1. Presented by Director General: Sifiso Mkhize
BRIEFING BY THE DEPARTMENT OF WATER AND SANITATION TOWARDS THE ESTABLISHMENT OF AN INDEPENDENT ECONOMIC REGULATOR
Presented by Director General: Sifiso Mkhize
8 November 2017
PRESENTATION TITLE
Presented by:
Name Surname
Directorate
Date

2. PRESENTATION OUTLINE BACKGROUND PROBLEM STATEMENT STATUS QUO
A CASE FOR CHANGE
AN EFFECTIVE ECONOMIC REGULATOR
GOVERNANCE
PROPOSED ORGANOGRAM
ESTIMATED BUDGET
SOURCES OF REVENUE
TRANSITIONAL PLAN
PROPOSED CONSULTATION PLAN
CONCLUSION 2

3. 1. BACKGROUND
National regulatory function lies with the Minister = the Department is responsible for policy-making, support and the regulation of the sector.
The implementation of these functions by the Department created a conflict of interest, which affects the decision-making process.
The separation of powers and functions of the Department has been deemed necessary for the improvements in the sector, (promote improved sector performance).
The Department instituted a project to investigate the most appropriate institutional model for effective economic regulator within the sector.
The decision was made to have an internal component in 2014 and the Chief Directorate: Economic and Social Regulation was established

4. 2. PROBLEM STATEMENT (1/2)
There is a need for an independent Economic Regulator within the water sector to effectively address the following challenges:
Insufficient investment in maintenance, refurbishment and replacement of infrastructure.
Poor management of services – interrupted supply, water quality, etc
High levels of unaccounted for water – theft, wastage, unbilled.
Areas still unserved, particularly in sanitation.
Weak tariff setting and billing.
Value for money in use of grants, (e.g. MIG) and Equitable Share.
High levels of debt within the sector.

5. PROBLEM STATEMENT… (2/2)
These challenges leads to:
unsustainable services;
non‐viable institutions;
degrading infrastructure, and
water users do not get the services they are entitled to and paying for, as according to their human rights.

6. 3. STATUS QUO (1/2) 1. Conflict of interest
Dual mandate: support and regulate = affects the decision-making.
A referee and a player for raw water charges - infrastructure developer and operator, as well as the management body that spends the revenue.
2. Legislative limitation
No legal provision for the establishment of the regulator as one of the institutions of the department.
3. Water Services Authorities as regulators
Self regulation for WSAs as bulk service providers
Municipalities only require and accept support from the national government department.
4. Under capacitated regulated institutions
Lack of capacity in both human resources and skills or experience within the sector.

7. STATUS QUO…(2/2) 5. Skills for regulatory function
Employment processes unable to secure personnel with the required skills and expertise.
6. In effective economic regulatory function within the Department
Oversight & Regulatory functions are within the same branch.
Regulator is not recognised as an authority with independent decision.
7. Implementation of debt management
There is no implementation of the punitive measures.
8. Strong policy framework for tariff development
Raw and bulk water tariff development – legislated process and tariff approval is by the Minister.
WSAs – Municipal Council mandated to approve the tariff for water services and adheres to the prescribed norms and standards.

8. 4. A CASE FOR CHANGE
The challenges experienced by the sector impede the promotion of effective, efficiency, financially viable and sustainable water resources and water services.
NDP - Regulation Commission proposal:
Government departments, Regulators and Utilities must improve their performance:
- Create investor certainty and encourage new investment.
- Ensure that the infrastructure is operated efficiently and tariffs
are set at appropriate levels.
Regulators can be optimistic to smooth prices and avoid economic shocks.
In the long term, users must pay the bulk of the costs for economic infrastructure, with due protection for poor households.
The role of government and the fiscus is to provide the requisite guarantees so that the costs can be amortised (remunerated/paid) over time.

9. 5. AN EFFECTIVE ECONOMIC REGULATOR
REGULATORY ATTRIBUTES
INDEPENDENT
Structural independence
Financial independence
Create a balance in the representation of the interests of government, institutions (service providers) and users
Separate from the central governmental structure
Have control and responsible for personnel policies with earmarked funding to promote the necessary expertise
Funding sources and budgeting processes of regulatory authorities can have an important impact on their independence, efficiency and cost of regulation; the key is that funding should be free from political and private interest influence
CREDIBLE
Act in a neutral or unbiased and non-discriminative manner towards its customers, understands the business that is regulated, through a proficient and effective process with measurable outcomes.
TRANSPARENCY AND ACCOUNTABILITY
Open regulatory process and decisions that allows access and stakeholder participation to enhance accountability
COMPETENT
Makes fair and justifiable recommendations, uses fair and acceptable procedures and operates in a predictable manner and make impartial decisions
AUTHORITY THROUGHOUT THE WATER VALUE CHAIN
Have a legal authority throughout the water value chain

10. 5.1 ECONOMIC REGULATORY FUNCTIONS
REGULATORY   SCOPE
REGULATORY  FUNCTIONS
Water resource management charges
Water resource development charge
Waste discharge charge
Bulk water tariffs and  service standards
Retail water tariffs and  service standards
Sanitation Charges and service standards
Bulk waste water charges and service standards
Technical Regulation
Set rules for charges determination
Approve charges
Dispute resolution
Monitor cost implications of compliance with service quality standards
Customer protection
Monitor efficiency and service ability of supply.
Service coverage
Asset management and design standards

