1. PRESENTATION TITLE Presented by: Name Surname Directorate Date Briefing the Portfolio Committee on Water and Sanitation on the 2016/17 Water Tariffs Presented by: Margaret –Ann Diedricks Director-General 25 May 2016

2. PURPOSE OF PRESENTATION To seek approval of: - Raw Water Tariffs - Bulk Water Tariffs 2

3. CONTENTS Raw Water Tariffs  Legislation and background  Process followed  2016/17 tariffs Process of determining Bulk Water Tariffs  Legislation and background  Process followed  2016/17 tariffs  Recommendations 3

4. Legislative mandate: Section 56 – 60 of the National Water Act, requires DWS to establish a pricing strategy for raw water charges. Raw water Pricing Strategy was first developed in November 1999. Revised Strategy was approved (Gazetted) for implementation with effective from April 2007. Legislative framework: Raw Water Charges 4

5. Types of raw water Charges: –Funding water resources management cost by water management institutions. –Funding of the development and use of water works –Waste discharge charge system –Water research levy Registered water use sectors –Domestic/Industrial/Mining/Energy –Irrigation –Stream Flow Reduction Activities (SFRA) (Forestry) [Water Resource Management Charge only] Raw Water Charges 5

6. Capping of Charges and Subsidies WRM ChargeWRI ChargeComments Domestic/ Industrial/ Mining/ Energy sector No Capping ApplicableIncreases < April PPI + 10% Until full cost recovery is reached Agricultural sector (established irrigation farmers) < 1.5 c/m3 Adjusted annually by April PPI (1.5 c/m3 based on 2007/08) O&M increases < 50% Depreciation < 1.5 c/m 3 Adjusted annually by April PPI from 2007/08 Until full cost recovery is reached Forestry sector R 10/ha plus April PPI (basis yr: 2002/3)NO Forestry Applicable Approximately Averaging 1.5 c/m3 6 Capping – tariffs being limited to a certain amount. This generally revenue lost to the Department, but currently being augmented by NT.

7. Budget planning process Cost of activities are based on zero based budgeting and economic fundamentals (economic indicators that measure changes in price levels, such as Consumer Price Index, Producer Price Index etc.) Price setting process Demand (quantity of water required), registered volumes, system yield, costs and asset values Consultation process Regional; Sector Specific and National consultation meetings with all stakeholders Raw Water Use Price Setting Process 7

8. Budget Planning & Price Setting 8

9. Water Resource Infrastructure Charge Determination Depreciation component: –Asset value as determined in 2008 –Depreciate on straight line over useful life as per table –Examples: Dams – 10% over 45y Steel Pipes - 75% over 30y –Asset values will annually be indexed by PPI until formal revaluation (+ every 10 y) 9 Return on assets: – 4% on completion cost – new infrastructure, or – 4% on depreciated replacement cost (asset value as determined in 2000) – Asset values will annually be inflated by PPI until formal revaluation (+ every 10 y) – Not applicable to existing State irrigation schemes Operation and maintenance charge: - Direct and indirect costs – (classified on the basis of whether they can be attributed to the production / provision of water) - Scheme by scheme basis – (related to specific infrastructure only) FOR REFURBISHMENT FOR NEW INFRASTRUCTURE & BETTERMENTS

10. Water Resource Management Charge Determination 10 Unit Cost Costs of WRM activities in WMA Registered volumes/waste load in WMA Costs of WRM activities will be divided between abstraction and waste discharged *WRM = Water Resource Management *WMA = Water Management Area * Division based on expenditure costs incurred for activities that are required to protect, allocate, conserve, manage and control the water resources and manage water quality located within the Water Management Areas.

