DWAF RAW WATER PRICING STRATEGY REVIEW: SAAWU INPUTS

SAAWU INPUTS INTO THE DWAF NATIONAL WATER RESOURCE STRATEGY (First Edition, September 2004)

In the first instance SAAWU would like to congratulate the Department of Water Affairs and Forestry on the work done on the development of the National Water Resource Strategy (NWRS). The task of protecting, using, developing, conserving, managing and controlling the water resources of this country so as to ensure that social and economic development is sustained in an equitable manner into the future is critically important and particularly challenging. The NWRS provides a comprehensive national frame work for the management of water resources in a manner that ensures that a wide range of diverse objectives are met and the broad interests of sector role players, stakeholders, interest/user groups and communities, including the previously disadvantaged, are all appropriately considered.

The inputs made by SAAWU are not intended to be a criticism of the NWRS or any part thereof, but should be seen as constructive contributions to the process of finalizing the NWRS.

PRINCIPLE ISSUES

In the first instance it is important to state the following principle issues that underpin and inform the SAAWU view on the NWRS. These views are primarily centered on the elements of the NWRS that impact on the business of water service delivery.

Holistic Approach

The integrated approach to water resources management propagated in the NWRS is strongly supported. It must however, also be emphasized that this integration must also extend to the entire water cycle so that there is a holistic approach to water cycle management and not just water resource management component. From a water services perspective the following is relevant:

Water Service Tariff Implications

All role players must recognise that all decisions and activities related to water resource management (WRM) ultimately form part of the cost chain for water services. The reality is that the costs associated with water resource management decisions and activities are (where relevant) passed on through the supply chain (raw water tariff component) and ultimately paid for by the consumer.

Integrated Raw Water Demand Projections

It is essential that there is effective integration and co-ordination of water demand estimates at all levels in the water supply chain. This includes resource management institutions, water utilities and water service authorities. If this is not done effectively there is a risk that the process remains disjointed (as is the case at present), resulting in a situation where in some cases, excess raw water is available, institutions have spare infrastructure capacity which cannot generate revenue and consumers are paying for high cost infrastructure which is not needed at the time, or conversely, too little raw water is available and there is a shortage of water available to the consumer. This must also be combined with an integrated regional approach to water demand management (WDM) so as to ensure that resources are conserved, protected and used in a sustainable manner.

Institutional Arrangements

The process of reviewing the institutional framework for water management institutions (Chapter 3, Part 5) must also be holistic and be aligned with and integrated with that of the institutional reform of water service provider (WSP) institutions. A number of common problems and challenges exist (eg WSPs who operate complex water service delivery schemes that provide bulk services across provincial boundaries, between water management areas, serve multiple water service authorities, large geographical areas and operate regional infrastructure arrangements). This is critical if meaningful progress is to be made in optimising water sector institutional arrangements, minimising duplications of functions and ensuring the effective mobilisation and utilisation of sector resources and skills to deliver the sector goals and targets and the MDGs.

Regulation

If the Department of Water Affairs and Forestry’s eventual role is to provide national policy and a regulatory framework for the sector there should be a more holistic approach to the regulatory regime for all sector institutions. The regulation of water management institutions, as substantial contributors to the water services cost chain, should therefore be addressed together with the establishment of the regulatory framework/regime for water services. The appropriateness of DWAF as the sector regulator in the future also becomes a critical issue.

Raw Water Pricing

A structured, clear and inclusive process for the appropriate involvement of all institutional role-players and stakeholders, including the consumer, in all water resources management decisions and activities that ultimately impact on raw water pricing must be established as soon as possible.

2. SPECIFIC COMMENTS

2.1 Chapter 3, Part 4. Water Pricing and Financial Assistance

2.1.1 Business interfaces where utilities pay DWAF for raw water provided must be underpinned by appropriate contractual agreements that address, amongst others, the key issues of security of supply, cost and quality of raw water.

Water utilities are required by legislation (WSA & PFMA) to produce 5-year business plans, including tariff projections. In addition they are required to enter into formal contractual agreements with municipalities covering costs, quality and service standards. No proper contractual agreements between DWAF and water utilities are in place with regard to price and quality of raw water. Given the cost impacts of raw water and its quality on the tariffs of utilities and the requirement to ensure that water pricing supports the tariffs of water services, this situation must be addressed as a matter of urgency.