11. 5.2 POWERS ~ ECONOMIC REGULATOR
To collect information through compulsory process
Protecting the public interest, and improving transparency of information and accountability of the water service sector.
Review and publish regulatory performance/ benchmarking of water institutions
Be responsible for analysing the investment or the business plan for the institutions - publish performance monitoring processes and benchmarking.
Enforce and monitor compliance of water institutions
Apply enforcement strategies that achieve the best possible outcomes by achieving the highest possible levels of compliance, while keeping the costs and burden as low as possible.
Resolve disputes through mediation
Mediator and intervene in arising disputes between and customers.
Assess investment plans of the water institutions
Investment plans and the proposed sources for funding those investments (strategic asset management strategy)
Review and approve contract terms between water institutions
Promote fair terms and conditions of the contract and details of the service agreement
Assess tariff setting process and approve tariffs throughout the water value chain
Statutory powers in relation to tariff setting by reference to a particular methodology or criteria defined by law (assess the processes involved in setting prices)
Carry out investigation
Right to request information and make inspections thereof

12. 6. GOVERNANCE
The regulatory governance should allow an autonomous environment to the regulatory institution.
NDP (2030) RECOMMENDATION PROPOSAL:
“The quality of regulation, however, is not just about the regulator:
The state itself must have adequate capacity and capability to formulate effective policy framework, support the design, establishment, review and improvement of regulators – and to respond adequately to issues identified by capable regulators.
Improved regulatory performance is vital for national development. Capacity‐building remains a core challenge, requiring sustained training to improve leadership and technical capabilities”.

13. 6.1 Reporting protocol and Accountability
Role of the Minister of Water and Sanitation
Policy making;
Shareholder representation; and
Project development and operations
To set minimum levels of service
Role of the Accounting Authority
Setting strategic guidance and developing operational policy of the regulator;
Appointing the Managerial Staff
Monitoring performance and accountable for regulatory efficiency.

14. 7. PROPOSED ORGANOGRAM CEO
Water Value Chain Social & Economic Regulation
Regulatory Support Services
Internal Audit
Legal
Pricing and Tariffs
Corporate Services
Communications & Stakeholder Management
Finance & Admin
Infrastructure / Investment analysis
Information Technology
Human Relations
Regulatory Research Reform and knowledge management
Dispute Resolution / Client services
BOARD

15. 8. ESTIMATED ESTABLISHMENT BUDGET
Estimated Establishment costs
Year 1
Year 2
Year 3
Year 4
Year 5
R'000
Fixed Assets  -
 921
 277
 271
Computers and basic Office software
135
222
269
232
226
Printers and other office equipment 15 35 45
Furniture
185 -
505
IT Network installation
100
112
Institutional establishment
750
Enabling Legislation
500
Marketing & Communication strategy
1 050
Recruitment costs
1 036
1 157
1 478
1 589
1 762
Induction training
250
280
297
314
Legal fees (contracts, etc.)
Total
2 821
2 714
2 680
2 162
2 347
SOURCE: PERR REPORT (2013)

16. 9. SOURCES OF REVENUE
The National Treasury and the Department are expected to fund the establishment costs, with users paying the running costs in the form the Economic Regulator charge
The main source of revenue for an independent Economic Regulator will be the revenue received from the economic regulator charge once all the legal requirements are done.
It will cover the costs of operations with no profit element.

17. 10. TRANSITIONAL PLAN (1/2)
Adopt a progressive and incremental approach:
To facilitate the gradual introduction of the Economic Regulatory functions to the sector.
The business case provide an operational transitional plan, which consists of the functions and the timeframes towards a fully functional independent institution.

18. TRANSITIONAL PLAN (2/2) Current 2018/19 – 2019/20 Short term
(1-2 years)
2020/ /22
Medium term
(3-5 years)
2022/23 and beyond
Long term
(6 years and beyond)
Bulk & Raw water tariff reviews
Building capacity as internal regulator
Revisions of the Pricing Strategy and Norms & standards
Dispute Resolution framework
Regulatory Performance Measurement System
Provide regulatory inputs during the review of policies, legislation and strategies
Institutional transition to independent regulator (Business case development)
Developing pricing policies, regulation and guidelines
Amend National Water Act (development of the National Water Amendment Bill)
Draft ESR Act
Developing database and baseline information for WSAs
Developing the Economic Regulatory systems and processes
Service Quality Standards Regulatory Tool
Independent regulator functional
Develop framework for benchmarking Water Boards
Undertake socio-economic studies to understand the impact of tariffs
Regulate water tariff (water value chain)
Consumer surveys
Assessment of consumer charters
Contract regulation
Review and approve Water Board corporate plans
Develop the framework for incentive based regulation and punitive measures for enforcement
Service Quality Assessments
Dispute Resolution

19. 11. PROPOSED CONSULTATION PLAN
NO.
STAKEHOLDERS
TARGET AUDIENCE
TIMEFRAME 1.
Government Protocol
National Council of Provinces
8 November 2017 2.
Department Officials
(DWS)
National and Provincial Chief Directors
21 November 2017 3.
Sector Institutions
Water Management Institutions
Water Boards
South African Association of Water User Associations (SAAFWUA)
Water Resource Commission
Council of Scientific and Industrial Research
28 November 2017
South African Local Government Association (SALGA) and Water Services Authorities (WSA)
29 November 2017 4.
External
National Treasury
05 December 2017
Department of Public Services and Administration
06 December 2017
Office of the Presidency
07 December 2017
Chamber of Mines/ Commerce / Business Unity of South Africa (BUSA)
Organized Agriculture
21 February 2018
Government Departments
23 February 2018
Civil Society
26 February 2018 5.
Administrative Processes/ Government Protocol
Economic and Social Cluster
February to March 2018
Portfolio Committee
Cabinet

20. 12. CONCLUSION
The sector is in need of an effective economic regulation, which can be achieved through the establishment of an independent institution.
To promote the NDP (2030) water sector vision:
All South Africans must have affordable access to sufficient safe water and hygienic sanitation to live healthy and dignified lives by 2030

21. Thank you