Department of Water & Environmental Affairs & Water Boards: Water Pricing &Tariffs 2009/10

Meeting report

Department of Water and Environmental Affairs (DWEA) & Water Boards: Water Pricing &Tariffs
The Chairperson apologised on behalf of the Committee, as there had been a venue change, delaying several members and presenters, which led to the late start of the meeting.

The Chairperson noted that it was disturbing that most of the presentations had only arrived that morning. This would prevent Members from doing full justice to the process, as they had not had adequate time to study all documents. In future the Committee would prefer to receive the documents at least a week in advance of the meeting.

Department of Water and Environmental Affairs (DWEA)
Dr Helgaard Muller, Acting Deputy Director-General (Policy Regulation): Department of Water and Environmental Affairs, reported on the four components of tariffs. He gave the comparisons between the raw water price and the price at which water boards sold water. He noted the range of costs added by water boards, adding that this depended on the distance the water had to be pumped, the quality of the water and the cost of infrastructure.

Tariff increases were also detailed, according to the tariff requested by water boards, the directive to reduce tariffs and the final tariff. The method by which water boards may set tariffs was regulated, and this related directly to the Department’s oversight in terms of Section 42 of the Municipal Finance Management Act (MFMA). In general, the strong position of water boards allowed for reductions in tariff. He reviewed some of the water boards to show the challenges facing water boards in general, and the Department's role in support of the water boards.

Discussion
Mr B Holomisa (UDM) asked if the water boards covered the whole country, specifically the rural areas.

The Chairperson responded that as the meeting unfolded, Members would be apprised of which areas were covered, and which were not. She indicated that she had similar concerns as people were suffering in rural areas through lack of access to water.

Mr J Skosana (ANC) noted that Nkangala water board was not reflected in the documents presented. He asked if Nkangala was represented among the water boards.

Mr Muller responded that Nkangala Water Board had been disestablished.

Mr Z Luyenge (ANC) asked what was the role of local municipalities in water provision, and where queries about water provision should be directed.

Mr Muller responded that the primary functionaries for water provision were the municipalities. Municipalities were Water Service Authorities (WSAs) and they could appoint a Water Service Provider (WSP) to supply bulk or retail service on their behalf. Some areas were not covered by water boards; this was part of the history of the past. The former Minister of Water Affairs and Forestry had commissioned a study on institutional realignment because of concerns about the institutions. That report had been finished and the Department (now the Department of Water and Environmental Affairs) would look at that report and take forward its proposals. 

The Chairperson noted that these two questions pointed to the need to hear an explanation from South African Local Government Association (SALGA ) as to how the water boards worked, before the presentations on the water boards’ tariffs.

The Chairperson thanked the Department for the honest response, and added that there must be a way to honour the Constitutional requirements that people be provided with safe and clean water.

Mr Holomisa asked if there were any plans to build dams in the Eastern Cape. There was an abundance of water in Eastern Cape rivers, but a loss of opportunity to use the water due to the fact that there were too few dams.

Mr Muller responded that he had not come prepared to answer that question. There were planning developments to match supply and demand in such cases. He would provide a written response.

Ms Zikalala expressed concerns about Jozini dam and other dams that were not used, and asked what was happening to these.

Mr Luyenge also queried the great number of unused dams that were now a danger to communities.

The Chairperson responded that a workshop was planned for 13 and 14 July 2009. Members should be asking these types of questions at that workshop, which would provide a platform for more general discussions. She reminded Members that this meeting was focusing specifically on tariffs.

South African Local Government Association (SALGA) briefing
Mr William Moraka, Director: Water and Sanitation, SALGA, presented the role of SALGA, the water pricing chain regulatory regime, its challenges and the way forward. The SALGA governance structure and strategic agenda was reviewed. SALGA believed, in regard to the water value chain, that the retail service was the most critical point. This was where there was interaction with end users, and where income was generated to pay for the whole value chain. Consistent pricing was needed in setting prices and tariffs. There was currently no consistent approach. He reviewed the impact of the current pricing regime along with the main challenges. SALGA’s pivotal proposal was the separation of the Water Service Authority (WSA) and the Water Service Provider (WSP).

