Report of the Portfolio Committee on Water and Environmental Affairs on Water Tariff increases of Bulk Water Resources 2009/10, dated 5 August 2009


The Portfolio Committee on Water and Environmental Affairs, on receiving briefings on 30 June and 1 July 2009, from the Department of Water and Environmental Affairs and 13 water boards, South African Local Government Association (SALGA) and National Treasury, and having considered the tariff increases of bulk water resources for 2009/10, reports as follows:

1. Introduction

According to Section 42 of the Municipal Finance Management Act of 2000 (MFMA), the water boards must consult the municipalities and SALGA to provide them with written comments on their proposed tariffs. Section 42, further requires water boards to submit to the Minister of Water Affairs amendments received from National Treasury and SALGA. The minister must table the pricing structure in parliament or the relevant legislature on or before 15 March in any year, in order for the tariffs to be effective on 1 July in that year. However, neither the minister nor parliament has the mandate to approve or disapprove the proposed tariffs.

2. Submissions received from the Department of Water and Environmental Affairs

On 30 June and 01 July 2009, the committee received briefings from the Department of Water and Environmental Affairs, SALGA, National Treasury and 13 Water Boards: Amatola, Botshelo, Bloem, Bushbuckridge, Lepelle Northern, Magalies, Mhlathuze, Namakwa, Overberg, Pelladrift, Rand, Sedibeng, and Umgeni. The Albany Coast Water Board tendered an apology.

The Department of Water and Environmental Affairs stated that the tariffs process was a value chain one, whereby the department provides raw water and the water boards act as bulk water providers to consumers. The raw water tariffs were set in terms of the pricing strategy. The following components determined the tariff settings: operation and maintenance costs, depreciation charges, return on assets and water resource management charges. The department reported that charges were funded from the budget schemes, for example, the Lesotho Highlands and Berg River and the Trans Caledon Tunnel Authority (TCTA). The department mentioned that provision of the free basic water to households, including cross-subsidisation was a municipal function, not of the water boards. The municipalities utilised the equitable share funding allocation to fulfill this function to the indigent.

2.1 Achievements

The department indicated that during the period under review, all the water boards:

• Complied with all the MFMA Act provisions.
• Met all timeframes relating to consultation process and received feedback from National Treasury.
• Due to global economic meltdown, the previous Minister of Water Affairs issued a directive to water boards to decrease their tariffs by 5%. All the water boards implemented the directive and tariffs were tabled on 13 March 2009.
• Strong financial position of all water boards allowed for the reduced tariffs.

2.2. Challenges

The department highlighted the following challenges faced by the water boards:

• The financial position of Albany Coast Water Board was adequate to carry out its operation but the infrastructure had a limited capacity to respond to the demand. Water shortages in the Port Alfred area were reported.
• Amatola water reticulation contract required review.
• Namakwa Water Board: The financial results showed a decline due to the closure of mines. The mines were their biggest consumers. The board needed a turnaround strategy and financial support to ensure viability.
• Botshelo was insolvent and the proposed tariff was unsustainable.
• Bushbuckridge: Debt collection from the municipality was a challenge and its water treatment plant could not meet short-term water demand increases.
• Lepelle: Debt collection was also a challenge as it was unable to collect outstanding debt from the municipality.
• Magallies was financially sound but capital investment needed review. The CAPEX plan needs implementation due to greater mine expansion and demand in the area.
• Overberg Water Board: A relatively small water board serving a big rural area and its business operations were sound but required financial support.
• Pelladrift: Its operations struggle to break even, require major infrastructure refurbishment in order to support the mines and rural communities.
• Rand Water Board: This is the biggest board and was financially viable and required R7 billion to expand to various areas in Gauteng. The CAPEX programme needed to be implemented.
• Umgeni Water Board: Business was profitable. However, it had high debt levels.

