1. FINANCIAL ARRANGEMENTS THE KZN CMA FINANCIAL ARRANGEMENTS TASK TEAM June 13

2. Establish well managed, financially sustainable CMAs In supporting this implementation it is critical to consider the financial viability of the CMAs, the policy assumptions upon which this is based, and the financial implications for both the fiscus and water users Purpose of the Financial Analysis and Policy Considerations Document

3. – Consumer tariffs relate to recovery of the full quantified financial cost of delivering an exclusive service, such as water supplied through infrastructure –development and operating costs – User charges apply to the additional direct operational costs incurred on behalf of a specific user The message is: – user charges should be related to the additional cost of management for the direct benefit of water users, while the fixed costs of the CMA to ensure water resources management in the public interest should be borne by the fiscus (general taxation), Financial Theory of User Charges

4. Presumption that because CMAs can raise water use charges, they should be self-sufficient and that their viability should be assessed according to whether water use charges will cover the total CMA operational costs. – This implies that CMA viability is entirely determined by affordability (or willingness-to-pay) issues for water users, primarily being farmers, municipalities and industries Financing of Regulatory Public Entities

5. There are two fundamental flaws with this approach: –If users are not willing to pay the full requirements for effective regulation of water resources, the public interest of water management is possibly jeopardised –It introduces a possible perverse incentive for the regulator to prioritise the allocation of water to those that are likely to pay, with the adverse impacts on equity and redress Both of these outcomes would counteract the political and social imperatives for decentralised equitable and sustainable water resources management. Financing of Regulatory Public Entities

6. Funding for CMAs will be from WRM charges and the fiscus Charges should be related to the cost of management for the direct benefit of users Costs to ensure water resource management in the public interest should be borne by the fiscus The concept of self-sufficient CMAs runs against international experience and public finance theory and will require fiscal support The pricing strategy prevents cross-subsidisation and shortfalls in affordability should be supported by the fiscus Principles for CMA funding

7. The recovery of relevant costs from water users is critical to promote local “ownership” of the CMA Charges should be collected from all water users that receive a benefit or require CMA management Affordability to all users must be considered CMAs have a mandate to regulate water resources in the public interest and to achieve government’s political, social and environmental objectives (in ways that may not directly benefit water users), so this mandate should be financially supported The costs associated with establishing or developing a new public entity should be supported by the fiscus, while DWA must transfer funding for the CMA before revenue collection is delegated Principles for CMA funding

8. Sources of Finance Section 84 of the National Water Act (NWA) gives the CMA full authority to raise funds for the purpose of exercising its powers and duties as an original function from the time of establishment. The Act details the possible sources of funding for the CMA as: – Parliamentary appropriation – Water use charges – Money obtained from any other lawful source, including: recreational concessions, license application fees, donor support and sponsorship, contractual payments, return on Investment, and in-kind contributions. FINANCIAL VIABILITY

9. The establishment of the CMA can be thought of occurring over three stages: Initial functions Consolidation and implementation functions Responsibility functions Initial functions The initial (proto-CMA) functions in first 2 years should be mainly funded through water use charges, except for some key institutional establishment processes and initial projects such as the catchment management strategy development. FINANCIAL VIABILITY

10. Financial Arrangements Sources of Finance Flow of capital Financial systems arrangements Financial analysis Public interest functions of a CMA accounts for about 35%

11. The primary source of finance for the CMA: water use charges Water uses as defined in the NWA: – Abstraction related uses- Section 21 (a), (b) and (d) of the NWA (1998) – Waste discharge related uses Section 21 (e), (f), (g) and (h) of the NWA (1998) – Non-consumptive uses Section 21 (c), (e), (i), (j) and (k) of the NWA (1998) CMA to levy charges for most of the water uses, after consultations with stakeholders. Charges in place: abstraction related uses; collected by DWA. Water Use Charges and the Pricing Strategy

12. Strategy has been developed for charging for recreational use, as a non-consumptive water use The Waste Discharge Charge will be piloted in three catchments Water uses that are not subject to charges under the Pricing Strategy. water use under Schedule 1 of the NWA, basic human needs (Reserve), ecological sustainability (Reserve), and  international obligations

13. Financial support National strategic interest large inter-basin transfer to the Vaal Water allocation reform and redress within the WMA affordability and equity Short to medium term until adequate cost recovery capping of water use charges ability-to-pay and willingness-to-pay Billing and collecting of water use charges institutional and systems issues require attention Cap on water use charges for agriculture (2c/kl plus CPI increase) and forestry (R10/ha plus CPI increase).  Where water resource management costs are in excess of this cap, that portion of the charge in excess be provided as a subsidy transfer from DWA.

