1st Floor, Everite House, 20 De Korte St, Braamfontein, 2001

1
WATER RESEARCH COMMISSION

• Recent Findings
• Effective cost recovery Before municipal
  demarcation and the Free Basic Water Policy
• Effective cost recovery After demarcation and
  the introduction of the Free Basic Water Policy

Presented by Lansana Marah
Sigodi Marah Martin RESEARCH FOR
DEVELOPMENT
1st Floor, Everite House, 20 De Korte St,
Braamfontein, 2001 Tel [phone] Fax
27 11 403-5781 www.smmdc.com
2
SIGODI MARAH MARTIN Current Projects
Sigodi Marah Martin is conducting the following
research Water Research Commission Identifying
Examples of Successful Cost Recovery Approaches
in Low-income, Urban and Peri-urban Areas Cost
Recovery in a Changing Institutional and Policy
Environment Municipal Demarcation, the Free
Basic Water Policy, and Financially Sustainable
Service Delivery (in progress) Institutional and
Socio-economic Review of the Use/Application of
Electronic Prepaid Meter Technology in the
Provision of Water Supply Services to Urban and
Peri-urban Areas (WRC) (in progress)
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RESEARCH MOTIVATION

• With the advent of democracy all South Africans
  were granted constitutional rights to access
  basic social and economic services
• Government expressed this commitment to these
  rights to delivering basic services to all
  subject to the availability of financial
  resources
• The Department of Water Affairs and Forestry
  (DWAF), through its White Paper, paid careful
  attention to the financial dimension of service
  delivery -- premised on the recovery of recurrent
  cost of service provision
• DWAFs own limited resources was devoted to
  capital expenditure on expanded basic service
  infrastructure
• Some allowance was made for municipalities to
  offer subsidised lifeline tariffs to the very
  poor, but financial responsibility of these
  subsidies was assigned to municipal governments

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RESEARCH MOTIVATION

• Successful cost recovery through user fees was
  thus essential to the 1994 DWAF approach to
  redressing historical inequalities
• However, difficulty in securing user payments
  threatened the financial viability of extending
  basic water services
• By identifying the sources of successful cost
  recovery to those municipalities experiencing
  difficulties, the cost recovery challenge could
  conceivably be met.

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RESEARCH STRATEGY

• Draw on existing South African and international
  research to develop a framework for analysing the
  determinants of cost recovery
• To identify examples of successful cost recovery
• Compile information about cost recovery outcomes
  and their potential determinants of South African
  municipalities before and after the new municipal
  demarcation and the introduction of the Free
  Basic Water Policy
• Use appropriate statistical techniques to
  identify and quantify the effects of the various
  determinants and present them accessibly to
  decision-makers
• Conduct in-depth case studies

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PROJECT OBJECTIVES

• To audit (countrywide) successful cost recovery
  for water services provision before and after the
  new municipal demarcations as a frame of
  reference.
• To establish the institutional, social, economic,
  and political contributions to successful water
  service provision and how these contributions
  have adapted to policy changes.
• To formulate indicators of components which
  strengthen cost recovery for the water service
  sector.

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COST RECOVERY IN A TYPICAL MUNICIPALITYSimulation
results conducted before and after demarcation
and the Free Basic Water Policy

• Upgrading service infrastructure
• Introducing penalties for non-payment
• Other billing and payment best practices
• Combined effects of available interventions
• Differing poverty profiles
• Expanding basic services to the poor

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EFFECTIVE COST RECOVERY Before demarcation and
the Free Basic Water PolicyMajor findings

• Success with cost recovery at the municipal level
  varies widely, with the percentage of household
  consumers paying regularly ranging from near 100
  to near 0.
• Interventions available to decision-makers have
  large effects on payment rates, with the
  difference between pursuing best and worst
  practices generally between 30 and 40 percent.
• The most important intervention for improving of
  cost recovery is using service restriction to
  penalise non-payment, preferably within 90 days.
• Other practices, such as Masakhane campaigns,
  progressive tariffs, and offering convenient
  payment facilities, improve cost recovery, but
  their effects are more modest.

10
EFFECTIVE COST RECOVERY Before demarcation and
the Free Basic Water PolicyMajor findings

• The combination of basic service levels and poor
  consumers is usually a recipe for failed cost
  recovery, an unfortunate finding, given the
  expectation that improved cost recovery would
  finance the expansion of basic services to the
  poor.
• Recent developments, the Free Basic Water Policy
  and municipal restructuring (demarcation), alter
  the challenge of cost recovery, but do not
  diminish it.

