Questions asked by the members of the Water and Forestry Portfolio Committee

UMGENI WATER - AMANZI

Response to the questions asked by the members of the Water and Forestry Portfolio Committee

QUESTION	ANSWER
I have noticed that you have reduced the short-term debt. I would like to know, what are the risks associated with having long-term debt.	In Umgeni Water’s (UW) case the switch from short-term debt to long-term debt allowed the organization to match its debt repayment profile more closely to when there will be free cash flows available to repay debt. Had UW retained so much of its debt in short term it would have increased both its liquidity risk and refinancing risk; which means that UW would continuously have to keep on rolling its short term debt until the funds became available to repay the debt. UW’s policy is to liquidate debt as soon as possible. During the 2004 financial year the organization did reduce its total net debt position by R118million. Any excess cash flows are either used to repay debt or are invested in a redemption portfolio for when the debt matures. UW’s cash flow projections are closely monitored and its funding requirements are based on those cash flow projections; thus the term of UWs debt is in line with its best cash flow projections. One must always keep in mind that UW has to always balance its financial viability with the lowest possible water tariff.
Do you think that there is a need for a national debate on tariffs? We have listened to a number of presentations and it seems that you all have different tariffs, what is your opinion about having a national debate on this matter?	Given that water is an economic and social good there is a need for a National Debate on Tariffs to clarify what costs are attributed to 1^st tier supply (Raw Water), 2^nd tier level (Bulk Potable Water Supply) 3^rd tier level (Water retail by Municipalities). Most of Capital Costs of the infrastructure at the 3^rd tier level is grant funding from National Revenue Fund with no impact on the balance sheet of the Municipalities and hence the 3^rd tier tariff should reflect operations and maintenance costs plus replacement provisions and minimal capital charges.
It is good to hear that Umgeni Water has thought about meeting the backlogs but is it possible to get a copy of the actual plan that indicates how the backlogs will be met by 2008 and 2010 for water and sanitation respectively?	As indicated at the meeting, Umgeni Water has prepared a concept plan for the whole of KwaZulu/Natal. The idea of the concept plan is that it will facilitate discussions in the province on matters relating to the provision of water in the region in order to meet the targets as set out by the President of South Africa in his address in May 2004. Umgeni Water believes that this concept plan is in line with the directive from the President of South Africa that, State Owned Enterprises (SOEs), such as Umgeni Water must be used and leveraged in order to address the developmental challenges facing the country. It is in this context that this document has been prepared. The full executive team of Umgeni Water is happy to spend a weekend with the Portfolio committee to discuss the contents of the concept plan at a suitable date and time to the Portfolio Committee.
We have heard you point on the positioning of the water utilities, we will invite Umgeni Water and other institutions to a discussion in the near future on this matter.	We believe that a discussion on the Water utilities in the context of the President’s call for SOEs to play a key role is urgently required. Umgeni Water will be happy to participate in this process.
Does Umgeni Water have a plan for the whole region of KwaZulu/Natal or just its own area of supply? My experience in Libela and Mkhanyakude is that people are really experiencing problems and sometimes have to do for 3 days without water? Does your plan indicate where dams are going to be built? Can you share the concept plan with us?	As already indicated in 3, above, Umgeni Water has prepared a concept plan for the whole of KwaZulu/Natal. The plan shows the existing and future dams. It also does indicate other bulk infrastructure requirements. At this stage the reticulation part of the plan is at it infancy. Again as indicated above, Umgeni Water would be very happy to present this document to the Portfolio Committee.
I heard a comment that Umgeni Water carries the debt of the schemes; can you please elaborate on this point?	Prior to 1994 UW embarked on a programme of providing safe water to a number of rural customers in its area of supply. At the peak of supply UW had directly provided water to over 35 000 rural customers at a capital cost of approximately R461 million. With the changes in legislation the responsibility for providing water services became that of municipalities and thus UW began the process of transferring these schemes to the relevant municipalities. In 2002, 30 schemes were transferred to eThekweni; in 2004 a further 6 schemes were transferred to Sisonke, Ugu and Illembe. The remaining schemes are in the process of being transferred to uMsundusi and uMgugundlovu. The substantial financial burden by way of the capital loans raised to fund the infrastructure makes it difficult if not impossible for some of the Municipalities to immediately repay for these assets. The repayment of these schemes is thus being cross-subsidized through the bulk tariff. In order to reduce this cross subsidization DWAF provided UW in 2003 and 2004 with grant funding towards the cost of these schemes totaling R120 million. The value of these assets is currently reflected in UWs books at about R370million.
Please indicate to what extend Umgeni Water supports other water users such as emerging farmers?	There is little support to emerging farmers, other than participation in Catchment Management Area Committee discussions. The Water Resources Strategy identifies four major water user sectors: - Water Services Authority Sector Industrial, Mining and Energy Sector Irrigation Sector Forestry Sector or Stream flow reduction activities Section 29 of the Water Services Act aligns the activity of the Water Boards to the Water Services Authority Sector.