14. 3 WMAs in KZN

15. Financial flow  Large users water users billed monthly and smaller users six-monthly  Kwa-Zulu Natal collection in the order of 75%.  Direct relationship between stakeholders, CMA will quickly improve upon these levels of collection.  CMA will require an establishment grant to cover all costs during the first 2 years,  Water use charge billing and collection is transferred from DWA to the CMA.  A 3 year budgetary cycle needs to be put in place for on-going operational support grants required by the CMA to make effective planning and execution possible. .

16. Organisational establishment costs include: Appointing a governing board and initially building its capacity (additional to the cost of the Board operations and administration covered in the CMA expenditure) as well as including change management processes; Setting up the CMA business and information management systems to enable its operation, including the first business plan and human resources strategies; Setting up the CMA in terms of appointing or transferring its initial staff complement and developing the first revised business plan; and Initial capital expenditure on communications, computers and obtaining/remodelling premises. Initial WRM costs include: Extending stakeholder participation, initial empowerment/capacity building of disadvantaged communities, and awareness creation around WRM and the CMA establishment; and Developing the first catchment management strategy for the entire WMA (an initial function of the CMA

17. Organisational establishment costs include: The outsourcing costs relate primarily to the implementation and consultancy projects typically – Water resources planning: including the CMS and other planning studies – Water use: including verification & validation and other licensing studies – Water management: including water conservation demand management implementation – Institutional cooperation: including convening catchment forums and WUA engagement – Information technology: developing water and corporate information systems – Corporate: developing corporate systems and financial management systems [

18. Financial analysis [ Calculated expenditure, differentiating salary, overheads, outsourcing and capital repayment costs, with recovery through a combination of water use charges and financial support CMA Expenditure Assumption: fully functional after 6 years with 6% inflation per annum. When the CMA is fully functional, expenditure will be approximately R 96 million per annum.

19. TOTAL Costs (‘000) 2 013 2 014 2 015 2 016 2 017 2 018 Governance Board R348R795R843R893R947R1 004 Office of the CEO StaffR2 713R2 877R2 878R2 879R2 880R2 881 Institutional cooperation Staff & OutsourcingR0R7 874R9 039R15 319R15 939R16 595 WR Planning Staff & OutsourcingR0R4 125R11 432R11 638R11 856R12 087 Water Use Staff & OutsourcingR0R8 480R9 379R14 000R14 559R24 342 Water Management Staff & OutsourcingR0R7 020R9 388R13 812R17 456R18 023 Corporate (admin & finance) Staff & Outsourcing & Overheads R3 537R5 033R6 522R9 695R12 091R13 934 Information Staff & OutsourcingR0R1 285R2 635R4 927R7 007R7 229 TOTAL COSTSR2 554R37 490R52 116R73 164R82 734R96 095 StaffR4 044R22 415R27 279R39 255R45 023R53 780 OutsourcingR0R11 640R20 009R26 291R28 980R32 100 OverheadsR2 554R3 436R4 828R7 619R8 731R10 215 Financial Arrangements

20. Projected revenue The CMA costs estimated above must be covered by user charges (under the pricing strategy) and/or by transfers from the fiscus (via DWA budgetary process), although other donor transfers for specific initiatives may be possible. The scenarios relate to: No financial support: funding only through water use charges, with different assumptions about users and billing recovery rates Charge-capping operating subsidy: DWA transfer for lost income related to the policy of capping water use charges to agriculture and forestry. Public-interest operating subsidy: DWA transfer for functions performed by the CMA that are in the public interest, rather than for direct water user benefit. In all of the scenarios, the CMA costs were fixed (at 2012/13 prices) as was the estimate of registered water use

21. Financial system arrangement: [  DWA will collect revenue and allocate funds within DWA to the CMA (from the Trading Account).  Consolidated invoice and centralised management of the system, are appropriate.  All risk is borne by DWA and this is supportive of a fledgling CMA.  Customer-oriented organization, credibility and legitimacy  At this stage of development of the CMA, the billing and collection cycle will be split between the CMA and DWA as follows:  The CMA will take over the customer relations responsibility, begin to set water use charges and undertake revenue collection.