Discussion
The Chairperson pointed out that SALGA had not provided the Committee with hard copies of the presentation, which she remarked was unacceptable.

Mr Luyenge asked what position Mr Moraka held at SALGA.

Mr Moraka responded that he was the Director of Water and Sanitation in SALGA.

Mr Skosana said that he was disappointed in this presentation by the highest body of local government. He felt that the presentation did not speak to the issues on the agenda and did not make sense.

Mr Moraka responded that SALGA had not been requested to talk about municipal tariffs. If Members needed details on those, they could be provided.

Mr Luyenge asked if SALGA wanted to outsource the provision of water. If so, he was concerned about it, considering the amount allocated to municipalities, and SALGA’s responsibilities.

Mr Moraka responded that SALGA did not mean to suggest outsourcing water provision, merely the separation of the WSA and the WSP.

Mr Holomisa felt that the information was insufficient and that it did not adequately unpack the linkages between water boards, municipalities, SALGA and the national Department.

The Chairperson noted that members were making comments rather than asking questions and advised that SALGA should liaise with her office so that at the forthcoming workshop it could respond to these issues.

A Member complained that many municipalities were not following the prescripts of the MFMA, and commented upon shortcoming and challenges in municipalities, as well as SALGA’s role. He felt that this should also be addressed at the workshop.

Mr Moraka responded that this was a useful suggestion. SALGA would formulate a response and provide it to Members in advance of the workshop.

Mr Luyenge noted that as a matter of protocol, the top level officials of all institutions should be making the presentations to the Committees. Ideally, the national Chairperson of SALGA should have made the presentation. It would not be fair to direct questions at a person who did not have the responsibility for making the decisions.

The Chairperson agreed. Parliament wanted to interact with officials who were responsible for decision making.

The Chairperson noted that Albany Water Board had sent a letter to say that it would not attend the meeting, as it was a new Board. She commented that this was unacceptable; this Committee was also newly constituted. Attendance of all water boards summoned was compulsory.

Amatola Water Board (AWB) briefing
Mr Craig Step, Divisional Director: Finance, Amatola Water Board, presented the Committee with a brief overview of the areas that this water board covered, being bulk water provision to Buffalo City, and bulk and retail provision to Amatola District Municipality, and tabled the statistics on water provision for the last financial year.

The inflationary factors affecting the tariff were then presented. Mr Step noted the reduction in the price of raw water from the Department. The increase in electricity tariffs had come as a major shock, as this constituted a large proportion of input cost.

AWB’s compliance with Section 42 of the MFMA was outlined, in a detailed timeline of the consultative process. It was noted that the original proposal of 10% or 11% gave AWB a moderate bottom line. The final tariffs encompassed a 7% increase for Buffalo City users and a 5% increase for the Amatola District Municipality (ADM). These changes had effectively widened the subsidisation gap. This left AWB with a loss of R20 million.

Mr Step reviewed the AWB five-year plan. This comprised both short and long term interventions and investments to cope with reduction in revenue.

Bloem Water Board (BmWB) briefing
Ms Nolene Morris, Chairperson, Bloem Water Board briefed the Committee on the Bloem Water Service Area, and gave its commentary on the water tariffs. The achievements of BmWB were presented, as were its challenges, which included the non-alignment of Integrated Development Plans (IDPs) with actual implementation. She highlighted the efficiency of this water board.

Botshelo Water Board (BWB) briefing
An official from the Botshelo Water Board presented an overview of Botshelo’s operation. The presentation detailed the previous tariffs as well as the tariffs that BWB had proposed. The impact of the raw water cost reduction and tariff adjustment directive was reviewed. It was noted that a particular challenge to the consultative process was the fact that municipalities often did not attend meetings when invited. The impact of the changed tariffs on end users was noted. However, it was said that this impact would be minimal for the majority of the end users, since they had access to free basic services, and therefore that indigent people would not be affected, although the larger consumers would generally be subject to a 12.5% increase

Bushbuckridge Water Board (BBRWB) briefing
Ms T Nyakane Maluka, Chairperson, Bushbuckridge Water Board, provided a brief overview of the current position of BBRWB. Bushbuckridge serviced two municipalities in Mpumalanga:  Bushbuckridge Local Municipality and Mbombela Municipality. This was a vast, mostly rural area, where the high unemployment levels made it difficult to collect revenue.

