PRESENTATION TO THE PORTFOLIO COMMITTEE ON WATER AND ENVIRONMENTAL AFFAIRS

Transcription

1 PRESENTATION TO THE PORTFOLIO COMMITTEE ON WATER AND ENVIRONMENTAL AFFAIRS 24 MAY 2011 Presenters: Mthobeli Kolisa Executive Director: Municipal Infrastructure Services William Moraka Director: Water Services

2 STRUCTURE OF THE PRESENTATION SALGAs Mandate Last year s issues and how these we dealt with Water Tariff regime Proposed increases and our comments Optimal Institutional Arrangements Challenges on the current tariff regime SALGAs suggested recommendations Conclusion

3 Mandate Organised local government institution recognised in terms of the Organised Local Government Act Mandate Represent LG (Voice) Advisor to municipalities Employer role limited to representing municipalities in collective employer processes Does not employ on behalf of municipalities Profiling LG

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5 2010/11 Recommendations' Issue Recommendation DWA Response SALGAs View Tariff application increase > business plan for all Water Boards WB s to provide justification Time difference between business planning process and tariffs Re-look at the two processes and align accordingly Raw water cost increases up 8% - 13%, 30% Revise policy to PPI plus 3% DWA is revising the pricing strategy however there is guarantee in raw water costs reduction Explore this further as part of the revision of the pricing strategy Asset productivity reduction through capex of 98% but water sales growth of 15.2% State assumptions of expansionary policy Long term infrastructure planning is accepted as long as it take capacity demands into account Infrastructure investments must be moderated by an effective regulator

6 2010/11 Recommendations' Issue Recommendation DWA Response SALGAs View Asset growth debt financed. No equity contributions from shareholder. a) Appropriateness of debt levels b) Make equity contribution as shareholder Water boards to be self funding NT provides subsidy to finance the trading account Users are subsidised through equitable share Bulk raw and bulk Infrastructure funding should be subsidised where applicable Wide range of return on assets [0.24% through 23.05%] PPI = 7.72% Specific motivation for under or over return for each utility PPI bears little or no relations to the ROA A higher ROA should be welcomed as it suggests that assets are employed productively Should measure the real ROA excluding inflation

7 2010/11 Recommendations Issue Recommendation DWAs Response SALGAs View Staff Costs < 10%. Chemical costs reduced by advanced procurement. Pollution of raw water driving purification costs a) Regulator to scrutinise costs b) Set cost driver targets Reduce pollution. Limit increases to PPI plus 3% Water boards costs are rising in excess of turnover increases Economic regulator will be set up Pricing strategy to introduce waste discharge charge SALGA and DWA to work together in reducing pollution at resource level This is not sustainable cause the trading account have been running at a deficit Supports the establishment of the regulator but short term arrangements are necessary SALGA to give inputs into the pricing strategy SALGA is part of the green drop certification process Raw Water pricing to be link to water quality DWA to take long term view to recover from the apparent historical under-

8 2010/11 Recommendations Issue Recommendation DWAs Response SALGAs View Scrutinise each water board as proposed No response Short term set up a expert panel Long term Independent regulator w Create a pricing policy for the entire water value chain No response The importance of the development of the funding and pricing strategy for the entire value chain cannot be over emphasised Separation of water board regulation from shareholding No response Independent regulator will be key in this regard

9 TARIFF REGIME DWA 1 st Tier National security of supply Tariff regulated by the raw pricing strategy BULK PROVIDERS 2 nd Tier Regional supply to WSA s Not regulated however the Water Services and Municipal Finance Management Acts provides guidance MUNICIPALITIES (Water Services Authorities ) 3 rd Tier Local service delivery and customer management Not regulated however the water services and Municipal Finance Management Acts provides guidance

10 Bulk Water Tariff Increases 2011/12 11

11 Context : International Experience 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Sufficiency of Global Water Tariffs Global Average High Income Countries Upper Middle Income Countries Lower Middle Income Countries Low Income Countries 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Global water tariffs to country income level; O&M and Capital Sufficiency Global Average High Income Countries Upper Middle Income Countries Lower Middle Income Countries Low Income Countries Too Low Sufficinet Sufficinet O&M and partial capital Too Low Sufficinet Sufficinet O&M and partial capital Source: Komvies, 2005 Source: Lee, 2005 Other key factors that impacts on affordability by households and businesses Electricity price increases Petrol price increases

