PRESENTATION TO THE

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PRESENTATION TO THE PORTFOLIO COMMITTEE ON
WATER AND ENVIRONMENTAL AFFAIRS 5 MAY 2010
Presenters Mthobeli Kolisa Executive Director
Municipal Infrastructure Services William Moraka
Specialist Water Services
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BRIEF

• Challenges faced by local government structures
  in undertaking their water and environmental
  functions
• The role of SALGA to represent, promote and
  protect the interests of local government in the
  water and environmental sectors
• Commentary on the proposed tariff increases of
  the Water Boards and its impact and implications
  on local government structures

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BRIEF
Challenges faced by local government structures
in undertaking their water and environmental
functions
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SOME KEY ISSUES FROM PRESENTATIONS

• Debt payment by municipalities
• Performance of municipalities responsible for
  water services
• Role of water boards vis-à-vis municipalities

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Context

• Municipal challenges in water services delivery
  are both
• Subjective within the control of municipalities
  and sometimes caused by municipalities
  (councils, councilors and managers)
• Objective structural and policy challenges
  beyond the control of municipalities

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Context

• Examples of subjective challenges
• Indecisiveness and/ or bad decisions e.g. long
  term decisions regarding institutional
  arrangements for providing services
• Cases of appointment of incompetent service
  providers
• Cases of corruption and nepotism
• Not all municipalities, councils, councilors and
  managers
• There are also subjective challenges of the
  leading/ sector regulating Department resulting
  in a situation where legislation has become a
  list of suggestions with no consequences for
  non-compliance

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Context

• Examples of objective challenges structural
  problems beyond the control of municipalities
• Municipalities which are not viable as WSAs
  assigned the water services function no
  mechanism of reassessing viability and
  reassigning the function
• Infrastructure maintenance backlogs resulting
  from prioritizing the extension of services to
  the historically unserved
• Inadequate financial provision for free basic
  services to the poor - providing for fewer at
  less than the cost of providing the service to a
  household
• Institutional design inadequacies (role of WB vs
  Municipalities)

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Representing, promoting and protect the interests
of local government
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Context

• Bulk services and related tariffs are a key
  factor to the delivery of water services
• Majority of WSA already operate their water
  distribution businesses at a deficit or at
  break-even
• The current environment in which municipalities
  operate is not favourable to big price increases
• Recognize the fact that the Water Boards are a
  critical component of the water supply value
  chain (they must be viable!)
• Had to undertake a thorough analysis of the
  proposed WB tariffs in order to effectively
  represent LG

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Context

• By the 9th of December 2009, SALGA had received
  13 bulk water tariff increases proposals for the
  financial year 2010/2011 - none from Namakwa
• SALGA scrutinised each proposal and gave comments
  to the water boards by the 25 of January 2010
• Saw a need to also look at the consolidated
  picture of the water board sector -

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Comment on proposed tariffs
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APPROVED TARIFFS
Name Tariff in 2008/09 R/kl increase Tariff in 2009/10 R/kl increase Tariff in 2010/11 R/kl
Albany Coast R 3.85 4.0 R 4.01 107.00 R 8.30
Amatola R4.73 (Amatole DM) R3.91 (Buffalo City) 5 7 R4.97 (Amatole DM) R4.18 (Buffalo City) 8. 8.8 R5.37 (Amatole DM) R4.55 (Buffalo City)
Bloem R 3.24 10.0 R 3.56 10.00 R 3.92
Botshelo R 2.66 18.0 R 3.14 16.00 R 3.64
Bushbuckridge R 2.94 3.7 R 3.07 12.46 R 3.45
LNW R 3.05 3.8 R 3.17 6.50 R 3.38
Magalies R 2.36 7.0 R 2.53 11 - 25 R 2.81
Mhlathuze R 1.29 14.0 R 1.47 18.00 R 1.73
Namakwa R 3.68 73.0 R 6.37 43.00 R 9.11
Overberg R 2.88 8.0 R 3.11 9.95 R 3.42
Pelladrift R 1.70 11.8 R 1.90 20.00 R 2.28
Rand R 3.21 8.3 R 3.48 14.10 R 3.97
Sedibeng R 4.98 5.0 R 5.23 12.00 R 5.86
Umgeni R3.07 (Others) R3.01 (eThekwini) 6.5 6.6 R3.27 (Others) R3.21 (eThekwini) 6.20 R 3.47
AVARAGE 14.23 10.53 ABOVE PPI!
Source DWA
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Comment on proposed tariffs
Alignment between the proposed bulk water tariff
increases and price adjustments anticipated in
Business Plans
Average tariff Increases of Water Boards, as
extracted from their Business Plans, and actual
tariffs increases proposed by water boards
why?
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Comment on proposed tariffs
Cost of raw water supplied by the Department

• Department has obtained approval for price
  increases which are significantly higher than
  those anticipated in BPs of WB
• Recommended
• Review of the raw water tariff applied by the
  Department, in particular the Raw Water Pricing
  Policy
• Phasing of raw water increases, in particular the
  portion of increases which relate to accounting
  adjustments to the value of fixed assets
• Revision of proposed pricing for 2010/11
  downwards, to PPI plus 3 and therefore phase in
  increases to meet the required return on assets
  over a longer period

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Comment on proposed tariffs
Increase in capital expenditure and decline in
asset productivity