22. Financial system arrangement: [  DWA will ensure that the CMA has access to key systems such as WARMS that assist the CMA with issues regarding registration of water use  The centralised DWA SAP system will be used for billing, debt management and financial accounting, with WRM charges submitted to DWA by the CMA.  Transfers from the trading account and the DWA main account will be made to the CMA account according to the arrangements agreed to in the CMA business plan.  These transfers will include funds generated through WRM charges, establishment support funds from DWA and any requisite operational support.

23. Projected revenue Water Use Name TOTALUrbanAgricultureForestry Pongola-UMzimkhulu 1917940813163 No financial support: Water use charges The registered water use for urban (domestic-industrial), agriculture (irrigation) and forestry (streamflow reduction activities) totals 1917 million m 3 / annum and excludes a transfer out of the WMA of 297 million m 3 / annum. Water use volumes per sector (million m 3 )

24. Projected revenue Full cost recovery through charges Year123456 Total CMA costs42023539960506743527878284547 WRM charges (c/kl) 0,221,853,163,884,114,41 While it is possible to have the CMA fully self-sufficient, it is an unlikely scenario due to a number of reasons.  The first is that the CMA would not be able to collect 100% of the charges, especially from year 1 and therefore requires an establishment subsidy to cover the first 2 years of costs.  Since current collection is between 40-80% of charges,  The second is that there is currently an agricultural cap of 2c/kl, and the current charges when the system stabilises is more than double the cap amount. Full cost recovery and user charges

25. Projected revenue What are the Implications of maintaining the WRM charge cap on agriculture and forestry, which is set at 2c/kl for the 2012/13 financial year (increasing by CPI). The analysis is based on including the establishment grant and water use charges for full cost recovery, except that there is a need for a charge-capping subsidy to be transferred to the CMA upon delegation of the charge collection function. This scenario partially addresses the affordability issue for agriculture and forestry, but would need to be implemented concurrently with subsidisation and/or management of under-recovery over the medium term. It also implies that municipal users pay over 100% higher charges that agriculture, which may lead to conflict between users with some negative impact for the CMA in the long- term. Establishment grant andAgricultural capping Year123456 WRM charges for all groups (except agriculture)(c/kl)003,514,314,574,90 WRM charge for agriculture (c/kl) 2222 Establishment grant (R'000)420235399 Agriculture grant (R '000)0014721225572506528328

26. Projected revenue. Public Interest Operating Subsidy Year123456 WRM charge (c/kl)0 02,282,802,973,19 Establishment grant (R'000) 420 235399 Public Benefit grant (R '000) 21177260232757429591 Public interest operating subsidy CMA functions from the fiscus The current situation where a part of the total DWA Regional Office proto-CMA costs are not allocated for recovery by WRM charges. The operating subsidy level of R29, 5 million per annum required at full functionality is similar to the subsidy required for the agricultural capping. The major difference is that the benefit is distributed among all water users, with a reduction in charges from 4,41c/kl to 3,19c/kl.

27. Financial support to the CMA.. Aim is to make the CMA financially self sufficient, the reality form of fiscal financial support The establishment grant is required to ensure that the CMA is set up The agriculture grant is a policy cap to ensure affordability in the agriculture and forestry sectors. The public benefit grant is an optional grant as it provides for a more equitable reduction in charges and covers charges which are in the public interest. Year123456 Establishment grant (R'000)4202353990000 Agriculture grant (R '000)0014721225572506528328 Public Benefit grant (R '000)0021177260232757429591 Total subsidy per annum (R'000)42023539935898485815263957919 WRM charge (c/kl)002,282,802,973,19 WRM charge for agriculture (c/kl)002222