1. National Treasury’s Assessment of the Water Boards’ Annual Reports Presentation by the National Treasury 8 July 2009 Portfolio Committee on Water and Environmental Affairs

2. Outline of presentation Water Boards –MFMA and PFMA requirements –Roles of National Treasury vis-à-vis Executive Authority (DWEA) –Financial analysis of annual financial statements –Proposals to address challenges facing WBs Water Boards vis-à-vis municipalities –Municipal water budgets –Relationship between bulk charges and municipal water tariff increases –“Water and sanitation” subsidies available –Proposals to address challenges facing municipalities Legislation and the role of Parliament

3. Analysis of Financial Performance of Water Boards

4. MFMA* Requirements (a recap) Section 42 –Provides an opportunity for National Treasury to comment on tariff increases proposed by water boards Sections 41 and 44 –Water boards must within 15 days after end of each month report on Amounts to be paid by municipalities for bulk resource Arrears owing by municipalities and age profiles of such arrears Actions taken by organ of state to recover arrears –NT to monitor payments made by municipalities and municipal entities for bulk resources * Municipal Finance Management Act

5. PFMA* Requirements (1/2) Financial Statements: –Water boards submit their annual report, audited financial statements and auditors report within five months of the end of a financial year (30 November) to the National Treasury and to the Executive Authority (DWEA) –The annual report and financial statements must include particulars of: Any material losses through criminal conduct and irregular expenditure and fruitless and wasteful expenditure as well as criminal or disciplinary steps taken as a result Any losses recovered or written off Any financial assistance received from the state and commitments made by the state on its behalf –The Executive Authority (DWEA) must table the annual report and financial statements and the audit report in the National Assembly * Public Finance Management Act

6. PFMA Requirements (2/2) Corporate plans: submit to the Executive Authority (DWEA) and to the National Treasury, at least one month before the start of its financial year (31 May) –A projection of revenue, expenditure and borrowings for that financial year in the prescribed format –Borrowing plans –Risk management and fraud prevention plans –Materiality and significance frameworks Section 54: Inform the National Treasury and seek approval from Executive Authority (DWEA) to establish a company, participate in a partnership, trust or joint venture, acquire or dispose of a significant asset or shareholding, commence or stop a significant business activity, etc. Section 66: Water boards (Schedule 3(b) public entities) may only borrow money, or issue a guarantee, indemnity or security, etc. subject to any conditions the Minister of Finance may impose Guarantees, indemnity or securities: may only be issued by the responsible Cabinet member (Minister of Water and Environmental Affairs) with the concurrence of the Minister of Finance

7. NT versus DWEA’s roles w.r.t. Water Boards National Treasury Comment on tariff applications Financial oversight over water boards: –Risk the water board presents to the fiscus –Macro economic impact Approve borrowing plans DWEA Determine tariffs Shareholder oversight over water boards: –Agree shareholder compacts –Ensure alignment to policy

8. 8 Water boards can be distinguished into three categories Established water boards (e.g. Rand Water): good revenue growth, profitable, financially sustainable, high cash reserves, raise money in the capital markets on the strength of their balance sheets, disciplined by capital markets, good long term planning, sustainable debt levels, good recovery of costs, strong capex progammes Developing water boards (e.g. Mhlathuze Water) reasonable revenue growth, profitability and cash reserves, able to raise some debt on the strength of their balance sheets although debt levels higher than that of established water boards, some under recovery of costs, modest capex programmes Emerging water boards (e.g. Namakwa Water): low to poor revenue growth, not profitable, unable to fund capex programmes, cannot borrow on strength of their balance sheets, low and negative profitability, under recovery of costs, unsustainable and not financially viable A water board’s classification is often dependent on economic structure of the region it serves

