Download Bulk Water Tariff Increases 2011/12

PRESENTATION TO THE
PORTFOLIO COMMITTEE ON
WATER AND ENVIRONMENTAL AFFAIRS
24 MAY 2010
Presenters:
Mthobeli Kolisa – Executive Director: Municipal Infrastructure Services
William Moraka – Director: Water Services
STRUCTURE OF
THE PRESENTATION
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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
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
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%, capped @ 30%
Revise policy to PPI DWA is revising the
plus 3%
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 Long term infrastructure
expansionary policy planning is accepted as
long as it take capacity
demands into account
Infrastructure
investments must be
moderated by an
effective regulator
2010/11
Recommendations'
Issue
Recommendation
DWA Response
SALGAs View
Asset growth
a) Appropriateness of debt
debt financed. No
levels
equity
b) Make equity
contributions
contribution as
from shareholder.
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%
PPI bears little or no
Should measure the
relations to the ROA
real ROA excluding
A higher ROA should inflation
be welcomed as it
suggests that assets are
employed productively
Specific motivation for
under or over return for
each utility
2010/11
Recommendations
Issue
Recommendation
DWAs Response
SALGAs View
Staff Costs < 10%.
Chemical costs
reduced by advanced
procurement.
a) Regulator to
scrutinise costs
b) Set cost driver
targets
Water boards costs are
rising in excess of
turnover increases
Economic regulator will
be set up
Supports the
establishment of the
regulator but short
term arrangements
are necessary
Pollution of raw water Reduce pollution.
driving purification
costs
Pricing strategy to
introduce waste discharge
charge
SALGA and DWA to
work together in reducing
pollution at resource level
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
Limit increases to
PPI plus 3%
This is not sustainable
cause the trading account
have been running at a
deficit
DWA to take long
term view to recover
from the apparent
historical under-
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
TARIFF REGIME
DWA
BULK
PROVIDERS
MUNICIPALITIES
(Water Services
Authorities )
1st Tier
National security
of supply
2nd Tier
Regional supply to
WSA’s
3rd Tier
Local service
delivery and
customer
management
Tariff regulated
by the raw
pricing strategy
Not regulated however the Water
Services and Municipal Finance
Management Acts provides
guidance
Not regulated however the water
services and Municipal Finance
Management Acts provides
guidance
Bulk Water Tariff
Increases 2011/12
11
Context : International
Experience
Sufficiency of Global Water
Tariffs
Global water tariffs to country
income level; O&M and Capital
Sufficiency
100%
90%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Global
Average
Too Low
High Income Upper Middle Lower Middle Low Income
Countries
Income
Income
Countries
Countries
Countries
Sufficinet
Source: Komvies, 2005
Sufficinet O&M and partial capital
Global
Average
Too Low
High Income Upper Middle Lower Middle Low Income
Countries
Income
Income
Countries
Countries
Countries
Sufficinet
Sufficinet O&M and partial capital
Source: Lee, 2005
Other key factors that impacts on affordability by households and
businesses
Electricity price increases
Petrol price increases
Context : International
Experience
120
3.50
c
100
3.00
2.50
80
c
2.00
60
1.50
Average 3-year tariff USD/15KL
WEF Rank
40
1.00
20
0
0.50
0.00
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 2010. Tariffs
in US$ per 15 kl. (Global Water Intelligence, 2011) (World Economic Forum, 2010)
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
R3.93 + R0.82
16.78%
R3.50 system tariff
Botshelo
R3.64
18%
R4.29
Bushbuckridge
R3.45
7.27%
R3.70
Lepelle Northern
R3.38
10.22%
R3.72
Magalies
R2.81
16%
R3.26
Mhlathuze
R1.73
14%
R1.97
Namakwa
R9.11
10.2%
R10.04
Overberg
R3.42
15%
R3.93
Pelladrift
R2.28
20%
R2.73
Rand Water
R3.97
12.9%
R4.48
Sedibeng
R5.86
8.5%
R6.36
Umgeni
R3.47
6.1%
R3.68
Average 13.58% = 6.8% and 9.38 above PPI and CPI respectively
Our Comments
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
Cost Drivers
Cost
Discussion
Raw Water
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
Labour increases of over 10% are proposed whereas SAAWU is yet to
negotiate increase with trade unions.
Power
Eskom’s tariff increases are factored into the applications sometimes
illegitimately above the 24% increase claiming that retail rates are
demanded by municipalities.
Chemicals
Wide range of cost increases casts suspicion over the legitimacy of
some cost increase projections.
Depreciation
Depreciation and “other operating” expenses sometimes change out of
sync with capital expenditure and “other operating revenue” raising
legitimacy suspicion.
