Www.salga.org.za MUNICIPAL MANAGERS FORUM NORTHERN CAPE JUNE 2015.

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MUNICIPAL MANAGERS FORUM NORTHERN CAPE

JUNE 2015

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OUTLINE • Understanding the Water Value Chain Pricing Regime • Bulk Water Tariff process • Municipal Pricing • Conclusion • Recommendations

2

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1st TierNational security

of supply

2nd TierWater Boards - Regional

supply to WSA’s

3rd TierLocal service delivery

and customer management

DeptWS

BULK PROVIDERS

MUNICIPALITIES

(Water Services

Authorities )

UNDERSTANDING THE TARIFF REGIME

Tariff regulated by the raw pricing

strategy - Capped at PPI + 10%

Not regulated

Not regulated however the water services and Municipal Finance

Management Acts provides guidance

Norms and Standards

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Tax

es

(pro

perty

rate

s)Funding mix for social and economic infrastructure (3Ts)

Municipalities have three main sources of revenue (“3Ts”)

Ser

vice

C

harg

es

Tran

sfer

s(e

quita

ble

shar

e

an

d gr

ants

)

Infrastructure, operations and maintenance

• Own revenue should mainly fund services for non-poor• Transfers enable municipalities to provide services to

the poor 4

Funding for economic infrastructure

Funding for Social infrastructure

Source: Grant Review NT

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Section 42 • The MFMA provides for any national or provincial organ of state which supplies

water, electricity or any other bulk resource to a municipality or municipal entity for the purpose of providing a municipal service to consult extensively and in a comprehensive manner on any proposed changes in the tariffs that may impact on the municipal services.

•Water Boards have a duty to submit tariff proposals to amend bulk water tariff every year and to adhere to timelines in terms Circular 23 of MFMA and s42(5)

•Tabling of the amended pricing structure in parliament by the Executive Authority. S42(4) 5

Municipal Finance Management Act

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Proposed tariffs increase submissions to reflect

Any submission in terms of subsection (I)(a) or (b) must be accompanied by- (a) a motivation of the reasons for the proposed amendment;(b) an explanation of how the amendment takes account of-

(i) the national government’s inflation targets and other macroeconomic policy objectives;

(ii) steps taken by the organ of state to improve its competitiveness or efficiency in order to reduce costs (iii) Any objectives or targets as outlined in any corporate or other governance plan applicable to that organ of state

(c) any written comments received from the National Treasury, organised local government or any municipality (d) an explanation of how such comments have been taken into account.

Source Section 42 MFMA

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Considerations in our analysis

• Inflation and affordability Bureau for Economic Research Characterictics of municipalities

• Raw water tariff increases• Energy• Chemicals

Exchange Rate• Staff costs & overheads

Compared to staff productivity• Some Water Boards are providing for significant CAPEX over the next 5 years, but

are not projecting a proportional increase in water sales. Leads to a lower Return on Asset Requires a higher tariff since the same volume is having to pay for a larger

asset base

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Cost Elements – Example 1 (Water)

Model B 2013/14 Equitable share 2013/140

1,000,000,0002,000,000,0003,000,000,0004,000,000,0005,000,000,0006,000,000,0007,000,000,0008,000,000,0009,000,000,000

10,000,000,000 Water cost vs equitable share

Top-upOtherDepreciationMaintenanceOperationsBulk purchase cost

The shortfall in the 2014 ES allocation for Water compared to the calculated cost of R 9.4 billion was R 638 million, or 7.3% of the ES

The cost elements used to determine ‘Cost’ based on ‘Responsible Custodianship’ (for 2013/14), compared to ES elements:

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Example Municipalities – Water (1)

Stellen

bosc

h - W

C

Renos

terbe

rg - N

C

Buffalo

City

- EC

Port S

t Joh

ns - E

C

Tswelo

pele

- FS

Ethekw

ini - K

ZN

Umkhan

yaku

de - D

M, KZN

Steve T

shwete

- MP

Bloube

rg - L

I

Rusten

burg

- NW

Emfulen

i - GT

0

200,000,000

400,000,000

600,000,000

800,000,000

Comparison - Cost to ES

Calculated Cost ES Allocation

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Context Illustration Examples

Number of installations Many treatment plants

Type infrastructure Sewers vs pits

Geography Area and topography

Economy Poverty

Size of installations ‘bigger is different’