Mr M Letswalo, Acting Chief Executive Officer, Bushbuckridge Water Board, reported that the water board’s key service areas was the Bushbuckridge Local municipality and that they have a Operation and Maintenance contract with Mbombela. He reviewed the input costs of raw water, norms for tariffs and the tariff structure. On the last point he mentioned the high salaries were an item inherited from the previous administration.

Comments from SALGA, National Treasury, and the Bushbuckridge local municipality were presented. The key challenges were named as the long outstanding debt, lack of bulk Infrastructure for distribution, operation of small schemes, cost recovery from the municipality and the raw water tariff. Bushbuckridge Water Board recommended tariff increase of 4.42%, subject to review during the year.

Discussion
The Chairperson remarked that the Committee had not received the Water Boards’ Annual Reports as yet. As this was on the agenda for the following day, she said that the Committee members needed the Reports to review before the meeting. She stressed that the water boards who were due to make presentations would have to arrange that the Members received all the necessary documents before the end of the day.

Mr Muller responded that the Annual Reports were submitted. He reviewed a list of Water Boards including Amatola, Umgeni, Bloem, Overberg, Botshelo, Lepelle Northern, Magalies, Namakwa, Rand, Sedibeng, Mhlatuze, Albany Coast, Bushbuck Ridge, Pelladrift. He confirmed that five hundred copies of the Annual Reports were indeed submitted to Parliament.

The Chairperson responded that the Committee wanted briefings on those Annual Reports. The letters submitted to the Water Boards were clear. The list mentioned referred to information given to the third Parliament. This was a new Parliament with new members, and indeed a new Department. She reiterated that the current Committee Members needed those documents.

Mr Luyenge agreed with the Chairperson's remarks. He noted that the reports presented in regard to the tariffs had not been signed. This was a matter that brought authenticity into question, and he pointed out that it was also important because these were now in the public domain.

 Mr Luyenge referred to the sharing of Ukhahlamba district in the Eastern Cape by the Amatola and Bloem Water Boards, and asked if there was synergy between them in service provision here.

Mr Step (Amatola) replied that although Bloem Water operated in the Ukhahlamba District, in fact AWB had negotiated with the district municipality. AWB had learned lessons from BmWB in terms of how their contract had gone previously, and took advice from this.
AWB had marketed itself in that area and had taken over the Sterkspruit water treatment plant. The quality of the water was now at the correct standard. AWB was also doing a plant upgrade on Sterkspruit worth R48 million through Municipal Infrastructure Grant (MIG) funding. Additionally, AWB would shortly be taking over five works. This was a new area.

Mr Luyenge noted that there was no reference made to the Auditor-General’s (A-G) reports as an indication of under or overspending. He added that though this information would be contained in the Annual Report, it was important to convey it now as well, to convince the Committee that funds were efficiently used.

Mr Step replied that water boards had previously been privately audited, but the legislation had changed and the A-G now had the option to audit the water boards. This option, however, had not yet been taken up by the A-G.  AWB was audited by KPMG. Oversight responsibility and budget checking was conducted through the Department. In future, Annual Reports would require a complete budget reporting exercise over two years, as a result of international accounting standards being used. The Committee would then be able to see budget line items linked directly to expenditure.

Mr Mahomed Vawda, Director: Institutional Oversight, Department of Water and Environmental Affairs, responded that the Department's role was one of oversight. If a water board wanted to expand its area of service, and the municipality agreed, then it was up to the two institutions to have a negotiated process between them. The Department was involved in the daily operations of the water boards. The Department did manage their budgets. The Department received and reviewed quarterly reports, an annual business plan and a shareholder compact, of which the water board and Minister were signatories, to ensure compliance with legislation.

Mr Skosana referred to the challenges mentioned by the Water Boards, and asked if there was departmental oversight of the Water Boards, and if the Department could provide an overview of the Water Boards' challenges in tariff setting.

Mr Skosana asked how effective the Water Boards' investment had been in order to ensure provision of services.

Mr Step responded that the reduction had necessitated changed timing of investments. Certain projects had to be moved into other financial years. The R20 million that AWB had lost by reason of the directive was absorbed partly through reductions in capital expenditure and operational expenditure, and partly through some increase in primary activity to balance the books.