12 Context : International Experience c c Average 3-year tariff USD/15KL WEF Rank Retail Water Tariffs of South African Metros and South Africa s Main Competitors as compared to the World Economic Forum s Global Competitiveness rankings for Tariffs in US$ per 15 kl. (Global Water Intelligence, 2011) (World Economic Forum, 2010)

13 Source: DWA APPROVED TARIFFS Water Boards Tariff in 2010/11: R/kl %age increase Tariff in 2011/12: R/kl Amatola R4.96 8% R5.35 Bloem R R % R3.50 system tariff Botshelo R % R4.29 Bushbuckridge R % R3.70 Lepelle Northern R % R3.72 Magalies R % R3.26 Mhlathuze R % R1.97 Namakwa R % R10.04 Overberg R % R3.93 Pelladrift R % R2.73 Rand Water R % R4.48 Sedibeng R % R6.36 Umgeni R % R3.68 Average 13.58% = 6.8% and 9.38 above PPI and CPI respectively

14 Our Comments 15

15 WHAT INFORMS OUR COMMENTS RATIONALE Section 42 of the Municipal Finance Management (MFMA) Act 56 of 2003 sets out a process within which bulk water providers should consult SALGA and National Treasury when proposing to increase potable bulk water tariffs. In essence the section states that, water bulk providers must give organised local government 40 days notice on the proposed bulk water tariffs before such can be submitted to the relevant executive authority or regulator. Municipal Inputs By the 10 of January 2011, SALGA had received a total of 11 bulk water tariff increases proposals for the financial year 2011/2012 for comments from various Water Boards including Midvaal Water. SALGA scrutinised each proposal and gave comments by the 25 of January 2011 as per requirements of National Treasury circular 23 of the MFMA. 16

16 Cost Drivers Cost Raw Water Labour Power Chemicals Depreciation Discussion Major cost driver driven by both deteriorating water quality needing additional chemicals raw water standards (price relation to quality). Raw water cost increase total 33% of the tariff increases. Labour increases of over 10% are proposed whereas SAAWU is yet to negotiate increase with trade unions. Eskom s tariff increases are factored into the applications sometimes illegitimately above the 24% increase claiming that retail rates are demanded by municipalities. Wide range of cost increases casts suspicion over the legitimacy of some cost increase projections. Depreciation and other operating expenses sometimes change out of sync with capital expenditure and other operating revenue raising legitimacy suspicion.

17 Capital Planning 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Projected Weighted Growth Rates for the Water Utilities to Projected Growth Rate Average Sustanable Growth Rate Average Affordable Growth Rate Water Provison Growth Rate 6% 5% 4% 3% 2% 1% 0% -1% -2% Planed growth is higher than sustainable growth rate. Affordable growth rate assumes a 50% debt funding, higher than ceiling set by Regulator. BRIC countries growth almost double SA. Capital projections must factor affordability or high tariff increases will be thrust on existing rate payers.

18 Cost of sales (Water) Direct labour cost Electricity Maintenance materials Chemicals/purification Other opeex Net Finance Charge Low and High Raw Water Cost Utilities Depreciation Other expenses Surplus Tariff income Cost of sales (Water) Direct labour cost Electricity Maintenance materials Chemicals/purification Other opeex Net Finance Charge Depreciation Other expenses Surplus Tariff income High Raw Water Cost Utilities Low Raw Water Cost Utilities Low raw water cost utilities have much higher surpluses and other

19 25% Tariff Application Average Increases and Business Plan Projected Increases for 2011/12 20% 15% 10% 5% 0% Business Plan Tariff Application

20 Comments per Water Board Utility Proposed Tariffs SALGA Recommendation Amatola 8% 7.96% Bloem Water 16.78% 9.17% Botshelo Water 18% 9.81% Bush buck water 7.27% 7.25% Lepelle Northern 10.22% 8.69% Magalies Water 16% 11.50% Mhlathuze Water 14% 14.19% 21