WSAs do not all operate in the same context

The Operational Challenge

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Gross Value Add (What Economic Activities

underpins Service Delivery)

Source: Eastern Cape Social Economic Council

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SALGA’s Suggested Tariff Increases

Water Board 2010/11 2010/11 SALGA* 2011/12 2011/12 SALGA 2012/13 2012/13 SALGA

Amatola 8,4% 6,7% 8,3% 7.96% 9.26% 9%

Bush Water 12,46 6,7% 7,27%  7.25% 5% 5%

Bloem Water 10% 6,7%   9.17% 11.4% 9%

Botshelo 16% 6,7% 18% 9,81% 12% 9%

Lepelle Northern 6,5% 6,7% 10,22 8,69% 7.55% 7%

Magalies 18% 6,7% 16,6% 11,5% 8,2%% 8%

Mhlathuze 18% 6,7% 14%  14% 9,4% 9%

Namakwa 43% 6,7% 10,2%  - -  -

Overberg 9,95% 6,7% 15% 12% 4.36% 0%

Pelladrift 20% 6,7% 20%  - 15% - 

Rand Water 14,10% 6,7% 12,9% 10,78% 11.3% 9%

Sedibeng 12% 6,7% 8,5%  13% 8,4% 7%

Umgeni 6,2% 6,7% 6,1% 6,1% (5.6) 16,9% 9%

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At a Municipal Level

• Agreements with most Water Boards are in place

• Tariffs consultation process has improved• We owe Water Boards R2.6B which half is

current account• Incline block tariff seems to be favoured

Research findings – outlines this approach as not sustainable

Not achieving its intent objectives• Our pricing structures not cost reflective

WSA

WSA

WSAWSA

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Non – Revenue Water

Source: WRC

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Cost structure

Operating costs

Maintenance cost

Focus on operating account

Customer management

Finance charges

Material and plant running costs for repairs and maintenance, departmental employee costs

Portion of municipal governance, administration and planning costs Cost of capital (interest), bad debt, depreciation, contribution to capital reserve

Bulk costs Mainly payments to Eskom and water boards

Overheads

Metering and billing

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wsa hh served kl/yr o&m o&m + refurb

o&m + refurb + capex

o&m o&m + refurb

o&m + refurb + capex

Buffalo City 217 931 40 065 480 3 399 4 439 5 998 18.49 24.14 32.62Amathole 166 682 18 092 856 4 299 4 637 5 143 39.61 42.71 47.38Sekhukhune 198 274 28 736 160 2 333 2 667 3 167 16.10 18.40 21.85Zululand 109 397 21 069 804 4 526 4 798 5 206 23.50 24.91 27.03Ngaka Modiri Molema 195 356 30 786 780 2 716 2 750 2 801 17.23 17.45 17.77Vhembe 296 041 40 405 368 1 436 1 585 1 809 10.52 11.62 13.26Sol Plaatjie 60 054 13 002 096 5 456 5 764 6 225 25.20 26.62 28.75Uthungulu 86 034 13 702 776 2 705 2 949 3 316 16.99 18.52 20.82Sisonke 73 177 10 126 884 3 181 3 449 3 850 22.98 24.92 27.82Albert Luthuli 39 016 8 240 616 3 522 3 894 4 451 16.68 18.44 21.07

R/hh/annum R/kl

Unit Cost of Water Services

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• SALGA in its assessments of water board tariffs 2016, concluding remarks highlighted the following:– Information received from the water boards is not presented in a manner

that is consistent – therefore comparison becomes increasingly difficult. – Projections should be provided for at least 3 years.– There should be a full breakdown of the key cost drivers and a consistent

definition of “cost of sales, direct costs and overhead costs” should be used by all Water Boards.

• Expense parameters should be set by DWS – especially for Energy and Staff

– In devising the principles of highly effective and sustainable pricing for the provision of Bulk Water service, cognisance should be taken of the abovementioned comments and the legislative guidelines provided for pricing of bulk water services provision.

Conclusions

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Recommendations

• Need policy guidance on inter-area subsidisation of social development costs

• A coherent funding and pricing regime for the water sector• Multi-year Price Determinations • Acknowledges difference characters of municipalities• Sets benchmarks for expense management• Incentivise cost reductions and performance improvement

• Panel of experts to develop benchmarks for financial ratios• Interest cover• Operating surplus • Capex development

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Jean de la HarpeExecutive Director: Municipal

Infrastructure Services [email protected]

012 369 8000

THANK YOU