devalues, this will increase chemical costs. Taking into consideration CPI, chemical costs are expected to increase by 13%. BER Forecast Exchange rates R/$ LABOUR COSTS The increasing capital expenditure requires that Rand Water’s labour pool matches this increasing crucial requirement. Rand Water is proud that it continues to meet its annual capital expenditure (in Rand terms and actual work undertaken). Rand Water and the water sector are represented by the same organised unions. 7

Tariff Versus Input Cost Inflation 8

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COMPARISON BETWEEN RAND WATER AND SALGA PROPOSED TARIFFS 10 In the previous tariff cycle, Rand Water noted that there were no differences. This can be attributed to two important points; Continuous cycle of engagements This year, SALGA attended the assessment of water boards session held on 3 rd – 5 th September 2013

Proposed Tariff 11

OVERALL INTERNAL INFLATION 12 Rand Water is also expected to enter capital markets to raise at least R1.340 billion. The proposed 2015/16 potable water tariff will thus be as follows:

THE WATER DEMAND MANAGEMENT FUND Non revenue water among Rand Water’s municipal customers has continued to worsen rather than improve. In 2005, the national average stood at approximately 27%. In Gauteng, the challenge was to improve these water losses to 15%. However, the national average now stands at 36.8%. The table below shows that non revenue water in Gauteng has worsened from 21.8% in 2005 to 35.9% in the Name Joburg Metro20.6%38.2% Ekurhuleni Metro23.8%39.8% Tshwane Metro14.0%26.5% Emfuleni47.6%44.4% Mogale18.2%26.0% Metsimaholo35.2%17.2% Rustenburg32.3%39.0% Midvaal23.0%26.2% Merafong25.9%26.0% Randfontein12.5%21.9% Westonaria10.3%29.7% Lesedi14.9%8.2% Ngwathe1.2%24.9% Kungwini28.7%43.0% Gauteng21.80%35.90% 13

THE WATER DEMAND MANAGEMENT FUND 14 However, this fund will only be applicable if all municipalities agree to it. If one of the municipalities do not agree to the continuation of this fund then it does not apply at all. This is because of the inter- connectedness, economies of scale and financial implications that Rand Water will face by charging different tariffs to different municipalities. The challenges of any municipality that will not be part of this fund will be incorrectly associated with this fund. The 2014 figures are subject to final audit process. Centralised revenue collection by Rand Water This has a huge impact on project finance, given that Smaller municipalities struggle to raise capital Most municipalities have qualified audits Most municipalities do not have a positive record with regards to repaying such funds Available project finance is typically lower than available commercial paper The Water Management Demand alternatives that have been utilised by municipalities have not been sustainable, given a number of competing needs.

15 In line with a well-established approach, Rand Water’s internal inflation is 13.5 per cent. Rand Water therefore proposes a 13.5 per cent tariff increment for the 2015 / 16 financial year with another 1 per cent allocated to the establishment of a Water Demand Management Fund. In total Rand Water proposes a 14.5 per cent tariff increment. CONCLUSION – PROPOSED TARIFF A new approach to tariff setting is crucial Stepped tariff based on volumes Stepped tariff based on non revenue water

16 Thank You