1 SOUTH AFRICAN ASSOCIATION OF WATER UTILITIES PRESENTATION TO THE PARLIAMENTARY PORTFOLIO COMMITTEE OF WATER AFFAIRS AND FORESTRY ON THE IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) AND FREE BASIC WATER (FBW) ON WATER UTILITIES: 04 JUNE 2003

2 The South African Association of Water Utilities An Association not for gain, representing public sector water service providers in SA. Represents 18 water boards and 5 other public sector institutions involved in water services provision. Water boards are organs of state. Principal objective of SAAWU is to: Ensuring access to water services by all South Africans by promoting the need for efficient and effective public sector regional water utilities and ensuring effective integration, co-operation and mobilisation of resources and capacity within the water services sector. SAAWU BACKGROUND

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4 SAAWU and its members have played an active and leading role in providing inputs into the Draft white Paper on Water Services. In particular we support moving toward greater regionalisation of water services and building off the established/existing institutional capacity to: “To establish regional water utilities offering a full range of water services and water service delivery solutions, in support of municipal water service authorities, so that they are able to meet their water service delivery obligations”. SAAWU will be requesting an opportunity to give a detailed presentation to the Portfolio Committee highlighting its views on the essential policy, legislative and implementation issues that should direct initiatives for regionalisation. SAAWU BACKGROUND (Continued)

5 IMPACT OF THE DIVISION OF REVENUE ACT (DORA) ON WATER UTILITIES: 04 JUNE 2003

6 IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON WATER UTILITIES SAAWU fully understands and accepts that the “authority function” for water services delivery is that of the appropriately delegated Municipal entity that is proclaimed as the Water Service Authority (WSA) for that area. In terms of existing legislation (Water Services Act and Municipal Structures and Systems Acts), water boards and other water utilities who are members of SAAWU are water service providers to the WSA. The existing water boards/utilities provide a range of water services such as bulk potable water, retail water, bulk waste water and retail waste water services in support of municipalities.

7 IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON WATER UTILITIES Many water utilities also operate and maintain a number of DWAF owned water supply schemes (both bulk and retail) on behalf of DWAF, or the municipal authorities who have been targeted/identified to receive transfer of these assets from DWAF. These arrangements exist in most instances where the WSA (municipal authority) lacks the capacity and resources to provide the service themselves. In many instances these arrangements are not formalized in terms of appropriate contacts or agreements. In many of these cases where the water utilities act in support of municipalities they receive a direct subsidy from DWAF for the operation and maintenance of these schemes.

8 IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON WATER UTILITIES Some water utilities provide services to primarily the rural poor (in ex-homeland areas and others in a more urban environment) where existing municipalities simply do not have the capacity or resources to deliver the services. In these instances most consumers are unable to pay for services and water utilities are reliant on subsidies from DWAF to cover operating and maintenance costs and for financial survival.

9 IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON WATER UTILITIES Section 8 of the DORA makes it clear that “An organ of state in the national or provincial sphere of government may only provide funds for a municipal service to the relevant municipality directly”. The understanding of SAAWU is that in term of DORA the subsidies currently paid to water utilities directly by DWAF for water services provided to communities will, in future, be directed to the local municipal authority.

10 IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON WATER UTILITIES In a significant number of situations where water utilities are providing services to consumers this arrangement is consequent to agreements between DWAF and the utility. In these instances there are NO contractual agreement in place between the municipality (WSA) and the water utility as the WSP. Given these circumstances the practical reality of complying with Section 8 (2) of DORA is considered remote.

11 IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON WATER UTILITIES SUMMARY OF KEY IMPACTS OF DORA ON WATER UTILITIES The arbitrary re-direction of all national government (DWAF) subsidies to the relevant municipal authority could have a significant impact on the provision of water services to vast numbers of primarily rural South Africans in that: The continued viability of service delivery where this is provided by water utilities will be subject to the municipality providing the requisite subsidy to water utilities. Current experiences with the allocation of a portion of the equitable share to fund water services do not support optimism in this regard and the financial viability of some water utilities will be severely impacted.

12 IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON WATER UTILITIES SUMMARY OF KEY IMPACTS OF DORA ON WATER UTILITIES The capacity and willingness of municipalities to enter into formal agreements with water utilities for the provision of water services is a significant constraint to effective implementation of DORA. (SAAWU and SALGA are currently developing a model WSP contract and guidelines for contracts between water utilities and municipalities and it is hoped that this will help resolve some of the immediate contractual problems.) There is an urgent need to put in place a practical and rational phasing process or mechanism that will enable a viable and sustainable transition to the situation where national an provincial subsidies for water service are directed through municipalities.

13 IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON WATER UTILITIES EXAMPLES OF SUBSIDIES PAID BY NATIONAL GOVERNMENT TO WATER UTILITIES FOR WATER SERVICE RENDERED ON BEHALF OF MUNICIPALITIES Lepelle Northern WaterR20.2 million = 20.9% of revenue Sedibeng/North West RegionR22.4 million Sedibeng/Qwa QwaR18.3 million

14 IMPACT OF THE IMPLEMENTATION OF FREE BASIC WATER (FBW) ON WATER UTILITIES: 04 JUNE 2003

15 THE FREE BASIC WATER (FBW) POLICY SAAWU fully supports the principle of FBW as an initiative to improve the quality of life of South Africans, specifically the indigent and rural poor. SAAWU supports the principal of municipal authorities being the most appropriate institutions to implement FBW, supported, wherever possible by other spheres of government. IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER (FBW) ON WATER UTILITIES