Mr Skosana pointed out that there seemed to be many problems with the Water Boards. He asked for suggestions on how the service delivery process could be taken forward. He also asked for clarification on whether the water boards were financially viable.

Mr Step replied that AWB had no excessive borrowing, and had a small loan from the Department. He felt that this was a positive, as it indicated that the water board could survive when times were tough.

Mr Skosana referred to the suspension of the Bushbuckridge CEO, and asked how this Water Board was still managing to deliver services.

Ms Nyakane-Maluka responded that in fact this was the second CEO suspended by the board. BBRWB had received a disclaimer audit report for 2003/4. Upon investigation of the mismanagement of funds, the then-CEO and then-Chief Financial Officer had both resigned. Civil and criminal charges were brought against them in 2005. The National Prosecuting Authority had delayed the decision to prosecute, but the case was now pending. The provisional dates for hearings were June and September. The Board was seeking to recover R600 000. Another CEO was appointed. The second suspended CEO was charged with mismanagement of assets. This case was also pending. A report on the upcoming hearings would be prepared and the matter would be concluded soon.

Mr Skosana asked how viable Bushbuckridge Water Board was, and if it should be disestablished.

Mr Letswalo responded that technically this Water Board had between R15 million and R20 million in working capital every year. The only challenge it faced was recovery of the long outstanding debt. It had agreed to very low repayment terms (R3 million a month), which was chosen as a way to sustain the BBRWB.  Section 78 of the Municipal Systems Act (MSA) posed a challenge with municipalities. Furthermore, the operations and maintenance contract with Mbombela was pivotal to this water board’s survival. The focus for the next financial year was how it could cross-subsidise the activities within Bushbuckridge Local Municipality. The water board was, technically, financially viable but faced the challenge of recovering the R156 million owed.

Ms Nyakane-Maluka added that although BBRWB had been on the brink of being disestablished, it had now justified its existence. The Minister had decided, late in 2008, not to proceed with the disestablishment, since to do so would have resulted in rural areas being without water. Municipalities in those areas would not have been able to provide water without cross subsidisation.

Ms A Lovemore (DA) asked what the basis was for determination of the directives from the Department of Water and Environmental Affairs. The Water Boards had to accept lower tariffs than they needed, and this had resulted in stress, in the form of cutting back their spending on much-needed infrastructure. She also asked if there was a dispute resolution process in place when the Water Boards disagreed with a directive.

Mr Vawda responded that the Minister had also reduced the raw water price. Another reason for the reduction of the tariffs was that the economic problems that South Africa faced had to be taken into account. He stated that the consolidated financial statements of all the Water Boards showed a turnover of R6,8 billion and a net profit of R1,3 billion. One of the components of the tariff provided for investment in capital expenditure. Water Boards had been underspending consistently in the area of capital expenditure. The Minister thought the reduction prudent, as the component for capital expenditure in the tariff had not been spent. This had generally been the case.

Mr Step responded that AWB was in favour of the cut, but was not in agreement with the extent of the cut. The time allowed for negotiation around the cut was very short. AWB, however, would deal with it as detailed in the multi-year plan.

Mr G Morgan (DA) remarked that a common problem that was critical to the viability of Water Boards was their ability to collect payment from municipalities. An inability or failure to collect resulted in challenges to capital expenditure and deficits. He noted that the Department had been requested to assist and asked if this assistance had been given.

Mr Step responded that the former Department of Water Affairs and Forestry had done road shows to all water boards in 2008, and had focused on collections, specifically concentrating on contracts with municipalities, the enforceability of those contracts and reporting. DWAF also had done a study of Amatola Water Board, to assess the lessons that could be learned from its good collections record. AWB collected with 30 days and reported in terms of Section 31 of the MFMA, and its collections were on par with any business. It had been fortunate as the customer-municipalities did pay accounts timeously.

Mr Vawda said that the issue was governed by the MFMA and the Department called upon the National Treasury to lead those negotiations. The method for approach was set out in Section 42 of the MFMA. The DWEA facilitated the negotiations.

