Rand Water Annual Report: briefing

Meeting report

WATER AFFAIRS AND FORESTRY PORTFOLIO COMMITTEE
15 October 2004
RAND WATER ANNUAL REPORT: BRIEFING

Chairperson: Ms C September (ANC)

Documents Handed Out
Rand Water PowerPoint presentation
Rand Water Annual Report (offsite link)

SUMMARY
The Rand Water presentation indicated improved efficiencies, performance and profits. Areas of concern had been the high costs of 'raw water', and the government's expectation that they keep their price increases below CPIX inflation. During the following discussion, Members expressed concern about retrenchments and job creation, and asked for clarity on why costs would be higher than CPIX. They also questioned the company's social responsibility programme and staff racial demographic representation.

MINUTES

Rand Water briefing
Rand Water's delegation consisted of Mr H Kasan, General Manager of Scientific Services; Mr P Camay, Chairperson; Mr D Dalling, Board Member; Mr G Verschoor, General Manager of Human Resources; Mr M Mathibe, General Manager of Information; Ms M Letsoalo, General Manager of Marketing and Communication; Mr K Naiker, General Manager of Sales and Customer Service; and Ms Y Tyantsi, Corporate Communications Executive.

Mr Kasan reported that Rand Water was the largest utility provider in Africa, with a service area of 18 000 square kilometres. Their largest customer was the City of Johannesburg, and 12 million people were supplied with water daily in Gauteng alone. The bulk of water supplied had increased, and there had been an improvement in turnover from R2.88 billion in 2003 to R3.26 billion in 2004. Their production processes were in line with international standards. Sales had increased but the percentage growth had declined relative to the previous three years. Costs of 'raw water' were very large, followed by energy, labour, and chemical treatment, and expected to increase at a higher rate than the Consumer Price Index X (CPIX). The last five years had seen an increase in gross profit, but the profit margin had declined. Rand Water had destroyed economic value in 2000 because, due to its capital-intensive nature, costs incurred from borrowing from the capital markets had not delivered good returns.

Return on assets, such as its pipelines and plants, were lower than the cost of capital at 5.1%, but this had improved to 7.5% in 2002, 9% in 2003, and 10% in 2004. At 13%, Rand Water would stop destroying economic value. A high profit had been generated as surplus funds, because it estimated it would require in five years, capital infrastructure of R25 billion. Firstly, costs would be lower if capital infrastructure were funded internally than to access funds from the open market. Secondly, with good credit rating, there would be a decline in costs of accessing debt, pressure on tariff decreases.

He reported that Rand Water had been a self-funding institution for 101 years, and never received any loans or guarantees from the government. It had not engaged in profiteering, but rather recovered the cost of debt from general profit. Indicators showed that their profit margin had increased from 3.8% to 11.5%. Net income per employee had also increased from 25% to 125% as a result of improved efficiency. Interest cover, return on asset, debt equity ratio, asset turnover, and current ratio all showed an upward adjustment. However, the average cost of capital had declined which indicated that Rand Water had been purchasing money at a lower cost than four years ago. Their credit rating had remained stable over the last four years.

Operational costs per kilolitre sold had increased from 90 cents to R1.06, and kilolitre per employee had also increased from 337 to 444, hence they were producing more per employee. In order to improve efficiency, employees were reduced from 3 250 in 2001 to 3 095 in the previous financial year. The income of employees had also increased on a productivity basis, as well as profit per employee. Customer satisfaction had remained constant. Investments in training accounted for 6.6% of total payroll in 2003, and increased to 7% in 2004, the highest in this sector in the world. The United States average was between 2.5 - 3.5%. Designated groups had increased from 60% to 64% between 2003 and 2004. Rand Water had supported black suppliers, and 46% of purchasing expenditure had gone to Black Economic Empowerment (BEE) companies in 2004.

A schools programme had educated children on the uses and importance of water. Their commitment in the area of HIV/AIDS was R637 000 and this had increased over the last two years. During the last financial year, Rand Water had forwarded R3 million to the Rand Water Foundation, engaged in communities on water related issues and water access, and through their initiatives, some 648 jobs had been created.

Rand Water Service (Pty) Ltd had been set up to engage in commercial business throughout South Africa and Africa, to provide back-up supply service for SASOL via a pipeline worth R40 million, and to engage with NEPAD so that its skills and expertise could assist other African countries. Investigations had been conducted to assess the environmental impact of the R450 million Brakfontein-Rustenburg 80 km pipeline. It would fund R40 million of the R113 million Western Highveld Region Project. A total of R962 million of infrastructure projects were in progress, out of R2.5 billion worth of capital investment. Rand Water had participated in the Presidential Lead Projects in Winterveldt to the value of R142 million, and had facilitated the supply of 3 500 community standpipes that benefited one million people. More than 2 540 toilets had been built at a cost of R8.3 million to benefit 25 000 people. The Integrated Water Department Management had spent a further R60 million on this intervention. R215 million worth of projects had been implemented by the CBPD. Female representation in management had increased from 22% in 2002 to 28.2% in the last financial year.