11. WATER MANAMENT AREAS FUNTIONS As per 2007 Approved Raw Water Policy 1Catchment management strategy 2Resource directed measures 3Water use authorisation 4Control and enforcement of water use 5Disaster management 6Water resources management programmes 7Water related institutional development 8Water weed control 9Terrestrial Invasive Alien Plant (IAP) (see 6.5.7) 10Geo-hydrology and hydrology (see 6.3.5) 11Administration & Overheads 11

12. CONSULTATION PROCESS The consultation sessions took place as follows: – Regional level from the 06 July to 20 August 2015 Purpose to solicit buy in from the stakeholders and report back on the status of the previous cycle activities and projects – Sector specific consultation held on the 27 August 2015 Purpose: to have sectoral approach and have key issues addressed holistically – National consultation took place on the 10 th September 2015 Purpose: to inform the users about the recommended tariffs prior to approval and seek final inputs or comments 12

13. WATER RESOURCE MANAGEMENT CHARGE 2016/17 DESCRIPTIONAPPROVED 2015/16 FY13% INCREASE RECOMMENDATION # 9 CMA D & I 2016/17 IRR 2016/17 SFRA 2016/17 D & I 2016/17 IRR 2016/17 SFRA 2016/17 c/m3 %% 1Limpopo3.802.441.31 4.292.511.48 2Olifants3.902.221.44 4.412.291.63 3Inkomati1.891.480.80 2.141.520.87 4 Pongola- Mzimkulu 1.691.480.80 1.911.520.90 5Vaal2.501.451.27 2.501.491.44 6Orange0.990.53- 1.110.60- 7 Mzimvubu- Tsitsikama 1.96 1.01 2.212.021.14 8Breede-Gouritz3.951.910.78 4.461.970.88 9Berg-Olifants3.851.941.28 4.351.991.44 Tariff increase limited to 13% 13

14. WATER RESOURCE DEVELOPMENT AND USE OF WATERWORKS Water Resource Infrastructure Charges: – Domestic & Industrial: Annual increase is limited to PPI (April 3%) plus 10% up until the target for development charge is achieved on state GWS Tariffs increase range from: 0% to 13.% (as per pricing strategy) – Irrigation charges:- Depreciation charge capped at 1.5c/m3 plus PPI Operation and maintenance cost increases limited to 50% p.a. Tariffs increase range from: 0% to 50% (as per pricing strategy) Recommendation: Maximum 13% 14

15. CAPITAL UNIT CHARGE INCREASE 15 *CUC = Capital Unit Charge *BO&R = Bulk Operating and Royalties Charge

16. ACID MINE DRAINAGE Government has taken into consideration the effect of the AMD and has developed a cost apportionment ratio of 67:33 that takes into consideration the capital infrastructure cost and the operation and maintenance. The government and the mining sector will be funding 67% of the cost, and 33% collected from Vaal River System users through the tariff. 16

17. PRESENTATION TITLE Presented by: Name Surname Directorate Date STATUS OF BULK WATER TARIFFS PROCESSES FOR 2016/2017

18. BACKGROUND: legislative Mandate Section 28 (WSA 108 of 1997)  WBs are bulk water providers to other water entities and are established by the Minister for Water & Sanitation. Section 29 (WSA 108 of 1997)  The primary activity of a WB is to provide water services to other water services institutions within its area of operations. Section 30 (WSA 108 of 1997)  A WB may perform an activity other than its primary activity, only if it is not likely to limit the WB’s capacity to perform its primary activity. Section 32 (a) (WSA 108 of 1997)  Provide for the WB to give priority to it’s primary activity Section 10 of the Water Services Act.  Provides for Norms and Standards for tariff setting. 18

19. BACKGROUND CONT........ Section 42 of the MFMA .......any national or provincial organ of state which supplies water to a municipality or municipal entity for the purpose of providing a municipal service must prepare a proposal or a submission for any amendment of their pricing structure....  the WB must request NT and SALGA to provide written comments on the proposed amendments within stipulated dates in terms of MFMA Circular 23.  either WSA or SALGA or both must make written submissions on the bases of the proposed tariffs,  tabling of the amended pricing structure in parliament by the Executive Authority (Minister of W&S. S42(4) on OR before 15 March every year.(...effective July same year.) 19

20. BACKGROUND CONT........ Circular 23 OF MFMA  WB has a duty to submit tariff proposals to amend bulk water tariff every year and to adhere to timelines in terms of the circular and s42(5) of MFMA  WB must consult extensively and in a comprehensive manner on any proposed changes in the tariffs that may impact on the municipal services.(esp. Water Services Authorities) WB’s tariff guidelines  Cost drivers, pro forma statement, financial models must be prepared  Proposal package must be submitted to the Minister for approval and tabling to parliament 20

