MUNICIPAL MANAGERS FORUM NORTHERN CAPE JUNE 2015

OUTLINE Understanding the Water Value Chain Pricing Regime Bulk Water Tariff process Municipal Pricing Conclusion Recommendations 2

1 st Tier National security of supply 2 nd Tier Water Boards - Regional supply to WSA’s 3 rd Tier Local service delivery and customer management Dept WS BULK PROVIDERS MUNICIPALITIES (Water Services Authorities ) UNDERSTANDING THE TARIFF REGIME Tariff regulated by the raw pricing strategy - Capped at PPI + 10% Not regulated Not regulated however the water services and Municipal Finance Management Acts provides guidance Norms and Standards

Taxes (property rates) Funding mix for social and economic infrastructure (3Ts) Municipalities have three main sources of revenue (“3Ts”) Service Charges Transfers (equitable share and grants) Infrastructure, operations and maintenance Own revenue should mainly fund services for non-poor Transfers enable municipalities to provide services to the poor 4 Funding for economic infrastructure Funding for Social infrastructure Source: Grant Review NT

Section 42 The MFMA provides for any national or provincial organ of state which supplies water, electricity or any other bulk resource to a municipality or municipal entity for the purpose of providing a municipal service to consult extensively and in a comprehensive manner on any proposed changes in the tariffs that may impact on the municipal services. Water Boards have a duty to submit tariff proposals to amend bulk water tariff every year and to adhere to timelines in terms Circular 23 of MFMA and s42(5) Tabling of the amended pricing structure in parliament by the Executive Authority. S42(4) 5 Municipal Finance Management Act

Any submission in terms of subsection (I)(a) or (b) must be accompanied by- (a) a motivation of the reasons for the proposed amendment; (b) an explanation of how the amendment takes account of- (i) the national government’s inflation targets and other macroeconomic policy objectives; (ii) steps taken by the organ of state to improve its competitiveness or efficiency in order to reduce costs (iii) Any objectives or targets as outlined in any corporate or other governance plan applicable to that organ of state (c) any written comments received from the National Treasury, organised local government or any municipality (d) an explanation of how such comments have been taken into account. Source Section 42 MFMA

Considerations in our analysis Inflation and affordability Bureau for Economic Research Characterictics of municipalities Raw water tariff increases Energy Chemicals Exchange Rate Staff costs & overheads Compared to staff productivity Some Water Boards are providing for significant CAPEX over the next 5 years, but are not projecting a proportional increase in water sales. Leads to a lower Return on Asset Requires a higher tariff since the same volume is having to pay for a larger asset base

Cost Elements – Example 1 (Water) The shortfall in the 2014 ES allocation for Water compared to the calculated cost of R 9.4 billion was R 638 million, or 7.3% of the ES The cost elements used to determine ‘Cost’ based on ‘Responsible Custodianship’ (for 2013/14), compared to ES elements:

Example Municipalities – Water (1)

ContextIllustrationExamples Number of installationsMany treatment plants Type infrastructureSewers vs pits GeographyArea and topography EconomyPoverty Size of installations‘bigger is different’ WSAs do not all operate in the same context The Operational Challenge

Gross Value Add (What Economic Activities underpins Service Delivery) Source: Eastern Cape Social Economic Council

SALGA’s Suggested Tariff Increases Water Board2010/112010/11 SALGA*2011/122011/12 SALGA2012/ /13 SALGA Amatola8,4%6,7%8,3%7.96% 9.26% 9% Bush Water12,466,7%7,27% 7.25% 5% Bloem Water10%6,7% 9.17%11.4%9% Botshelo16%6,7%18%9,81%12%9% Lepelle Northern6,5%6,7%10,228,69%7.55%7% Magalies18%6,7%16,6%11,5%8,2%8% Mhlathuze18%6,7%14% 9,4%9% Namakwa43%6,7%10,2% -- - Overberg9,95%6,7%15%12%4.36%0% Pelladrift20%6,7%20% -15%- Rand Water14,10%6,7%12,9%10,78%11.3%9% Sedibeng12%6,7%8,5% 13%8,4%7% Umgeni6,2%6,7%6,1% (5.6) 16,9%9%

At a Municipal Level Agreements with most Water Boards are in place Tariffs consultation process has improved We owe Water Boards R2.6B which half is current account Incline block tariff seems to be favoured Research findings – outlines this approach as not sustainable Not achieving its intent objectives Our pricing structures not cost reflective WSA

Non – Revenue Water Source: WRC

Cost structure Operating costs Maintenance cost Focus on operating account Customer management Finance charges Material and plant running costs for repairs and maintenance, departmental employee costs Portion of municipal governance, administration and planning costs Cost of capital (interest), bad debt, depreciation, contribution to capital reserve Bulk costs Mainly payments to Eskom and water boards Overheads Metering and billing

Unit Cost of Water Services

SALGA in its assessments of water board tariffs 2016, concluding remarks highlighted the following: –Information received from the water boards is not presented in a manner that is consistent – therefore comparison becomes increasingly difficult. –Projections should be provided for at least 3 years. –There should be a full breakdown of the key cost drivers and a consistent definition of “cost of sales, direct costs and overhead costs” should be used by all Water Boards. Expense parameters should be set by DWS – especially for Energy and Staff –In devising the principles of highly effective and sustainable pricing for the provision of Bulk Water service, cognisance should be taken of the abovementioned comments and the legislative guidelines provided for pricing of bulk water services provision. Conclusions

Recommendations Need policy guidance on inter-area subsidisation of social development costs A coherent funding and pricing regime for the water sector Multi-year Price Determinations Acknowledges difference characters of municipalities Sets benchmarks for expense management Incentivise cost reductions and performance improvement Panel of experts to develop benchmarks for financial ratios Interest cover Operating surplus Capex development

Jean de la Harpe Executive Director: Municipal Infrastructure Services THANK YOU