The table below reflects the comparison between the proposed tariffs and approved tariffs:

Water boards	Proposed tariffs for 2009/10	Tariffs tabled to parliament for 2009/10
Albany	R4.01 (4%)	R4.01 (4%)
Amatola	R5.25 (11%) – Amatole District Municipality R4.31 (10%) – Buffalo Municipality	R4.97 (5%) R4.18 (7%)
Bloem	R3.73 (15%)	R3.56 (10%)
Botshelo	R3.27 (23%)	R3.14 (18%)
Bushbuckridge	R3.05 (3.7%)	R3.05 (3.7%)
Lepelle	R3.32 (8.8%)	R3.17 (3.8%)
Magalies	R2.65 (12%)	R2.52 (7%)
Mhlathuze	R1.54 (19%)	R1.47 (14%)
Namakwa	R6.55 (78%)	R6.36 (73 %)
Overberg	R3.27 (13.5 %)	R 3.12 (8.5%)
Pelladrift	R1.90 (11.8 %)	R1.90 (11.8 %)
Rand	R3.72 (15.3%)	R3.47 (8.3%)
Sedibeng	R5.58 (12%)	R5.23 (5%)
Umgeni	R3.27 (6.5%)-eThekwini Municipality R 3.21 Other	R3.27 (6.5%) eThekwini Municipality R 3.21 Other

In conclusion, the department reported that, in relation to support rendered to water boards, it:

• Facilitated meetings between the water boards, municipalities and Treasury.
• Facilitated instances where there was outstanding debt between the water boards and municipalities. Successful cases included Bloem Water Board vs. Ukhahlamba Municipality and Umgeni Water Board vs. Umsunduzi Municipality.

3. Submission by the South African Local Government Authority (SALGA)

The SALGA presentation detailed their mandate, governance structure, and water pricing value chain from the water resource to reticulation of water to consumers as per the constitution and regulatory regime. It acknowledged the important role played by the water boards in the provision of water services in South Africa. It proposed that in terms of water pricing, the same principles and methodologies be applied throughout the value chain. Whilst the national department had a pricing strategy in place, there was none available for local government to guide the setting of prices and tariffs.

SALGA highlighted the following challenges:

· Non-compliance with Section 42 of the Municipal Finance Management Act provisions by water boards and budgetary implications thereof for municipalities.

· Lack of consistency in water pricing.

· Debt payment owed by municipalities to water boards.

· Non-expenditure on Capex, which impedes planning.

· Inadequate skills in the water sector.

· Tendency to build on reserves rather than refurbishing infrastructure.

Therefore, SALGA proposed a way forward and suggested that:

• In the absence of a regulatory framework, there should be a review of the water pricing strategy by an independent body.
• There should be a separation of functions between Water Service Providers and Water Service Authorities.
• The monitoring and enforcement for compliance should be undertaken by the National Treasury in respect of Section 42 of the MFMA and to penalize under- expenditure on Capex.
• Integrated pricing framework to be developed.

However, the committee noted that the SALGA presentation was unsatisfactory, as it did not address the municipal tariffs. The committee expressed the view that SALGA was not rising to the expectation as the highest decision-making body for municipalities.

4. Summary of submissions by the water boards

The table below highlights the challenges noted by the water boards:

