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PRESENTATION TO THE

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Title: PRESENTATION TO THE


1
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
2
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

3
BRIEF
Challenges faced by local government structures
in undertaking their water and environmental
functions
4
SOME KEY ISSUES FROM PRESENTATIONS
  • Debt payment by municipalities
  • Performance of municipalities responsible for
    water services
  • Role of water boards vis-à-vis municipalities

5
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

6
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

7
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)

8
Representing, promoting and protect the interests
of local government
9
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

10
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 -

11
Comment on proposed tariffs
12
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
13
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?
14
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

15
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

16
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

17
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
18
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

19
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.

20
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.

21
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

22
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

23
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

24
  • Thank you
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