21. PROCESS FOLLOWED DWS engaged on 2015/16 tariffs feedback sessions with all 9 WBs to prepare for 2016/17 WBs’ tariff cycle – August 2015 DWS conducted pre-tariff consultation sessions with WBs 9 just before they consult any other stakeholder- Sept/Oct 2015 WBs consult with municipalities on the proposed 2016/17 tariffs – Oct/Nov 2015 with DWS observing. Tariff proposals packages are sent to SALGA and National Treasury for their inputs and comments- Dec 2015 All WBs submitted proposals to the Minister by 25 January (in terms of the Circular 23) 21

22. The complete proposal comprises of-: -Covering letter with proposed tariffs to DWS -Presentation to support & motivation for the proposal (as presented to stakeholders, consultation tool) -Notices of consultation with customers (communication with stakeholders & invitations) -Actual consultations with customers (Confirmation & evidence of consultative sessions having occurred) -Comments from customers and the WB’s response (Only written comments) -Comments from National Treasury (NT) & SALGA and the WB’s response to the comments. (written as evidence) -Cost break down schedule, projections (assumptions) as required by the WB tariff guidelines) PROCESS FOLLOWED..... 22

23.  Makes a final analysis on the proposal and recommends the final tariffs for the Minister to table in Parliament,  Strives to maintain a balance between ‘sustainability’ of WBs and ‘affordability’ of the tariffs,  Resolve disputes and recommend a reasonable tariff between WBs and the customer on the tariff. ( a rational consumer will always buy into the lowest possible price whereas the supplier will bid for the highest possible price until the market settles the price where there is competition, without then the regulator determines the final price)  monitors compliance with provisions set for bulk tariff determination process both in the Municipal Financial Management Act and Water Board guidelines ROLE OF THE CHIEF DIRECTORATE: ECONOMIC REGULATION (Internal) 23

24. The country faces “drought” which disadvantages everyone  shortage of water inflates the prices of food,  shortage of water does not reduce the fixed costs of purification- water gets expensive, The current economic outlook in the country  Possible revision of CPI forecast figures beyond the projected and the SARB targets,  The weaker SA Rand against the dollar – possible underestimation of chemicals for water treatment,  Increased Repo rate with most WBs engaged in capital projects through borrowings,  Tight budgets and cost-containment in the public institutions ECONOMIC OUTLOOK 24

25. 2016/17 PROPOSED TARIFFS Water BoardCustomer16/17 proposed tariff(Average) % increase OVERBERG HESSEQUAR8.3421.34% TWKR7.4621.62% AGRICULTURALR15.7330.96% AMATOLA AMATHOLER9.0010% BUFFALO CITYR8.3110% NDLAMBER10.5410% UMGENIALL WSAsR5.9911.1% (-0.5%) SIZAR7.7611.1% (-0.5%) RAND WATERALL WSAsR7.5611.9% BUSHBUCKRIDGER5.307% MLHATHUZE R3.746.5% BLOEMALL WSAsR6.8615% LEPELLEALL WSAsR5.158.5 % (-0.5%) 25

26. 2016/17 PORPOSED TARIFFS Water BoardCustomer16/17 proposed tariff(Average) Average % increase MAGALIES VALKOPR5.2811.63% WALMANADTHALR8.3812.33% KLIPDRIFTR6.3312.08% CULLINANR6.029.65% SEDIBENG NAMAKWAR14.947.4% PELLA DRIFTR4.039.5% VAAL GAMAGARAR9.447.9% NORTH WESTR5.987.5% FREE STATER9.325.91% 26

27. 2016/17 RECOMMEDNDED TARIFFS Water BoardCustomer16/17 Recommended (Average) % increase OVERBERG HESSEQUA R8.2419.94% TWK R7.3720.23% AGRICULTURAL R14.7722.98% AMATOLA AMATHOLER9.0010% BUFFALO CITYR8.3110% NDLAMBER10.5410% UMGENIALL WSAsR5.8210.7% SIZAR7.1111% RAND WATERALL WSAsR7.5611.9% BUSHBUCKRIDGER5.307% MLHATHUZE R3.746.5% BLOEMALL WSAsR6.8615% LEPELLEALL WSAsR5.478.0% 27