16 POSSIBLE CONTRIBUTIONS BY WATER UTILITIES TO THE IMPLEMENTATION OF FREE BASIC WATER (6kl) Many Water Utilities have expertise that can be mobilised to support Municipal Authorities in the implementation of FBW such as: -Water loss management -Technical and financial management -Water demand management -Customer management and credit control -Operation and maintenance of services IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER (FBW) ON WATER UTILITIES

17 POSSIBLE CONTRIBUTIONS BY WATER UTILITIES TO THE IMPLEMENTATION OF FREE BASIC WATER (6kl) (Continued) Water Utilities can : Be used as a regional/sub-regional vehicle for cross subsidisation in some areas due to the fact that they do operate over provincial and municipal political boundaries. Where they act as water service providers to municipal authorities,they can implement and manage the FBW for the municipal authority. Can provide financial, technical and management expertise for low (basic) level water schemes in rural areas, ie boreholes, hand pumps, flow limiting technology etc. Can act as implementing agents for new infrastructure provision. IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER (FBW) ON WATER UTILITIES

18 CURRENT CHALLENGES TO FBW IMPLEMENTATION Municipal demarcation has not significantly improved the economic viability of all municipal areas (especially rural district municipalities). Many municipalities have also applied for a review of their boundaries. The equitable share and other resources are used to supply free basic water to those who are already benefitting from the receipt of services at the expense of the un-served Universal metering and full cost recovery above 6kl is critical for municipal financial viability, ongoing FBW implementation and the viability of the entire water sector. This requires significant additional capital investment. IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER (FBW) ON WATER UTILITIES

19 CURRENT CHALLENGES TO FBW IMPLEMENTATION (Continued) Unauthorised/illegal connections continue to destroy the viability of schemes and undermine FBW provision in many areas. The process of allocation of funding to capital projects is unwieldy. Many municipalities lack the capacity/resources to implement FBW effectively. Full cost recovery for water services in most rural and some urban environments is not taking place. IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER (FBW) ON WATER UTILITIES

20 CURRENT CHALLENGES TO FBW IMPLEMENTATION (Continued) The reality is that water is not free and someone has to pay for the 6kl of FBW supplied to consumers. In municipal areas where there is not a healthy mix of high volume urban users to low level rural users, cross subsidisation of FBW via the consumer tariff is not viable. Most parts of rural South Africa fall into this category. In these areas the only source of revenue to cover the costs of FBW is the equitable share. IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER (FBW) ON WATER UTILITIES

21 CURRENT CHALLENGES TO FBW IMPLEMENTATION (Continued) IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER (FBW) ON WATER UTILITIES The allocation (quantum) and discretionary use of the equitable share does not guarantee that sufficient funding is made available by municipalities to cover FBW implementation costs to the rural/urban poor. Where cross subsidisation is implemented there is a critical requirement for reasonableness to prevail, failing which, the negative impacts will cause industrial, commercial and domestic users to consider other alternatives. Most rural water supply schemes run by water boards on behalf of DWAF or municipalities have effectively been rendered non viable by the FBW implementation.

22 CURRENT CHALLENGES TO FBW IMPLEMENTATION (Continued) IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER (FBW) ON WATER UTILITIES Municipalities currently owe water utilities more than R 200 million for water services rendered that have not been paid for. In many cases these are municipalities with a large rural base who are unable to get full cost recovery for services provided to consumers. In some areas water utilities are supplying water services directly to consumers due to the fact that municipalities lack the capacity and resources to undertake this function. In most cases these services are not paid for and the water utility relies on subsidies from DWAF in order to cover the costs of delivering the FBW and basic water services.

23 CHALLENGES ASSOCIATED WITH THE USE OF THE EQUITABLE SHARE ALLOCATION TO MUNICIPAL AUTHORITIES TO FUND FBW It is an unconditional allocation to municipal authorities. Use of funds is largely discretionary. Administrative capacity is not always sufficient at municipal level. Equitable share allocations are in-sufficient to meet all service needs. A portion of the equitable share is not always used by municipalities to pay water service providers for services rendered. IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER (FBW) ON WATER UTILITIES

24 SUMMARY OF THE IMPACTS OF FBW ON WATER UTILITIES The challenge now is to ensure that sufficient revenue is available through cross subsidies via the tariff or the allocation of the equitable share to enable municipal authorities/water service providers to recover the full costs of water service provision. It is critical that all consumers pay for all services received that exceed the BFW limit of 6 k/lt per house hold per month. The entire water sector is dependent on the revenue from the consumer for services rendered. If municipalities do not pay water utilities who are acting as the service provider for the service rendered the water utilities will ultimately fail along with the rest of the water service sector. IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER (FBW) ON WATER UTILITIES

25 CONCLUSION The impact of FBW implementation on water utilities are primarily financial. This impact is, however, not insurmountable but will require rational and resolute decision making, total commitment and the cooperation of all role players and stakeholders. SAAWU and individual water utilities pledge their full support, capacity and skills to assist in ensuring the successful implementation of the Free Basic Water Policy. IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER (FBW) ON WATER UTILITIES

26 Some examples of arrears owed to water utilities operating in significant rural areas Amatola Water R8,057,000 Magalies Water R6,535,703 Midvaal Water R4,778,759 Lepelle Northern Water R26,300,826 Sedibeng Water R3,451,152 Rand Water R285,012,283 City of Cape Town R2,227,025 Bloem Water R24,193,201 IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER (FBW) ON WATER UTILITIES

27 Thank You for Your Time and Attention. IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER (FBW) ON WATER UTILITIES