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TYPICAL MUNICIPALITYThe effects of replacing
worst with best practices
Replacing worst with best practices in an
otherwise South African municipality can be
expected to improve the payment rate by 26
12
EFFECTIVE COST RECOVERYAfter demarcation and the
Free Basic Water PolicyMajor findings

• Payment rates in a typical municipality
• Impact of Masakhane programmes, strong penalties
  and progressive tariffs
• Adopting these practices and policies would
  improve cost recovery by roughly 21
• Masakhane and progressive tariffs
• Moving from absence to full implementation of
  these measures is likely to result in an increase
  in payment rates of about 11
• Strong penalties
• A municipality moving from no penalties to strong
  penalties would improve cost recovery by 9 on
  average.

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EFFECTIVE COST RECOVERYAfter demarcation and the
Free Basic Water PolicyMajor findings

• Strong penalties, progressive tariffs and the
  abolition of flat rate billing.
• Payment rates will increase by about 23
• Current payment rates (based on simulating for a
  typical municipality) are only 57.

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EFFECTIVE COST RECOVERYAfter demarcation and the
Free Basic Water PolicyMajor findings
Relationship between proportion of water loss and
cost to household
The symbols indicated in the graph show the
demarcation board classification of
municipalities.
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EFFECTIVE COST RECOVERYCHALLENGES FOR MUNICIPAL
OFFICIALS

• Profound changes in the institutional and policy
  environment -- including municipal demarcation
  and Free Basic Water -- have forced South African
  municipalities to revise their approaches to cost
  recovery substantially.
• Municipal demarcation has reduced the number of
  primary local and metropolitan authorities from
  more than 800 to less than 300 -- creating larger
  units characterised by much greater internal
  social and institutional heterogeneity than their
  predecessors.
• The Free Basic Water Policy obliges
  municipalities to find alternative ways to
  finance basic water service provision.
• Municipal officials challenge is not only to
  integrate and administer the disparate cost
  recovery arrangements they have inherited, but
  also to generate revenues to cover the costs of
  providing basic services free.

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EFFECTIVE COST RECOVERYPRACTICAL IMPLICATIONS

• Prior cost recovery initiatives geared toward the
  lower end of the market are increasingly
  overshadowed by the implementation of the Free
  Basic Water Policy.
• For example, the use of prepayment water meters
  now focusses on monitoring consumption under the
  Free Basic Water Policy, rather than securing
  payment for basic services.
• Within new municipalities, the cost of free basic
  water must be offset by payments collected for
  services consumed above the free basic level.
• The effective implementation of penalties against
  non-indigent consumers who fail to pay a
  progressive, volume-related tariff, takes on
  increasing importance.

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EFFECTIVE COST RECOVERYCONCLUDING REMARKS

• Reconfiguration of municipalities, coupled with
  the implementation of the free basic water policy
  has had a marked influence on how recovery of
  costs can be enhanced.
• On the one hand initiatives geared toward the
  lower end of the market are increasingly
  overshadowed by the implementation of the free
  basic water policy.
• On the other hand the implementation of punitive
  sanctions against non-indigent consumers who fail
  to pay a progressive, volume-related tariff,
  takes on increasing importance.
• As punitive sanctions become increasingly
  necessary, they also become more expensive to
  implement.
• The abolition of flat rate billing is advised.

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EFFECTIVE COST RECOVERYCONCLUDING REMARKS

• The abolition of flat rate billing is advised.
• There is a limit to how much cost recovery can be
  improved by increasing the per litre charge to
  consumers as increasing the charges results in a
  greater proportion of water being lost in
  distribution
• The focus for effective cost recovery should thus
  shift to ensuring that all consumers who use more
  than the free basic provision are billed for what
  they consume.

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THANK YOU
Sigodi Marah Martin RESEARCH FOR
DEVELOPMENT
1st Floor, Everite House, 20 De Korte St,
Braamfontein, 2001 Tel [phone] Fax
27 11 403-5781 www.smmdc.com
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CAUSAL MODEL
Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
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THE DATASET

• Sources
• A national survey of municipal cost recovery
• Census-based municipal social profiles
• The realised sample
• Response rate
• Geographical and social representivity
• Absence of significant selection bias

Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
23
SAMPLE COMPOSITION BY PROVINCE
Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
24
SAMPLE COMPOSITION BY SOCIAL CATEGORY
Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
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DESCRIPTIVE DATA ON COST RECOVERY OUTCOMES
Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
26
PAYMENT RATES FOR WATER SERVICES
Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
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SELECTED DESCRIPTIVE DATAInfrastructure, billing
and payment
Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
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TYPICAL MUNICIPALITYEffects of upgrading
existing service infrastructure
Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
29
TYPICAL MUNICIPALITYEffects of introducing
penalties for non-payment
Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
30
TYPICAL MUNICIPALITYEffects of introducing
specific billing and payment best practices.
Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
31
TYPICAL MUNICIPALITY Effects of differing
municipal poverty profiles
Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
32
TYPICAL MUNICIPALITY Effects of extending basic
services to poor households
Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
33
DESCRIPTION OF MEASURES INCLUDED IN
OPERATIONALISEDMODEL OF COST RECOVERY OUTCOMES
Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
34
MAJOR FINDINGS

