1 COMMENTS ON THE TARIFF CONSULTATION PROCESS AND DEBT OWED BY MUNICIPALITIES TO WATER UTILITIES SALGA’S INPUT TO THE PORTFOLIO COMMITTEE ON WATER AFFAIRS AND FORESTRY 7 MAY 2008

2 Structure of the presentation Tariff consultation process Suggested Way Forward Debt Owed to municipalities and Water Utilities Suggested Way Forward

3 The Tariff Negotiations process

4 TARIFF CONSULTATION Ten (10) of out Fifteen (15) Water Boards managed to consult with us as per the provisions of the MFMA. We wish to commend those Boards who have really strived to ensure compliance with legislative framework and we need to praise them for all their efforts in this regard.

5 TARIFF CONSULTATION The proposed bulk potable increases ranged between 2% - 8%, i.e. 2% been the lowest and 8% been the highest. We further wish to commend those Water Boards who have taken the necessary steps to ensure that the bulk potable increases are within the Government’s inflation targets of between 3% and 6%. It is anticipated that out member municipalities (Water Services Authorities) will follow suit.

6 TARIFF CONSULTATION A worrying factor for us are the tariff increases beyond the 6% mark - this worry must be seen within the economic environment at which we all are subjected to and have no control over. Jeopardise the financial viability and sustainability of our water institutions.

7 TARIFF CONSULTATION Steps taken to improve efficiencies thereby reducing costs Benchmarks and competitiveness of our water institutions local and internationally Required financial sustainability of water services infrastructure development and maintainance in the short, medium and long term within a particular geographic area Redemption period of any loans – Debt to Equity ( we need to set an acceptable target) Return on capital invested – return on assets (lifespan vs income generated)

8 TARIFF CONSULTATION PRINCIPLES Recover full cost of undertaking the delivery of services (replacement, rehab, “Reasonable” return on investment Promote Zero budget based approach - Budgets are more strongly related to the previous years than actually calculated needs

9 Recap Suggested Way Forward DWAF to finalise regulations of tariffs by (June 2007) (this will form part of the regulation strategy to be finalised between june and August 2008) Ring Fencing of water services (report is available with recommendations) and Section 20 of the Water Services Act give us the plaform) DWAF, SALGA and NT to rationalise tariff methodologies (March 2008) (have undertaken a tariff study and a report is available)

10 SUGGESTED WAY FORWARD The water pricing models and tariff structures of the entire value be review to ensure correct pricing of water in the Country i.e. Source to Consumer with the acknowledgement of the existing pricing strategy A Provincial and National expect panel be established to advise and assess the appropriateness of the pricing structures at both National (WR) and Provinces (WR & WS) - representation of such a panel will be agreed upon by the stakeholders The sector set target for multi-year tariff model (NERSA and Eskom have done it)

11 Debt owed to municipalities and Bulk Water Utilities

12 1 st Tier National security of supply 2 nd Tier Regional supply to WSA’s 3 rd Tier Local service delivery and customer management DWAF WATER UTILITIES MUNICIPALITIES WSA’S CONSUMER x x DEBT CRITICAL POINT Overview of the South Water Chain

13 Municipal Debts Collection of debt owed to municipalities poses significant challenge for all municipalities. The current outstanding debt is approximately R40 billion. In terms of State of Cities Report, cities are owed R 25.6 billion and have provided approximately R16.4 billion for non-payment. Some of the factors contributing to high levels of debt are: Continuous charging of interest on outstanding which increases the amount outstanding on a monthly account.

14 More realistic provision for bad debt. Successful initiatives to improve the completeness and reliability of consumer billing system/database. Strengthening of PMS by linking the performance of senior managers with revenue collection. Implementation of stringent credit control measure that provide for the indigent.

15 Good Practices SALGA have through intergovernmental structure (Premier Coordinating Committee) assisted municipalities to collect debt owed to them by government department. Project undertaken by MEC of Provincial and Local Government in partnership with SALGA to assist municipalities to collect outstanding amounts owed them by government department for service rendered. The project included cleaning of data, classification of property, verification of ownership and correct amount being billed for service rendered. It is envisage that the project will be replicated to other provinces.

16 Geographical Area of WU and Revenue Poor Revenue Good Revenue Poor Revenue

17 DEBT Owed Still have a challenge for payment of debt to water utilities Debt over 90 days is highly irrecoverable Institutional Arrangements (retail & bulk integration) – organs of State Metros good relationships and three secondary cities (revenue base) Rural Areas (Government Challenge) – not too sure how to deal with it

18 Some Thoughts Debt over 90 days is highly irrecoverable Institutional Arrangements (retail & bulk integration) Metros good relationships (revenue base) Rural Areas (Overall Government Challenge) Business Case Model – for funding

19 Recap of suggested way forward 1.Undertake and Resolve debt owed by Munics to Water Boards with Nat. Treasury by (June 2007) (process underway) 2.Facilitate and Resolve the signing of bulk agreements (legal platform is in place) by (June 2007) (published bulk agreement) 3.DWAF, SALGA Approach National Treasury on the said debt i.e. how to arrange payment (process underway) 4.Put debt collection mechanism in the entire value chain (by 1April 2008) (part of the regulation strategy and discussions with NT, DWAF and dplg)

20 Suggested Way Forward 1.Institutional Arrangements - in line with the institutional re-alignment driven by the Minister 2.The sector needs re-engineering of the service provision - 3.Focus more on urban areas for revenue collection 4.Rural area – Business Case Model - integration (BBM – BBW) 5.Tariff rationalisation

21 THANK YOU