What does it mean that you have made a saving of R43 million on administration costs, what do you tribute this to?	Of significance is the fact that In 2004 there was no increase in the Bad Debt provision (in 2003 the bad debt provision was increased by R16 million) In 2004 there was no asset impairment (2003: R9m) and no restructure costs (2003: R11m) All other expenditure also reduced in real terms. It is important to note that UW operated under drought conditions during the latter part of 2004 and that it actually incurred R15 million additional electricity costs which had not been budgeted for; despite this UW’s costs for 2004 were R43 million lower than the previous year.
Is it true to say that the restructure process has led to a better management of your debt?	The organizational restructure has most definitely impacted on UW’s debt in a positive way, namely by ensuring that both operational and capital costs are better controlled. This resulted in positive cashflows being generated. This is evident from our Cashflow Statement that clearly indicates how in 2004, for the first time in five years, a cashflow surplus of R150 million was generated from operating and investing activities. The balance sheet restructure enabled UW: To cease its market making operations which saves UW about R9million p/annum and To buy back some of its bonds and restructure its debt through the DBSA loan which resulted in its weighted average cost of capital (WACC) reducing from 14.43% pa to 13.36% pa which equates to a saving of about R26 million.
Please indicate to us what you mean by the fact that 41 % of the tariff is attributable to Umgeni Water and the other part to the municipality.	In terms of international norms the wholesale water tariff should be in the region of 45% of the retail tariff. Our calculations show that UW’s wholesale tariff at R2.61/kl is 40% of eThekweni’s average retail tariff of R6.47 and 42% of uMsunduzi’s average retail tariff of R6.22/kl (the average retail price was calculated on consumers using 35kl of water per month).
Please indicate to us what corporate governance systems you have in place, for example do you have an audit and risk committee, and have you complied with the King 2 Report?	The corporate governance systems in place at Umgeni Water include the following: A board: which has sub-committees responsible for certain matters. These include the Audit Committee, the Finance Committee, the HR and Remuneration Committee, the Capital Projects, Fixed Assets and Procurement committee, the Legal Committee, and the Chairs Committee. Each year the organization reviews the King 2 report and all applicable legislation to ensure compliance. This information is provided in the annual report and is done by the external auditors. A fraud prevention committee: this is chaired by an outsider and it is located within the management component of the organization. It reports directly to the audit committee. A corporate risk committee that looks at all the risks of the organization and makes recommendations to the Board and also to the Audit committee. A hotline has been established - for the reporting of any fraud and other fraudulent activities that might occur. This is done through an external auditing firm not linked to the external auditors. Executive management – run the organization on the day-to-day basis and report to the Board every 2 months.
Please give us an understanding on how you are doing in procurement.	Black Economic Empowerment Umgeni Water recognises the historical disparity of previously disadvantaged communities and commits to promote BEE enterprises by making procurement accessible to them, through processes, which are competitive, fair, transparent, equitable and cost effective. Umgeni Water has an approved Black Economic Empowerment Policy that is broad based, evaluating suppliers according to these pillars: Ownership and control Training and development Preferential procurement Enterprise development Social responsibility Economic Empowerment is viewed as a business imperative aimed at the following: To facilitate access to Umgeni Water’s procurement activities by BEE To ensure that previously disadvantaged individuals achieve full participation and involvement in businesses. To develop and/or establish new, sustainable business with black entrepreneurs, through procurement process. To encourage the establishment of value adding joint ventures between traditional and emerging BEE supplier, thus giving the latter access to technology, skills and knowledge. Umgeni Water has a support programme for companies that are 100% black owned and that have total annual revenue of less than 25m (SME companies); this programme includes: Paying a maximum of 10% premium on the lowest tendered price. Setting aside selected commodities for each financial year Arranging expedited payment terms of 15 days from date of statement Award SME’s long term contracts with an option of further extension The BEE policy has a monitoring system which assist in avoiding fronts and abuse of the policy and is directly tied to penalties being imposed whenever necessary. BEE expenditure is calculated against total discretionary expenses and there is a set target of 45% for the 2004/5 financial year-end. Umgeni Water’s BEE policy is implemented by the procurement department through the sourcing of goods and services for different projects, which includes water and sanitation projects rolled out in different communities around KwaZulu Natal. These projects are utilised to uplift the otherwise unemployed and unskilled labour of the different communities in partnership with the Department of Labour, which facilitates training of unskilled labour. This is done adopting the principles of the Extended Public Works Programme (EPWP), defined as a Nation-wide programme which will draw significant numbers of the unemployed into productive work, so that workers gain skills while they work; enhancing the ability of workers to earn an income, either through employment created by these projects or through entrepreneurial activities aligned with Umgeni Water’s BEE policy.