PRESENTATION TO THE PORTFOLIO COMMITTEE ON WATER AND ENVIRONMENTAL AFFAIRS 5 MAY 2010 Presenters: Mthobeli Kolisa – Executive Director: Municipal Infrastructure Services William Moraka – Specialist: Water Services

 Challenges faced by local government structures in undertaking their water and environmental functions  The role of SALGA to represent, promote and protect the interests of local government in the water and environmental sectors  Commentary on the proposed tariff increases of the Water Boards and its impact and implications on local government structures BRIEF

Challenges faced by local government structures in undertaking their water and environmental functions

SOME KEY ISSUES FROM PRESENTATIONS 1.Debt payment by municipalities 2.Performance of municipalities responsible for water services 3.Role of water boards vis-à-vis municipalities

Context Municipal challenges in water services delivery are both:  Subjective – within the control of municipalities and sometimes caused by municipalities (councils, councilors and managers)  Objective – structural and policy challenges beyond the control of municipalities 5

Context  Examples of subjective challenges  Indecisiveness and/ or bad decisions e.g. long term decisions regarding institutional arrangements for providing services  Cases of appointment of incompetent service providers  Cases of corruption and nepotism  Not all municipalities, councils, councilors and managers  There are also subjective challenges of the leading/ sector regulating Department resulting in a situation where legislation has become a list of suggestions with no consequences for non-compliance 6

Context Examples of objective challenges – structural problems beyond the control of municipalities  Municipalities which are not viable as WSAs assigned the water services function – no mechanism of reassessing viability and reassigning the function  Infrastructure maintenance backlogs resulting from prioritizing the extension of services to the historically unserved  Inadequate financial provision for free basic services to the poor - providing for fewer at less than the cost of providing the service to a household  Institutional design inadequacies (role of WB vs Municipalities) 7

Representing, promoting and protect the interests of local government

Context Bulk services and related tariffs are a key factor to the delivery of water services Majority of WSA already operate their water distribution businesses at a deficit or at break-even The current environment in which municipalities operate is not favourable to big price increases Recognize the fact that the Water Boards are a critical component of the water supply value chain (they must be viable!) Had to undertake a thorough analysis of the proposed WB tariffs in order to effectively represent LG 9

Context By the 9 th of December 2009, SALGA had received 13 bulk water tariff increases proposals for the financial year 2010/ none from Namakwa SALGA scrutinised each proposal and gave comments to the water boards by the 25 of January 2010 Saw a need to also look at the consolidated picture of the water board sector - 10

Comment on proposed tariffs 11

12 APPROVED TARIFFS NameTariff in 2008/09: R/kl% increaseTariff in 2009/10: R/kl% increaseTariff in 2010/11: R/kl Albany CoastR %R %R 8.30 AmatolaR4.73 (Amatole DM) R3.91 (Buffalo City) 5% 7% R4.97 (Amatole DM) R4.18 (Buffalo City) 8.% 8.8% R5.37 (Amatole DM) R4.55 (Buffalo City) BloemR %R %R 3.92 BotsheloR %R %R 3.64 BushbuckridgeR %R %R 3.45 LNWR %R %R 3.38 MagaliesR %R %R 2.81 MhlathuzeR %R %R 1.73 NamakwaR %R %R 9.11 OverbergR %R %R 3.42 PelladriftR %R %R 2.28 RandR %R %R 3.97 SedibengR %R %R 5.86 UmgeniR3.07 (Others) R3.01 (eThekwini) 6.5% 6.6% R3.27 (Others) R3.21 (eThekwini) 6.20%R 3.47 Source: DWA AVARAGE 14.23% = 10.53% ABOVE PPI!

Comment on proposed tariffs 13 Alignment between the proposed bulk water tariff increases and price adjustments anticipated in Business Plans Average tariff Increases of Water Boards, as extracted from their Business Plans, and actual tariffs increases proposed by water boards: why?

Comment on proposed tariffs 14 Cost of raw water supplied by the Department Department has obtained approval for price increases which are significantly higher than those anticipated in BPs of WB Recommended: –Review of the raw water tariff applied by the Department, in particular the Raw Water Pricing Policy –Phasing of raw water increases, in particular the portion of increases which relate to accounting adjustments to the value of fixed assets –Revision of proposed pricing for 2010/11 downwards, to PPI plus 3% and therefore phase in increases to meet the required return on assets over a longer period