9. Financial Analysis

10. 10 Financial Highlights

11. 11 Financial Highlights

12. 12 Financial Highlights

13. 13 Financial Highlights

14. 14 Financial Highlights

15. 15 Financial Highlights

16. 16 Proposals to address challenges faced by water boards National government –Strengthen regulation of water boards and water sector –Put in place an appropriate strategy to deal with “emerging” water boards (interim measure) –Develop appropriate institutional re-alignment options to achieve regional efficiencies, skills sharing, etc (longer-term solution) Water boards –Water boards to focus on longer-term service delivery (infrastructure capital) projections Conclude long-term bulk water supply agreements with municipalities (and other users) Determine appropriate funding resource mix for financing infrastructure –Water Boards should render services on a cost recovery basis, as far as possible Ensure tariffs accurately account for cost of providing services Ensure that where cross subsidisation of tariffs takes place, it should be done transparently Attracting and retaining appropriately skilled personnel and board members Eliminate unnecessary costs/achieve efficiencies Put in place appropriate metering, billing, collection and credit control mechanisms to recover costs for services rendered Maintain existing infrastructure

17. Relationship between Water Boards and Municipalities with respect to the water services function (and funding)

18. 18 Grants are paid to authorised municipalities - this requires service delivery agreements with service providers, i.e. other municipalities and water boards (DoRA*) Total Municipal Income and Expenditure for Water per Province * Division of Revenue Act

19. Examples of Proposed Municipal Water Tariff Increases Municipal tariff increases for water range between 5% to 13% for 2009/10 Is there a relationship between bulk increases and municipal tariff increases? 6.5% NT recommendations re WB tariffs: * Closer to inflation * * * 15% 10%

20. Grant funding for the Water and Sanitation Functions Local Government Equitable Share – water and sanitation components to authorised municipalities (unconditional grant) –To enable municipalities to provide free basic services to poor households Municipal Infrastructure Grant (MIG) – 75% for water and sanitation infrastructure Regional Bulk Infrastructure Grant (total grant over 3 yr MTEF* = R 2.9 bill) –Implementation models Water Service Authorities – 90% of projects Water Boards as implementing agents on behalf of DWEA * Medium Term Expenditure Framework

21. Proposals to address challenges faced by municipalities National government –Strengthen regulation of municipal water and sanitation tariffs –Address current dysfunctionalities in system White Paper Policy Review on Local Government to review appropriate roles of district and local municipalities –Institutional review of the water services sector (to achieve regional efficiencies) Municipalities –Municipalities should render services on a cost recovery basis, as far as possible Similar principles as stipulated for water boards –Municipalities should prioritise grant funding (infrastructure and grant funding) towards the roll-out of basic infrastructure and services to poor households, as far as possible

22. Legislation and the role of Parliament

23. Proposed constitutional amendments to resolve disputes arising from assignment of powers and functions between national and local government (including basic services) Investigation and discussions required regarding the apparent duplication of activities between water boards and Water Service Authorities to determine best way forward Improved oversight over water boards by DWEA and Parliament welcomed –Monitoring whether water boards achieve outcomes set out in the strategic plan –Intervention often required at multiple levels

24. 24 Thank you

25. 25 Appendices

26. Governance of the Water Boards Water Boards are established under Section 28 (1) of the Water Services Act no 108 of 1997. The Department of Water and Environmental Affairs (DWEA) is the Executive Authority of all the Water Boards. The Minister of DWEA appoints the chairperson of the Board and other members of the Board. Members of the Board are appointed for a period of office determined by the Minister, which may not exceed four years.

27. Governance of the Water Boards The Minister of DWEA may re-appoint a member of the Board for a period limited to three consecutive terms. The Minister may terminate the appointment of any or all members of the Water Boards. The Water Board is managed on a day to day basis by the Chief Executive Officer (CEO). In addition to the Water Service Act no 108 of 1997, the Water Boards needs to comply with the Public Finance Management Act no 1 of 1999 (PFMA) and the Treasury Regulations.

28. 28 Established Water Boards: Rand Water –Turnover in excess of R4 billion –Turnover growth about 7% –Net profit margin steady at 17.7% –Low debt levels, gearing about 16% and a debt ratio of 24% Developing Water Boards: Mhlathuze Water –Turnover around R160 million –Turnover growth closer to 12% –Net profit of 17.7% –higher debt levels, gearing about 37% and a debt ratio of 60% Emerging Water Boards: Namakwa Water –Turnover around R10 million –Turnover growth negative –High negative net profit margin of 176% and more losses expected –Unsustainable debt levels even though gearing and debt ratios are low Financial Highlights of Water Boards