• The Water Board Sector is planning capital
  expenditure of about 98,7 of the current fixed
  asset value
• During this period, Water Volume Sales will
  increase by only 15,2
• Planning a decline in the productivity of assets
  in the future? - appropriateness of this apparent
  expansionary policy is questionable especially
  given the relatively small growth in Water Supply
  Volumes.
• Recommended
• Scrutiny of the underlying assumptions informing
  this apparent expansionary policy especially in
  as far as it will result in an apparent decline
  in the productivity of assets

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Comment on proposed tariffs
Increase in the levels of debt of Water Boards

• The investment in fixed assets is, according to
  the BPs, to be financed through increased debt
  and no plans are made to receive further
  capitalisation or equity injection from the
  Shareholder.
• This will result in severe increases in interest
  costs and will place severe pressure on many
  Water Boards to service debt repayments going
  forward. Both of these factors will place upward
  pressure on Bulk Water Tariffs.
• Recommended
• Review the funding models of the Water Boards
  especially their apparent overdependence on debt
  financing and how this impacts on Bulk Water
  Tariffs

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Comment on proposed tariffs
The return on capital of the Water Boards
Return on assets (NP/Total Assets) Return on assets (NP/Total Assets) Return on assets (NP/Total Assets) Return on assets (NP/Total Assets)
Water Board 2009 Water Board 2009
Bloem 0.24 Lepelle Northern 8.29
Amatola 1.23 Rand 8.45
Mhlathuze 1.23 Overberg 9.50
Magalies 1.64 Pelladrift 9.50
Botshelo 2.08 Umgeni 12.02
Sedibeng 4.34 Bushbuckridge 23.50
Albany Coast 5.10
Sector 7.72
PPI (Feb 2009) 7.40 CPI (Feb 2009) 6.90
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Comment on proposed tariffs
The return on capital of the Water Boards

• It is necessary for the WBs to generate a return
  on assets in order to maintain the economic value
  of the assets of the sector and ensure that the
  assets can be replaced and enhanced to meet
  future demand requirements
• However, in some cases this seems excessive,
  indicating that the tariffs charged are too high,
  and in other cases the it seems low affecting
  both its future sustainability and ability to
  grow to meet evolving needs
• Recommended that WB reflecting a RoA
• greater than PPI provide a motivation for the
  high surplus creating tariffs or the proposed
  tariff increase be reduced to a level that will
  result in return on assets that is equal to PPI
• less than PPI to provide additional information
  that will demonstrate that this will not
  compromise their sustainability

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Comment on proposed tariffs
Optimisation of operating expenditures

• Collectively planning to increase operating
  expenses by 79,75 in the period 2010/11 to
  2013/14 against a 15.2 increase in Water
  Volume Sales
• For 2009/10, the Water Board Sector projected
  above PPI sector average increases in operating
  expenses per unit (from R2,92 per kilolitre to
  R3,23 per kilolitre - 10,43)
• Suggests that the WBs are operating less
  efficiently over time, and are passing this
  reduced efficiency to the WSA
• Consequently water tariffs will rise by more
  than 10 above PPI
• Particularly concerning is that even Rand Water
  which, given its large size, should be in a
  position to secure increases at or near PPI,
  through economies of scale efficiencies is
  projecting an increase of 19,83.

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Comment on proposed tariffs
Optimisation of operating expenditures

• Staff costs a significant component increasing by
  24 from 2008/9 to 2009/10, (no more than 10 is
  reasonably accounted for by salary increases)
• Chemicals increase is partly due to increased
  volumes, partly due to ongoing deterioration of
  raw water
• The energy costs are significant
• Recommended that the regulator carefully
  scrutinise the operating expenses of water boards
  before making decisions on the proposed tariffs.

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Comment on proposed tariffs
Raw water quality and its impact on cost and
sustainability of water supply

• Water Boards are reporting decline in Raw Water
  quality
• This is ascribed to pollution and contamination
  of the river systems by industrial, agricultural,
  and by human waste entering the rivers
• Leads to expensive disinfection and purification
  measures increasing the cost of Potable Water to
  the Municipalities
• In the long run these resources will be polluted
  to a point of being unusable.
• Concerned and note that the mandate of the
  Department includes protecting the National
  Resource from such degradation
• LG will play its part

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Overall recommendations

• Given the amount of work proposed and
  appreciative of the time constraints for decision
  making wrt proposed tariffs SALGA recommended
  that
• the a PPI plus 3 be allowed for both raw water
  and bulk potable water increases for DWA and all
  water boards that have requested increase that
  are above this level
• The scrutiny proposed in this submission be
  carried out for each water board during the
  2010/11 financial year in order to determine
  appropriate increases for specific water boards
  in the future.
• A pricing policy for the whole water services
  value chain be completed during the 2010/11
  financial year
• The Minster moves speedily to establish an
  institutional separation between the water boards
  shareholder role and the water sector regulator
  role which are currently both played by DWA
  making the Department both a referee and a player
  at the same time

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SALGA priority interventions in 2010/11

• Facilitating implementation of appropriate long
  term institutional mechanisms for sustainable
  service delivery
• Clarifying the role of LG in Integrated Water
  Resource Management and facilitating effective
  participation of municipalities in CMA's
• Guidance wrt improving local regulation of
  service provision
• Facilitating identification and implementation of
  priority interventions to improve water and waste
  water quality management by municipalities
• Guide towards a transparent and appropriate
  water tariff determination methodologies

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• Thank you