28. 2016/17 RECOMMENDED TARIFFS Water BoardCustomer16/17 proposed tariff(Average) Average % increase MAGALIES VALKOPR5.2811.63% WALLMANSTALR8.3812.33% KLIPDRIFTR6.3312.08% CULLINANR6.029.65% SEDIBENG NAMAKWAR14.947.4% PELLA DRIFTR4.039.5% VAAL GAMAGARAR9.447.9% NORTH WESTR5.987.5% FREE STATER9.325.91% 28

29. AMATOLA WATER The WB serves WSAs in the EC province and supplies smaller volumes of both raw and treated water (high fixed costs- higher tariffs.) WB currently not making surplus in their statements, Have huge capital expenses not reflected in their tariff proposal and the sources of funding thereof. The WB has submitted insufficient information to reflect on their position a concern also raised by National Treasury. The tariff are recommended for approval as proposed for both raw water and treated water. 2016/17 Recommended tariffs 29

30. 2016/17 Recommended tariffs BLOEM WATER The WB serves WSAs in the Free State province and supply both raw and treated water BW has multiple planned CAPEX programme of over R800m over next 5 years Tariff still under recovery, shortfalls to be funded from reserves Growing Kopanong debt of R118 mil will put pressure on liquidity, the WB’s account receivables is currently sitting on R184 million Extreme drought could mean up to a further approved tariff that will be added for every 10% water restriction implemented Tariff recommended for approval as proposed at 15% in view of the revenue that was lost due to water restrictions on grounds of drought during 2015/2016 FY. Raw water tariff at a rate of 15% as well to R5.04. Included is also a R0.75 and R0.53 increase on the tariffs for treated and raw water respectively whenever there is 10% restrictions implemented.

31. 2016/17 Recommended tariffs RAND WATER The WB serves Gauteng municipalities and Mpumalanga. (2 Metros- viable areas), North West and Free State Facing huge capital expenditure on upgrades and replacements of infrastructure. Upgrading Bushbuckridge to bring it to standard with the rest of Rand water services. Good revenue collection and well positioned in their reserves. Rand Water has to decide together with customers how they deal with R0.33 that was billed for AMD whilst the DWS has not billed RW for such. Has provided for debt minimisation for Bushbuckridge while the customer reduces the historical debt, RW proposed two sets of tariffs for Bushbuckridge LM, (1 for the first 3.6 mil Kl and 2 for demand beyond 3.6 mil Kl) which are R4.22 and R5.31. The tariff is recommended for approval as proposed for both Bushbuckridge and the other customers.

32. LEPELLE NORTHERN WATER Owns only 4 schemes out of the 15 they operate, Most schemes cannot recover costs of operations yet overall making positive surplus, Scheme based tariffs yet signs of cross subsidisation among the schemes, Serving mostly rural municipalities who owe the WBs- poor / indigent communities and not paying for the water services Major capital projects to be undertaken with funding sources not identified, The proposed tariff increase is recommended for approval with reduction by 0.5% to 8% for selected schemes that have high tariffs proposed. 2016/17 Recommended tariffs 32

33. UMGENI The WB serves WSAs in the KZN province, 1 Metro, Msunduzi, Harry Gwala, Ilembe, Ugu, uMgungundlovu and Sembcorp Urban municipalities cross-subsidise the poor municipalities by huge amounts to enable them afford the tariffs. The Umgeni tariff is projected over a long time which leaves room to reach consensus with customers well before the formal proposal of the tariffs, Have CAPEX based on grants that are not yet approved, Mkomazi scheme levy that has been added into the tariff have increased the tariff beyond the normal expected rate, The pending litigation between the WB & Siza over the 2015/16 tariff and non acceptance of the 2016/17 proposal of Mkomazi charge, However UW makes sufficient surplus and major contribution into the reserves. The tariff has thus been reduced by 0.5% at cost to 9% excluding Capital Unit Charge and the Mkomazi levy as mitigation for the unaffordable tariff to WSAs and Siza and is recommended for approval. 2016/17 Recommended tariffs 33

34. Conditions of Tariff Reduction The adjustment of Tariff increase from 9.5% to 9% is conditional on the following:- – Confirmation of RBIG funding for the rural development projects already being implemented, viz: Greater Mpofana (Phase 1 to 4): R962 million Maphumulo (Phase 1 to 4): R294 million Mshwathi (Phase 1 to 5): R1410 million – Approval of Drought levy for implementation on the 01 st of July 2016 – Approval of an additional 2% on the bulk water tariff increase from 01st July 2016 to be set aside in a stabilisation fund and managed on balance sheet by UW to assist in smoothing in the impact of the Mkomazi BWSS (bulk component only which is estimated at R4.3bn).