Water boards	Challenges
Albany	Tendered an apology.
Amatola	Implications posed by the tariff reduction had a negative impact on the board’s cash flow and therefore required reduction on the operating expenditure. The board had to also increase borrowings and explore new income streams. It required R100 million to refurbish its water pipeline.
Bloem	Non-alignment of Integrated Development Plans (IDPs) with actual implementation was reported.
Botshelo	The consultative process with the municipality was problematic and was hampered by the fact that municipalities often did not attend meetings when invited. The impact of the changed tariffs on customers was also a challenge.
Bushbuckridge	The area was rural and characterised by high levels of unemployment and poverty and posed difficulty when collecting revenue from the clients. The cross subsidisation for free basic water, lack of bulk infrastructure refurbishment vs. the overhead allocations was noted. The labour costs were also high due to deployment of staff to the board by the department. Its cash flow was low, due to its inability to collect R7 million owed by municipality. It would consider reviewing its tariff during the financial period to address the highlighted challenges.
Lepelle	The tariff reduction of 3.8% affected Lepelle operations to the tune of R4 billion for the whole year.
Magalies	Raw water costs were noted to be one of the major cost drivers.
Mhlathuze	The tariff reduction meant a loss of R5.2 million for the current year. The majority of Mhlathuze’s clients especially the mines, exported products and were feeling the strain, in the light of the global recession and additional increase in costs. There was reduction in demand from aluminium exporters.
Namakwa	The board requested the committee’s assistance in acquiring finance for operating costs, as they were technically insolvent.
Overberg	It was impossible to plan refurbishments without securing service level agreements with the four municipalities. It could not refurbish infrastructure due to absence of reserves and needed the intervention of the department.
Pelladrift	Raw water costs were the biggest challenge. The 2008/9 tariffs increased by 7%; for 2009/10 the suggested increase was 7%, but 80% for Black Mountain Mine, to which the mine had agreed. Black Mountain Mine was to close in seven years time. There was a need to get back to a break-even situation.
Rand	Transportation costs were high because their water was drawn from 60 kilometers away, in Lesotho. There were outstanding debt from municipalities, and needed the intervention of the committee.
Sedibeng	Challenges ranged from consultative issues, and municipalities’ concern about separation from the regional tariff. The minister’s tariff reduction 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.
Umgeni	A high tariff made things impossible for the poor consumer. The result was a delay in their capital expenditure programme.

5. Response of the portfolio committee

The Portfolio Committee deliberated on the following:

• The current economic climate and the impact of the minister’s directive raised a number of concerns on the future financial viability of water boards. This would be further exacerbated by the possible tariff increase by Eskom.
• Another concern was the transformation in water provision and coverage of water provision by the water boards in under-serviced areas, including the Eastern Cape, KwaZulu-Natal and Mpumalanga, as there were water related deaths in Limpopo and the Eastern Cape.
• The utilisation of appropriated funds to reflect effective outcomes by the department.
• The corporative governance challenges faced by water boards, such as the, suspension of the CEO. In addition, financial mismanagement affected service delivery.
• The role of municipalities in relation to water provision: There were difficulties in directing people with water related problems to the relevant institution/s.
• The role of SALGA in ensuring outstanding debt settlement by the municipalities to the water boards, as well as skills shortage in sector and compliance by municipalities with MFMA provisions was also questioned.
• There was a need to create better working relationships, knowledge sharing and cooperation between the Department, water boards, municipalities and SALGA to improve service delivery.
• Was there a possibility of water boards being located under the Department of Cooperative Governance and Traditional Affairs, since the Integrated Development Plans (IDPs) resided at local government level?
• Questions were raised around the under-expenditure on CAPEX funding by boards.
• The committee needed to further interrogate the Intergovernmental Review Report 2006/7 on challenges faced by the water boards.
• Departmental plans for constructing major dams in the country, as there were complaints with regards to a lack of access to water from dams such as Umzimvubu, Inyaka and Jozini dams, by surrounding communities.
• The assistance and support provided to water boards by the department was inadequate to ensure their viability, as some water boards were facing internal problems, which affected their ability to perform.
• There was no financial assistance provided to water boards that were in financial distress by the department and a proposal was made to amend the existing water legislation in order to assist the struggling water boards.

6. Recommendations

The Portfolio Committee recommends the following:

• The department considers penalizing boards for not spending their CAPEX.
• The department to submit a report on water resources plan, detailing the envisaged dam construction.
• The Department of Water Affairs and Forestry continue its oversight role over the water boards and to provide adequate support.
• New funding models for water boards to be explored in the future.
• In order to function optimally, good corporate governance and the building of partnerships in long-term planning were essential.

Report to be considered.