• Realised sample consists of 301 municipalities
  serving roughly three million household consumers
  ( 40 of entire population)
• The geographic and social composition of the
  realised sample is very similar to the population
• Success with cost recovery at the municipal level
  varies widely, with the percentage of household
  consumers paying regularly ranging from near 100
  to near 0.
• Interventions available to decision-makers have
  large effects on payment rates, with the
  difference between pursuing best and worst
  practices generally between 30 and 40 percent.
• The most important intervention for improving
  behavioural and financial indicators of cost
  recovery is using service restriction to penalise
  non-payment, preferably within 90 days.

Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
35
MAJOR FINDINGS

• Other practices, such as Masakhane campaigns,
  progressive tariffs, and offering convenient
  payment facilities, improve cost recovery, but
  their effects are more modest.
• The combination of basic service levels and poor
  consumers is usually a recipe for failed cost
  recovery, an unfortunate finding, given the
  expectation that improved cost recovery would
  finance the expansion of basic services to the
  poor.
• Recent developments, the Free Basic Water Policy
  and municipal restructuring (demarcation), alter
  the challenge of cost recovery, but do not
  diminish it. Comprehensive thinking of tariff
  schedules within new municipal boundaries
  requires informed expectations about cost
  recovery if financial sustainability is to be
  achieved.

Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
36
CASE STUDIES

• To examine the cost recovery successes of four
  representative municipalities
• Durban, Kwa-Zulu Natal
• Mogale Local Municipality, Gauteng
• Adelaide, Nxuba Municipality, Eastern Cape
• Middleburg, Mpumalanga

Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
37
CASE STUDIES - METHODOLOGY

• Collection of preliminary data
• Two questionnaires were developed
• a household questionnaire designed for quantitive
  analysis
• a qualitative questionnaire for use during focus
  group discussions

Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
38
CASE STUDIES - METHODOLOGY

• The case studies addressed the following
• assessed the roles and relationships of local
  structures and their bearing on water supply
  management in the community
• documented the broad socio-economic context in
  which cost recovery programs are implemented
• examined the linkage between quality and levels
  of service and rates of cost recovery
• identified former (and alternate) water supply
  arrangements and assess their impact on current
  cost recovery

Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
39
CASE STUDIES - METHODOLOGY

• determined consumer awareness and perceptions
  about the cost of service in relation to current
  tariffs and test overall acceptance of the user
  pays principle
• assessed the roles and relationships of local
  structures and their bearing on water supply
  management in the community
• got an overview of different cost recovery
  systems, with their strong and weak points
• identified the main constraints to cost recovery
• identified the mechanisms and strategies being
  applied at community level to encourage and
  enforce payment

Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
40
CASE STUDIES - METHODOLOGY

• determined consumer awareness and perceptions
  about the cost of service in relation to current
  tariffs and test overall acceptance of the user
  pays principle
• got an overview of different cost recovery
  systems, with their strong and weak points
• identified the main constraints to cost recovery
• identified the mechanisms and strategies being
  applied at community level to encourage and
  enforce payment
• gained insight into water management roles and
  decision making at household level.

Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
41
CONCLUDING REMARKS

• Findings can guide municipalities
• Simulate the effects of replacing worst with
  best practices in an otherwise typical South
  African municipality
• Statistically quantify the extent to which
  improvements in cost recovery can be obtained by
  applying the recommended principles of best
  practice.
• Feedback from Case Studies
• Each different
• Three sets of factors common to all
• Rationale
• To establish its current level of cost recovery
• Compare with statistical estimates
• Set cost recovery targets

Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
42
CONCLUDING REMARKS

• Strategy to address
• Poverty/socio-economic implications
• Affordability
• Refusal to pay
• Basic water loss
• Vandalism
• Illegal connections
• Central theme
• Ongoing involvement of the community
• incentives

Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas
43
CURRENT AND FUTURE WORK

• Sigodi Marah Martin is conducting further
  research for the Water Research Commission based
  on the findings presented today. The title of the
  research project is
• Cost Recovery in a Changing Institutional and
  Policy Environment Municipal Demarcation, the
  Free Basic Water Policy, and Financially
  Sustainable Service Delivery
• In addition, Sigodi Marah Martin is conducting
  research on
• Institutional and Socio-economic Review of the
  Use/Application of Electronic Prepaid Meter
  Technology in the Provision of Water Supply
  Services to Urban and Peri-urban Areas (WRC)
• The Costs of Water from Raw Water through to User
  Charges (DWAF)

Identifying examples of successful cost recovery
approaches in low-income, urban and peri-urban
areas