COMMENTS ON THE DEBT OWED BY MUNICIPALITIES TO WATER BOARDS SALGA INPUT 20 MARCH 2007 BY WILLIAM MORAKA

Structure of the presentation Background Good Practices Water Pricing Chain Challenges Municipal Debt Suggested Way Forward

Area of Supply: Water Utilities in SA

Overview of the South Water Chain 1st Tier National security of supply 2nd Tier Regional supply to WSA’s 3rd Tier Local service delivery and customer management DWAF WATER UTILITIES CRITICAL POINT x MUNICIPALITIES WSA’S x CONSUMER

Good Practices Have a Bulk Potable Water Agreement All 3 Metros in GP have Bulk Water Agreement with Rand Water SEDIBENG WATER have agreement with all Municipalities in their of Jurisdiction Lepelle Northern Water, with Mopani, Sekhukhune DMs Central District Municipality (SALGA, DWAF facilitated a session to enter into interim service level agreement Interim Arrangements with Water Boards (Western Highveld MP) DWAF,SALGA, MUNICS

CHALLENGES Completion of s78 of the Municipal Systems Act Tariff Policy and Enforcement (Methodologies in the value chain) Set tariffs that facilitate financial stability of the service provided Enter into Bulk Agreements with clear deliverables Promotion of Cooperative Governance Provision of information timely to Munics for planning purpose Utilisation of Surpluses of Water Boards Joint Planning (BPs and IDPs)

FACED WITH DELIVER CHALLENGES

The water pricing chain

REGULATION Source: Strategic Framework for Water Services

“Economic regulator’s perspective” … Prices set too low To sustain assets Retail water price Bulk water price Raw water price CMA charge

Impact of governance on prices … Notwithstanding the previous point, the way prices are set depend on the governance arrangements that apply along the chain. For example: DWAF sets its raw water price in terms of a pricing strategy Water Boards set bulk water prices in terms of the Water Services Act and prices are (in effect) approved by national government. Municipal tariffs which are approved by local councillors in terms of a local tariff policy which must comply with nationally defined norms. How can consistency be ensured in this context?

DEBT RECOVERY MECHANISM Section 41(2) of the MFMA Monthly reports to NT Contract Management (Bulk Water Agreement in place between SALGA and SAAWU) Section 80 of the MSA Raw Water Tariffs (The raw water) 4. Transfer of Water Services Infrastructure 5. Ring Fencing of Water Services Business Discussion: The key issue facing the sector is not access to finance, but the fact that water is unsustainably priced.

Municipal Debt Levels Municipalities constantly struggles to contain debt levels within acceptable norms. Current debt outstanding is R40 billion. Water debts are of particular concern as municipalities are not easily able to disconnect due to water being constitutionally protected as a basic necessity. Need to implement stringent credit control policy that provide for the indigent and is enforced without political interference.

LES Formula Component based formula Grant =BS+D+I-R±C BS is intended to support the recurring cost of providing basic services. Recognises core functions currently costed at R130 (water-R30; electricity-R40; sanitation-R30 and refuse removal R30) per month. Variation of costs across different municipalities in providing these are not factored in the allocation.

LES Formula The estimated cost of services defined as basic for the allocation of equitable share to municipalities is far below the level of providing these services. This has also been confirmed by FFC in its submissions for 2007/08. The concern for the cost of service on serviced areas is that the fit for all cost of service approach tend to disadvantage municipalities with fairly high service costs due to factors outside their control. SALGA is therefore calling for the review of the estimated costs of basic services in order to introduce different average service costs for municipalities with relative comparable cost of service. The approach would mean having more than one average cost of service.

Suggested Way Forward Undertake and Resolve debt owed by Munics to Water Boards with Nat. Treasury by (1 July 2007) Facilitate and Resolve the signing of bulk agreements (legal platform is in place) by (June 2007) DWAF, SALGA and NT to rationalise tariff methodologies (March 2008) DWAF to finalise regulations of tariffs by (1April 2008) Put debt collection mechanism in the entire value chain (by 1 April 2008) Ring Fencing of water services (1 April 2008)

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