Ms Nyakane-Maluka responded that her Water Board had found that the national Department was attempting to assist. At provincial level BBRWB had heard reports that the Mpumalanga regional offices were urging municipalities not to sign the service level agreements, because they were trying to have the Water Board disestablished. She lobbied the Committee to make a point of encouraging the alignment of actions between the national Department and the regional offices.

Ms H Ndude (COPE) asked AWB who was responsible for the Ncuma area. This encompassed a number of rural areas and villages in the Eastern Cape. If AWB was responsible, she asked what it was intending to do, as there was literally no water available in this area.

Mr L Greyling (ID) remarked that the general response to reduced tariffs had been a reduction in capital expenditure. He wondered what this meant, particularly for Amatola. He asked if this was aimed at the big pipelines and bulk water supply, or plans to roll out water provision. Mr Greyling noted that much of the area covered by AWB was very rural in nature and many villages did not have any piped water. Ukhahlamba had made the news in 2008 with reports of poorly treated piped water. There was a severe drought in the Xorha Mouth district, forcing people to drink from polluted rivers. Unless a plan was made to provide these people with water, there would be more deaths. He asked if this was the responsibility of Amatola Water Board or the local municipality.

Ms Zikalala stated that she would reserve her questions for the upcoming workshop, as she had queries on specific districts, like Engcobo. She also mentioned concerns about Chris Hani district in particular.

An official from AWB responded that the Ncuma municipality was not part of the AWB’s  primary service area. It did provide support through a management contract ,in terms of operations and maintenance of the bulk infrastructure. Ncuma municipality had done a feasibility study on the supply of water to the whole area. It had MIG funding for the new financial year. It would begin rolling out in the new financial year and had been allocated R157 million to this end.

He added that AWB was also involved in operational maintenance for Engcobo's bulk infrastructure, but did not own that infrastructure. This area was a neighbour of Chris Hani municipality. Chris Hani did have an infrastructure development plan for Engcobo, but this was a matter of implementation, and was slow at present.

Ms Ndude responded that if this was the case, she would have to pose the question to the Department. She would continue to persist on this issue, as people from these areas were the most vulnerable.

The Chairperson responded that it was sad that some communities did not have any access to water. She added that the Members should visit such areas to see the situation for themselves, and provide assistance where needed. The Committee should also determine the links between the water boards, local, provincial and national government so that it could know who was responsible. The workshop would be of great assistance here.

Mr Luyenge stated that all were in agreement that provision of water was a problem. The Department had outsourced this responsibility. The Department provided no funding, yet had oversight. There was a need to create a conducive environment for water provision.

Ms Ndude asked what AWB meant by new income streams, and asked if this was based on more revenue from municipalities.

Mr Step replied that AWB was moving into Ukhuhlamba, in terms of the five new works. AWB had made a proposal Alfred Nzo Municipality to take over their bulk infrastructure and would be meeting with Ndlambe Municipality to discuss how AWB could assist them. Most of these income streams were not primary activity – defined as a situation where one body would  own, operate and deliver water. They were concerned with secondary activity - where the Water Board would manage on behalf of municipalities. The focus of AWB over the next five years was to move into the Eastern Cape and cover as many of the district municipalities as possible. The biggest concern now was that if all the proposals were accepted immediately, this would create extra pressure. AWB had submitted a proposal to its managing board on restructuring so that this scenario could be managed.

Ms Ndude stated that she was satisfied with the reasons for the high salaries in relation to BBRWB. She queried the reason for the big jump in energy cost estimates, which had almost tripled between 2008 and 2010. She asked if the estimate was realistic. She pointed out that there was no mention on what BBRWB would do about the poor collections recovery from municipalities. This must affect the cash flow. She asked for recommendations on how BBRWB could recoup the money owed.

Mr Letswalo responded that energy costs had doubled. BBRWB’s estimate was based on incremental increases in energy costs, and it had projected that the movement would likely be to 20.2%. Actual energy costs were more than the 8.6% figure in the presentation, taking into account that there might be incremental increases. He said that BBRWB had tried to recover the debt. A dispute had recently arisen out of a negotiation with a municipality about water meters, which had now been finalised, and the meters were installed. The agreement stipulated that BBRWB would be entitled to recover by invoice, and it should be able to recover debt retrospectively, as far back as March 2006.