21 Comments per Water Board Utility Proposed Tariffs Proposed and Recommended Tariffs Overberg 15% 12.00% Rand Water 12.9% 10.78% Sedibeng Water 8.5% 13.59% Umgeni Water 6.1% 6.1% 22

22 Institutional Arrangement 23

23 CHALLENGES Common understanding of the approval process Who should approve the tariffs Timelines for the tariff consultation Dec-Jan are not good for consultation During the consultation process smaller municipalities are unable to scrutinise tariff proposals and make meaning inputs Different tariff methodologies are used Value chain uses different approaches Lack of Transparency Adequate information is not made available Quality of the tariff proposals Proposals are not standardised Lack of an independent economic regulator to review investment decisions and tariffs for the entire value chain DWA plays referee, player and coach Suggest panel of expert to fufil this role

24 SUGGESTED INSTITUTIONAL ARRANGEMENTS Short term Should consider establishing a panel of expert in the interim Embark on a 3 multi-year tariff determination framework (pricing strategy could be a platform) Long Term Have to establish an independent economic regulator

25 Our Suggested Recommendations on the bulk potable water tariffs 26

26 Recommendations Recommendation Detail DWAs Response SALGA s view 1. New schemes factor household income. New scheme extension must set and fund tariffs under 5% of household budget South African inequality Cost recovery will not be possible Water Boards to be self funding Affordability is key to price setting. There is a need for a funding and pricing strategy that balances the two 2. Low raw water utility costs Investigate efficiency of costs of low raw water cost utilities. Benchmarking Agree with the point Acknowledge need for an independent regulator role What do we do in the short term where there is no independent regulator? panel Benchmarking outcomes to be made available in the next tariff cycle 3. Low raw water cost utility surpluses Curtail surpluses on low raw water cost utilities to 5% unless specific and valid justification is offered. Reserves need for refurbishment and Development Debt collection Developed a guideline on surpluses

27 Recommendations Recommendati on 4. Factoring of local government ability 5. Tariff Applications Variance Detail DWAs Response SALGAs View Regulator to factor the ability of local council s to absorb tariff increases. Examination of detailed utility comments for dubious tariff increases and reduce tariff accordingly. LG to utilise Equitable share to pay for water services Bloem Water Tariff adjusted downwards Moderating other boards tariff will require will require detail investigation Such moderation to be done by an independent regulator The develop a water sector funding strategy For an independent panel of expert will be helpful in the process 6. Capital and Operating Cycle Optimisation Form realistic capital programs and operating cycle performance Infrastructure Development to be informed by the supply agreement including pricing for such Infrastructure to be demand driven An independent panel of experts should moderate infrastructure programmes in the short term

28 Recommendations Recommendation Detail DWAs Response SALGAs View 7. Alternative financing options Explore project finance and viability gap funding type grants for eligible schemes in assistance to existing subsidisation. Projects for Economic users are off budget RBIG and MIG to fund social projects Develop a water sector funding strategy

29 Recommendations Recommendation Detail DWAs Response SALGAs View 8. Better reporting Curtail current tariff increases recognising limitations of current reporting deficiencies perpetuated by water boards. Framework to be developed Meanwhile there is a need to contain price increases that are not transparently justifiable

30 Recommendations Recommendat ion Detail DWAs Response SALGA Views 9. Cash flow modelling Enforcement of longterm cash flow models as the chief tariff determination mechanism. Framework to be developed Must be part of the pricing strategy 10. Sustainable growth projections That utilities prepare capital expenditure budgets within the affordable growth rate of the utility given prescribed debt Point noted Reduce Energy costs Attempt will be made to cut cost This must form part of the planning requirements

31 Conclusion For DWA to take into considerations our suggested recommendations or inflation related increases plus 3% For establish a panel of experts to oversee the tariff increase process and make recommendations Long term the sector to focus its energies towards the establishment of an independent economic regulator The sector explores developing a sustainable funding strategy Common tariff methodologies Pricing of water 32

32 Thank You!