35. DROUGHT LEVY IN DETAIL The impact of reduced volumes produced and sold on operating cashflow is highly significant to the financial sustainability of UW. The levy was therefore modelled on the potential impact on the operating cashflow required to service debt and operating expenditure.

36. MHLATHUZE The WB serves only one WSA Mhlathuze and industries in the North KZN, Raw water prices, which is the biggest cost factor in WBs’ business is considered affordable in the Mhlathuze area, The financials are in healthy state with good cash flows. The WB have good relationship with customers, The 2016/2017 tariff has thus been recommended for approval as proposed together with a drought tariff proposed. However the implementation of the drought tariff will require further clarification. 2016/17 Recommended tariffs 36

37. MAGALIES The WB serves WSAs in North West and Waterberg LMs in Limpopo, One water board with scheme based tariffs and differentiated tariff levied. The WB has major capital expenditure that is driving the tariffs for certain schemes. The rates are high, but the WB does not have alternative funding from elsewhere, but own source. The 2016/2017 tariff is recommended for approval proposed, 2016/17 Recommended tariffs 37

38. SEDIBENG It is the largest WB by area of coverage across 3 provinces, Free State, North West and Northern Cape’s isolated areas, One WB which is owed over R1billion by WSAs within its supply, Operating large infrastructure however isolated in the 3 provinces with long pipelines. Employs a scheme based model of tariff determination in their various regions dominated by rural residence. Sedibeng’s tariffs are highly uneven across the regions which requires a review of their tariff model in order to relieve off huge burdens from poorer WSAs, The Northern Cape area is characterised by small volumes versus the huge capital infrastructure outlay and high electricity charges due to long distance pumping. Have big capital projects (Vaal Gamagara) that requires huge funding- future tariffs may require reforms, however the use of their R2 bill on reserves is not disclosed. On the basis of the available information the 2016/2017 tariff are just break-even tariffs and thus recommended for approval as proposed although the tariff to Namakwa is a concern. 2016/17 Recommended tariffs 38

39. WB area of coverage includes Hessequa LM, Theewaterskloof LM and Agricultural customers in the Overberg region of Western Cape Province. One of the small WBs by volumes of water supplied – higher fixed costs that are expensive when passed on to consumers as tariffs. Unique tariff structure which is designed to ensure that all the costs are recovered, but makes it expensive – to be reviewed, Improved quality of information submitted for the 2016/2017 proposal. Water sitting with vacancies on key positions for more than 2 years, provisions for the vacancies in the budget increases the tariffs further high. They had a cut in their tariffs for 2015/2016 due to insufficient and unclear information supplied- it was a set-back for the WB. The WB proposes a 21.3%, 21.62% and 30.96% for Hessequa, Theewaterskloof and Agricultural customers respectively- none of the stakeholders is in support of the proposed tariff. A drought tariff has also been proposed to kick-in when dam levels are below 40%, The proposed tariff has been adjusted to 19.94%, 20.23% and 22.98% for the 3 customers due to the concerns over affordability and recommended for approval with the adjustments. 2016/17 Recommended tariffs: (OVERBERG ) 39

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41. The tariffs for all the Water Boards are generally increasing over the 4 year period 2013 - 2016. The tariff increase for the period is between 11% and 35% with Lepelle; Bloem; Umgeni; Magalies and Rand having highest increases above 20%, At the retail layer of the value chain WSAs charges are about 200% of the Water Board charges in general which is higher in view of them receiving readily purified water. Some WSAs are heavily indebted to the Water boards which risks the escalation of the debts should the bulk tariff increase rates not properly managed. The billions of rands owed to municipalities is also evidence of the socio economic impact the increasing tariffs may have on the domestic sector as the last line of consumption, the industrial treated water consumers will also pass the burden of the higher tariff into the price of food they produce. The analysis done attempt to balance the sustainability of entities and affordability of the tariffs to minimise the social impact of the tariffs. 2016/17 Recommended tariffs 41

42. THANK YOU