Ms Nyakana - Maluka added that this was a problem common to all the water boards in the country. The debt owed by municipalities in total amounted to billions of rands. BBRWB, in particular, had limited capacity and would have to lobby this Committee to assist it in engaging with the Portfolio Committee dealing with local government, in relation to payment by municipalities of debts owed to all water boards. BBRWB had attempted to engage with parties, even as far as engaging with National Treasury, but without success. The R23 million owed by the Botshabelo Municipality had stifled operations.

Ms Ndude stated that she took the point that the salaries were largely a matter of inheritance and would have to follow up on these salaries, given the fact of the large amounts owing to the Water Board.

Ms M Tlake (ANC) referred to Botshelo Water Board’s presentation (slide 8) and its projection that the tariff reduction had disadvantaged the Board to the tune of R 800 000. Slide 9 pointed to the municipalities' evasion of the scheduled meetings. The meetings with SALGA and National Treasury had still taken place, in the absence of the Municipality. Slide 11 stated that "the increase would not affect the indigent as there are indigent policies in place and they do not normally consume more than 6kl of water per month." She felt that this did not seem credible or make sense. If the municipalities did not communicate with the Water Board, she questioned how the Water Board could come to the conclusion that the indigent would not be  affected.

Ms Ndude sought clarity on the seemingly high tariff increase presented by Botshelo Water Board. Botshelo' s overheads also seemed low. She asked this Board to share how it had reduced overheads with the Committee.

An official from  Botshelo Water Board responded that the slides highlighted by the Member were not contradictory. The BWB had evidence as to how far it had gone, at every point in the consultative process, to deal with the municipality. This was why the Department and SALGA had accepted that BWB had made every effort to engage. The BWB had done what the legislation required, but the municipalities had failed to respond. 

He noted that BWB was previously insolvent. Slide 4 attempted to give the Committee some background. The present board was appointed in 2007. They encountered challenges after appointment and had set up new management teams and audit committees. Because of the Water Board’s lack of financial viability, the Department had requested the development of a turnaround strategy. This turnaround strategy was submitted as part of the shareholders compact. They were now evaluating the appropriateness of some of the interventions around weak areas. In the areas where BWB supplied bulk water there would not be a problem, as the indigent people would still get the water from the municipalities, since, in this instance, BWB was not responsible for reticulation.

The point about SALGA and National Treasury was made in order to confirm that BWB did engage at the national level. It was an indication that there was a lack of interaction at local level with municipalities.

Ms Tlake queried the reasons for SALGA not attending meetings when invited, and similar behaviour from municipalities. The challenge was how to create better working relationships to improve service delivery. She wondered how SALGA and the municipalities thought the policies could be implemented if they did not want to attend the meetings.

Ms P Bhengu (ANC) referred to BWB’s challenges and asked what the Department's role was in improving the performance of that Board.

Mr Luyenge asked if AWB was expected to function on its own in the Eastern Cape, and also asked what assistance the Department provided.

The Chairperson indicated that these were good questions. As SALGA representatives were present, they now knew the issues under discussion and would be able to respond at the forthcoming Committee workshop.

The Chairperson indicated that it was important for members to note that the Water Boards  did not get any funding help from the Department. They bought raw water from the Department and generated revenue out of the onward sale of that water to service providers.
This meant that it was the role of the Committee to assist the boards. This might even include the need to amend legislation to compel the Department to provide assistance.

Ms Tlake agreed on the necessity of a workshop and thought that the meeting was useful for oversight purposes. She asked how the Committee would do oversight to assist people in the future.

Ms Lovemore recalled that the rationale for the reductions was the underspending that had occurred with regard to the capital expenditure budget of the Water Boards. She pointed out that this was an assumption of future spending, and that there was an enormous need to spend on infrastructure.

Mr Vawda replied that the Department had not assumed that capital expenditure spending would not take place. The reduction was a penalty for past underspending on capital expenditure. This was also the first time such action was taken by the Department. The Department had not made any assumptions and would be assessing the Water Boards on their future capital expenditure spending.