K Naicker reported that tariffs had only come into effect after a process of notifying the municipalities six months previously; giving the National Treasury and SALGA 40 days to comment; and engaging in public consultations and information sharing. The Department had approved preliminary tariffs, and Parliament had to give a final approval before the tariffs took effect on 1 July. Activities had been divided into core and non-core, and it was imperative to ensure that non-core activities did not influence the cost of water Rand Water had tried to keep increases in bulk water tariffs below the costs of raw water. There was also the expectation to keep price increases equal to or below the inflation rate. The CPIX was higher than the price at which Rand Water sold bulk water to municipalities, indicating that municipalities were responsible for the high cost.

Mr P Camay added that water board accountability was ensured by a number of measures. The Minister had oversight authority over water boards, in terms of review of provisions, recommendations, and monitoring.

Discussion
A Member asked whether monies had been given to credible social organisations that took care of people with HIV/AIDS, and if particular attention had been paid to infected parents and their children. Furthermore, what were the targets to achieve a fair representation of women? Who were the black suppliers? Were there any efforts to prevent wastage? What kinds of sanitation projects were being carried out in Winterveldt?

Ms M Gumede (ANC) asked what the concept of 'destroying economic value' entailed.

Mr M Masala (ANC) was concerned that retrenchments in the interest of efficiency was against government objectives of job creation, and asked about the boundaries between improving efficiency and reducing the number of jobs.

Mr M Manana (ANC) asked if there were any problems with payment from municipalities, and if any bursaries were awarded this year.

Mr S Simmons (NNP) asked for clarity on sales trends, and about the basis for awarding bursaries.

The Chairperson asked for clarity on the rationale that costs would be higher than CPIX and about what influenced costs in delivering water. Had there been any alignment of social responsibility in line with the government goals of eradicating poverty and creating jobs?

Mr Kasan said that 'double-rating' indicated the solid financial standing of Rand Water. If a small business' start-up capital at 10% generated 8%, it would have destroyed economic value and returns on investment would not equal the costs of infrastructure. Ms M Letsoalo said the HIV/AIDS initiative had focused on affected children, provided support to institutions, and participated in national events. In the Winterveldt project, the community had approved a design of toilets and their water supply had cost R86 million.

Mr G Verschoor reported that skills training had focused on the ability, performance and career progression. HIV/AIDS training had been organised through care educators. Efforts at school level focused on the use of water, and 'Water Wise' programmes had educate the public to conserve water, especially in the Gauteng area. There had been a reduction of jobs rather than a reduction in employees. They had encouraged voluntary retrenchments, and converted temporary employees to permanent ones. They had needed to improve efficiency because of financial pressures. The increasing amount of work was indicated by the financial turnover. They provided free medical care to all employees with HIV/AIDS.

Mr Naicker said the government had expected Rand Water price increases to be below inflation because of fixed term debt incurred. In order to finance this, they needed to ensure a consistent income. Extra water had been obtained from Lesotho. A decline in demand had meant a surcharge had been needed to raise money to pay for the Lesotho Dam Water Scheme. Municipalities had honoured payments, but in recent months, there had been delays in cash flows.

Mr Dalling said Rand Water had provided bursaries for postgraduate education for their staff, and focussed primarily on 'previously disadvantaged' workers to study operational skills. All bursaries went to blacks - 56% of bursaries were taken up by women. There had been a mentoring programme for lower management to improve the 'outlook' of Rand Water. Seven out of 19 Boardmembers were women, compared to the situation in 1994 where the entire Board was male, with only three 'non-white' Members. Currently there were only three white members. In 1994, all 12 of the management team were white men, compared to a a very mixed team in 2004. Five of the top managers were women. At the bottom of the scale, transformation had been radical. Rand Water and the municipalities had performed different functions. Rand Water dredged water, cleansed it, and pumped it into the reservoirs of the municipalities. The municipalities kept and maintained reservoirs to supply the water to the consumer. The amount of 'water lost unaccounted' had been due to faulty pipes and old infrastructure.

Mr Camay reported that Rand Water's customers included local authorities, industries like SASOL, and individuals. Targetting designated group had been a challenging task. The Board had received and approved a report for water management for the next ten years. Mr Kasan said input cost for chemical, electricity and labour had increased more than CPIX, and they had engaged in dialogue to mitigate these increases.

The meeting was adjourned.