2.1.2 A number of water utilities are currently engaged in WRM related activities and these utilities should receive fair compensation for the costs of theses activities via appropriate formal agreements.

Some water utilities are actively involved in a range of activities that fall within the ambit of water resource management activities. Examples are catchment management, pollution control activities and water demand management activities. These activities are currently funded via the bulk water tariff of the utility. DWAF also charges a pollution control levy via the raw water tariff. Where this happens customers/consumers are effectively being charged twice for the same service and this should be addressed.

The business interface between DWAF and a water utility (in terms of the contract referred to in 2.1.1 above) must be subject to full and effective regulation by the sector regulator.

The fact DWAF is positioned as the sector regulator again raises the issue of the referee also being the player).

Raw Water Quality Costs. DWAF must be able to adequately monitor and control the quality of raw water to acceptable standards. Should they fail to do this, and water utilities are required to abstract sub-standard raw water, then DWAF should financially compensate water utilities. The financial compensation should match the additional purification costs that the water utility must incur as a result of being supplied with sub-standard raw water.

Deferral Of Payment Until Costs Are Incurred. There have been incidences where DWAF has made it mandatory for water utilities to pay for budgeted expenses in the anticipation that they may be utilised sometime in the future. One example is the anticipated pumping costs to augment water supplies from the Thukela Scheme to the Vaal Scheme. The net effect of this is that it inflates the water utility costing structure with the result that higher than normal tariffs are passed through to customers and therefore end consumers.

It is suggested that a special purpose vehicle be created whereby these costs can be effectively managed, paid when they are incurred, credits carried over to "subsidise" future years, and manage the impact on consumer tariffs.

Excess Income Due To Volume Growth. The DWAF raw water price (c/kl) is based on estimated volumes of raw water. In cases where such volume exceeds the estimate, DWAF logically recovers more than the required revenue. Such over-recoveries should be declared and preferably set aside to offset future under-recoveries, or paid over to reduce debt.

Pricing Policy Impact on Small Schemes. The impact of the pricing policy on small and non-viable schemes where demand volumes are low can be substantial. This is particularly relevant in rural environments. The net effect of this is that the return on assets and depreciation components of the raw water tariff are very high and this drives up the consumer tariff to excessive levels.

Chapter 3, Part 4. Water Management Institutions

2.2.1 Institutions for infrastructure development and management. There needs to be broader sector engagement with regard to the most appropriate institutional arrangements for water resource management institutions. The national utility/regional utility options have not been tested with broader sector stakeholders at this stage. The key issues of alignment and integration with other sector initiatives focused on institutional review and regulation is a critical requirement if a holistic approach to the sector is to be achieved. This approach should also be informed by the understanding that a primary driver of institutional reform is the need to ensure that the best possible institutional arrangements are established to ensure that the sector is structured to optimally mobilize and use the collective capacity skills and resources of the sector to help municipalities achieve sector targets as set out in the Strategic Framework for Water Services (SFfWS) and the Millennium Development Goals.

2.2.2 A clear time line for the process of establishing appropriate WRM institutions should be determined.

2.2.3 Sub section 3.5.2.9 makes specific reference to schemes that are regarded to be national water resources infrastructure. A clear set of criteria should be developed to inform decisions regarding the classification of national infrastructure/ regional infrastructure and local infrastructure. This will provide a rational and objective framework for classification of theses schemes.

2.2.4 The need to ensure that there is a high degree of integration between water resource management and water services is acknowledged in sub section 3.5.3 of the NWRS and is strongly endorsed and supported.

Chapter 4, Capacity Building in the Water Sector

The capacity building strategy that is referred to in 4.2 will need to be informed by the establishment of WRM institutional arrangements and the alignment and linkages with the services functions. The registration of DWAF WRM staff with the responsible water SETA will also contribute toward a more integrated and holistic approach to sector capacity building.

The capacity building strategy should also deal with the key challenges of an aging skills base and skills development in the short term.

2.4 Public Consultation, Education and Awareness Creation

As identified there is an important requirement to ensure that sector stakeholders are properly informed with regard to water management issues. The processes of public consultation, the Water Education Programme, communication initiatives and research activities as set out in the NWRS are fully endorsed and supported.