Ms Morris generally responded to the questions raised around Bloem Water. Bloem Water was the service provider for Ukhuhlamba Municipality,  for the Sterkspruit area, until July 2008. The water quality was not poor at Sterkspruit. AWB took over an operation from a private sector service provider. She noted that there had been co-operation, specifically on Ukhuhlamba municipality. Bloem Water had an unqualified audit report and the suggestion that its tariff had been cut because of capital expenditure underspending was incorrect. Bloem Water did not underspend on capital expenditure, and could provide proof of this. The Department had stated that the financial results were lower than acceptable because of lower volume increases. This too was incorrect, and Bloem Water needed to engage with the Department because it appeared that the Department did not understand their financial statements and situation.

Mr Letswalo addressed the kinds of support that Water Boards received from the Department. He stated that support was often requested, but responses might only be received after five to ten letters had been addressed. That would be an accurate summation of the kind of support received.

The Chairperson responded that she did not find this acceptable and, as Chairperson, would not tolerate such conduct. Departmental officials responsible for such behaviour would be asked to leave.
Mr Skosana said that the Committee would have to focus on helping at community level. He asked what was in place to replace Nkangala Water Board. He asked which municipality was responsible for the Nkangala area.

Mr Morgan stated that he appreciated Bloem Water Board’s frankness and the Chairperson’s response.

Mr Morgan noted that the Department had instituted a one-time penalty. Bloem Water had countered by stating that it had spent the capital expenditure budget entirely. He was sure that the approach by the Department was not so general. He told the Department that the majority of infrastructure in South Africa was more than 30 years old, and it was imperative that new infrastructure be provided in many areas. South Africa was in a period of recession. Many governments, during times of recession, would decide to spend on infrastructure to create demand in particular sectors. He was concerned that the effect of the Department’s actions was to cut off the opportunities for Water Boards to invest, when they most needed to do so. It was not just a matter of cost, but was also about creating jobs in certain sectors, like construction, and stimulating demand and the economy. Infrastructure investment was widely regarded as the best way to grow a country out of a recession.

Mr Vawda responded that a business plan for capital expenditure was drawn up annually, containing a five year projected capital expenditure. The Department needed to monitor whether those amounts had actually been spent. He responded that the Department, in order to implement the Keynesian model suggested, would require funding, which would come from National Treasury and be supported by increased tariffs. Wherever it was practical, and where there was money available, the Department would encourage Water Boards to spend accordingly.

Mr Morgan asked if the Minister distinguished between the priority projects when evaluating Water Boards, specifically the water treatment plants that needed attention. He asked what advice the Minister received to make this distinction.

Mr Muller responded that the responsibility to appoint a Water Board lay entirely with the municipality. The Department felt that there were some decisions in which the National Department should have some influence. This was a policy issue, and might involve an amendment of Section 78 of the MSA. It was part of the policy review conducted by the former Department of Provincial and Local Government.

Mr Muller said the Department did encourage Water Boards to engage as water service providers. One problem was the lack of proper contracts. The Department, together with SALGA and the South Africa Association of Water Utilities, had developed a model contract for use by Water Boards. The Department often found that disputes around non-payment arose because of lack of a proper contract. The Department also encouraged longer-term contracts; a five year period was preferable as proper investments could be made.

Mr Muller added that there was provision for funding the Water Boards through the equitable share. National Treasury would make transfers to municipalities and a certain amount of those transfers would be the specific allocation to pay to pay for basic services. It was the responsibility of municipalities to pass on the rightful portion of the equitable share to water boards, to provide basic services to the poor.

Mr Luyenge suggested that the Department and Water Boards should state whether a feasibility and desirability study had been done as to how Water Boards should account to departments. The approach seemed inconsistent. He asked if it would not be better to have the Water Boards falling under the Department of Cooperative Governance and Traditional Affairs. Taking into account that the Integrated Development Plans (IDPs) resided at local government level, he asked for a proposal that would be effective and efficient at rural level.

The Chairperson responded that the current system was in place for a reason. If the Members felt that a change was necessary, they would have to consult with their parties. This was also something that  could also be discussed at the workshop.

 
Sedibeng Water Board (SWB) briefing
Mr M Ubisi, Chief Financial Officer, Sedibeng Water Board, outlined the tariff directive to Sedibeng and the impact of that tariff directive on the Water Board and consumers. He reported that SWB had taken over a water scheme in the Northern Cape in late 2008. Due to the state of the scheme, it had received a subsidy  for the first three years from the Department in order to avoid a 300% increase in price for consumers. The subsidy enabled SWB to run the scheme without having to burden consumers with the costs of improvement, so that the scheme could become viable and smooth out increases to end users.