Comment on proposed tariffs 15 Increase in capital expenditure and decline in asset productivity The Water Board Sector is planning capital expenditure of about 98,7% of the current fixed asset value During this period, Water Volume Sales will increase by only 15,2% Planning a decline in the productivity of assets in the future? - appropriateness of this apparent expansionary policy is questionable especially given the relatively small growth in Water Supply Volumes. Recommended: Scrutiny of the underlying assumptions informing this apparent expansionary policy especially in as far as it will result in an apparent decline in the productivity of assets

Comment on proposed tariffs 16 Increase in the levels of debt of Water Boards The investment in fixed assets is, according to the BPs, to be financed through increased debt and no plans are made to receive further capitalisation or equity injection from the Shareholder. This will result in severe increases in interest costs and will place severe pressure on many Water Boards to service debt repayments going forward. Both of these factors will place upward pressure on Bulk Water Tariffs. Recommended: Review the funding models of the Water Boards; especially their apparent overdependence on debt financing and how this impacts on Bulk Water Tariffs

Comment on proposed tariffs 17 The return on capital of the Water Boards Return on assets (NP/Total Assets) Water Board2009Water Board2009 Bloem0.24%Lepelle Northern8.29% Amatola1.23%Rand8.45% Mhlathuze1.23%Overberg9.50% Magalies1.64%Pelladrift9.50% Botshelo2.08%Umgeni12.02% Sedibeng4.34%Bushbuckridge23.50% Albany Coast5.10% Sector7.72% PPI (Feb 2009)7.40%CPI (Feb 2009)6.90%

Comment on proposed tariffs 18 The return on capital of the Water Boards It is necessary for the WBs to generate a return on assets in order to maintain the economic value of the assets of the sector and ensure that the assets can be replaced and enhanced to meet future demand requirements However, in some cases this seems excessive, indicating that the tariffs charged are too high, and in other cases the it seems low affecting both its future sustainability and ability to grow to meet evolving needs Recommended that WB reflecting a RoA: greater than PPI provide a motivation for the high surplus creating tariffs or the proposed tariff increase be reduced to a level that will result in return on assets that is equal to PPI less than PPI to provide additional information that will demonstrate that this will not compromise their sustainability

Comment on proposed tariffs 19 Optimisation of operating expenditures Collectively planning to increase operating expenses by 79,75 % in the period 2010/11 to 2013/14 against a 15.2 % increase in Water Volume Sales For 2009/10, the Water Board Sector projected above PPI sector average increases in operating expenses per unit (from R2,92 per kilolitre to R3,23 per kilolitre - 10,43%) Suggests that the WBs are operating less efficiently over time, and are passing this reduced efficiency to the WSA Consequently water tariffs will rise by more than 10% above PPI Particularly concerning is that even Rand Water which, given its large size, should be in a position to secure increases at or near PPI, through economies of scale efficiencies is projecting an increase of 19,83%.

Comment on proposed tariffs 20 Optimisation of operating expenditures Staff costs a significant component increasing by 24% from 2008/9 to 2009/10, (no more than 10% is reasonably accounted for by salary increases) Chemicals increase is partly due to increased volumes, partly due to ongoing deterioration of raw water The energy costs are significant Recommended that the regulator carefully scrutinise the operating expenses of water boards before making decisions on the proposed tariffs.

Comment on proposed tariffs 21 Raw water quality and its impact on cost and sustainability of water supply Water Boards are reporting decline in Raw Water quality This is ascribed to pollution and contamination of the river systems by industrial, agricultural, and by human waste entering the rivers Leads to expensive disinfection and purification measures increasing the cost of Potable Water to the Municipalities In the long run these resources will be polluted to a point of being unusable. Concerned and note that the mandate of the Department includes protecting the National Resource from such degradation LG will play its part

Overall recommendations 22 Given the amount of work proposed and appreciative of the time constraints for decision making wrt proposed tariffs SALGA recommended that: –the a PPI plus 3% be allowed for both raw water and bulk potable water increases for DWA and all water boards that have requested increase that are above this level; –The scrutiny proposed in this submission be carried out for each water board during the 2010/11 financial year in order to determine appropriate increases for specific water boards in the future. –A pricing policy for the whole water services value chain be completed during the 2010/11 financial year –The Minster moves speedily to establish an institutional separation between the water boards shareholder role and the water sector regulator role which are currently both played by DWA; making the Department both a referee and a player at the same time

SALGA priority interventions in 2010/11 Facilitating implementation of appropriate long term institutional mechanisms for sustainable service delivery Clarifying the role of LG in Integrated Water Resource Management and facilitating effective participation of municipalities in CMA's Guidance wrt improving local regulation of service provision Facilitating identification and implementation of priority interventions to improve water and waste water quality management by municipalities Guide towards a transparent and appropriate water tariff determination methodologies 23

Thank you 24