Capital Planning
Projected Weighted Growth Rates for
the Water Utilities to 2015
18%
6%
16%
5%
14%
4%
12%
3%
10%
2%
8%
1%
6%
0%
4%
-1%
2%
0%
-2%
2009
2010
2011
2012
2013
2014
2015
Projected Growth Rate
Average Affordable Growth Rate
Average Sustanable Growth Rate
Water Provison Growth Rate
• 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.
Low and High Raw
Water Cost Utilities
6.00
6.00
5.00
0.16
0.12
0.26
0.53
0.14
0.16
0.12
0.26
0.53
0.53
0.26
0.53
0.12
0.26
0.53
0.19
0.13
0.45
0.19
0.13
0.45
0.19
0.13
0.45
0.19
0.13
0.45
0.19
0.13
0.45
0.86
0.86
0.86
0.86
0.86
5.00
0.52
4.00
0.86
0.45
0.13
0.45
0.19
0.13
0.45
0.86
0.86
0.86
0.76
0.36
0.76
0.12
0.36
0.76
0.19
0.12
0.36
0.76
0.19
0.12
0.36
0.76
4.00
2.96
0.59
0.25
0.59
0.25
0.59
0.25
0.59
0.25
0.59
0.25
0.59
0.25
0.59
1.23
0.41
1.23
0.41
1.23
0.41
1.23
0.41
1.23
0.41
1.23
0.41
1.23
0.41
1.23
0.41
1.23
0.39
0.39
0.39
0.39
0.39
0.39
0.39
0.39
0.39
0.39
Surplus
2.96
Other expenses
2.96
Depreciation
2.96
Net Finance Charge
2.96
Other opeex
2.96
Chemicals/purification
2.96
Maintenance materials
2.96
Electricity
2.96
Direct labour cost
3.00
Cost of sales (Water)
3.00
2.96
2.00
2.00
1.00
5.13
High Raw Water Cost Utilities
Tariff income
Surplus
Other expenses
Depreciation
Net Finance Charge
Other opeex
Chemicals/purification
Maintenance materials
Electricity
Direct labour cost
Cost of sales (Water)
-
-
Low Raw Water Cost Utilities
Low raw water cost utilities have much higher surpluses and other
3.54
Tariff income
1.00
Tariff Application Average Increases and Business Plan Projected
Increases for 2011/12
25%
20%
15%
10%
5%
0%
Business Plan
Tariff Application
Comments per
Water Board
Utility
Amatola
Bloem Water
Proposed Tariffs
SALGA Recommendation
8%
7.96%
16.78%
9.17%
18%
9.81%
Bush
buck water
7.27%
7.25%
Lepelle Northern
10.22%
8.69%
Botshelo Water
Magalies Water
16%
11.50%
Mhlathuze Water
14%
14.19%
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Comments per
Water Board
Utility
Overberg
Proposed Tariffs
Proposed and Recommended
Tariffs
15%
12.00%
Rand Water
12.9%
10.78%
Sedibeng Water
8.5%
13.59%
Umgeni Water
6.1%
6.1%
22
Institutional
Arrangement
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
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
Our Suggested
Recommendations on
the bulk potable water
tariffs
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
Recommendations
Recommendati
on
Detail
DWAs Response
SALGAs View
4. Factoring of
local
government
ability
Regulator to factor
the ability of local
council’s to absorb
tariff increases.
LG to utilise Equitable share
to pay for water services
The develop a water
sector funding
strategy
5. Tariff
Applications
Variance
Examination of
detailed utility
comments for
dubious tariff
increases and reduce
tariff accordingly.
Bloem Water Tariff adjusted
downwards
Moderating other boards
tariff will require will require
detail investigation
Such moderation to be done
by an independent regulator
For 2012-13 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
Recommendations
Recommendation Detail
DWAs
Response
SALGAs
View
7. Alternative
Explore project
financing options 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
Recommendations
Recommendation Detail
8. Better reporting
DWAs
Response
Curtail current tariff Framework to
increases
be developed
recognising
limitations of
current reporting
deficiencies
perpetuated by
water boards.
SALGAs
View
Meanwhile
there is a need
to contain
price
increases that
are not
transparently
justifiable
Recommendations
Recommendat Detail
ion
DWAs
Response
SALGA Views
9. Cash flow
modelling
Framework
to be
developed
Must be part of
the pricing
strategy
Point noted
Reduce
Energy costs
Attempt will
be made to
cut cost
This must form
part of the
planning
requirements
Enforcement of longterm cash flow
models as the chief
tariff determination
mechanism.
10. Sustainable That utilities prepare
growth
capital expenditure
projections budgets within the
affordable growth
rate of the utility
given prescribed debt
Conclusion
• For 2011-2012 DWA to take into considerations our
suggested recommendations or inflation related increases plus
3%
• For 2012-2013 – 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
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Thank You!