SWB had called for a 12% tariff increase. Comments from National Treasury showed that it should have at least an 8% tariff increase. The Minister's directive had been only 5%, based on the 5% reduction in the raw water price. A weighted average in fact showed that this 5% increase amounted to only 2% in real terms. The directive, not taking into account the subsidy, would cause SWB to have a deficit of around R15 million.

Mr Ubisi noted that the challenges included consultative issues, and municipalities’ concern about separation from the regional tariff. The directive would have an effect on the viability of Sedibeng, specifically its ability to repay loans, to cover electricity costs, negotiate salaries and reduction in capital expenditure.
 
Discussion
Mr Morgan referred to the comment on Slide 9  to the effect that in order “for end-users to benefit from the approved low tariff, the Water Services Authorities must be regulated to pass on the low tariff to consumers." He agreed with this position. It was true that the water boards could absorb the deficit created by the tariff directive. There was a risk that the tariff charged by the municipality would allow them to make extra funding. He said that there was a broader question as to how to ensure that Water Boards were both viable and able to invest in capital expenditure. It seemed that the funding sources available to water boards were quite limited. Grants were sporadic and usually targeted at a specific project. As a general rule, Water Boards were getting their funding through selling bulk water to municipalities. He opined that municipalities had more scope for other types of income, especially the equitable share and Municipal Infrastructure Grant. For this reason, he wondered if Water Boards were taking an unnecessarily large hit. The Water Boards could be charging higher tariffs, while municipalities could absorb some of that impact by compensating through the equitable share and MIG. He felt tat the stress caused by the Ministerial directive had often been quite severe.

Mr Ubisi responded that this was an issue for discussion. At present, he could safely say that the tariffs that Water Boards passed on were not necessarily what the municipalities would then charge. The savings generated by the reduced tariff of Water Boards were not necessarily passed on to the end-consumers.

Mr Luyenge asked for specifics on SWB’s loans, since it had noted that it was not able to honour loan repayments.

Mr Ubisi responded that the details of loans were contained in the Annual Report and could be summarised in the Annual Report presentation.

Mr Luyenge requested the details immediately. He was adamant that Mr Ubisi must have a general figure in mind.

Mr Ubisi responded that, broadly speaking, loans were received from the Public Investment Corporation, the Development Bank of Southern Africa and the Department of Water and Environmental Affairs. All the loans had been consolidated and the bulk of them would be repaid by 2011. The remainder would be settled by 2018.

Mr Luyenge pointed out that SWB received a subsidy from the Department. He found this contradictory, as Members had earlier been told that Water Boards received no funding from the Department.

Mr Ubisi responded that SWB had acquired this scheme in 2008. The scheme was not sustainable under the tariffs that then applied, and it was recognised that the only way in which service could still be provided under that scheme was to increase the tariffs threefold. In order to avoid loading consumers, SWB had negotiated a specific subsidy with the Department for three years, during which time the tariff increase could be smoothed out.

Mr Skosana referred to Slide 8, saying that SWB’s inability to pay for salaries, electricity and purifying chemicals posed a risk of impending collapse of the institution. He asked that the Department should provide this assistance.

The Chairperson asked which areas SWB covered.

Mr Musa Furumele, Chairperson: Sedibeng Water Board, responded that the areas were, in the Free State, the Matjhabeng Local Municipality, Nala Local Municipality and Maquassi-Hills Local Municipality. In the North West region the areas covered Dr Ruth Mompati District Municipality and Phokwane Local Municipality. In the Northern Cape, the areas were Tsantsabane Local Municipality and Gamagara Local Municipality.

Rand Water Board
The Chairperson asked Rand Water Board to make their presentation. However, no hard copies of the presentation were available and the briefing did not proceed.

The Chairperson said that the Committee would heard the remainder of the Water Boards’ briefings on the following day and would review the Annual Reports on the following Tuesday. The Annual Reports had by now been placed in Members’ pigeonholes.

The meeting was adjourned.