1 FINANCING OF THE BUSINESS OF WATER SUPPLY AND SANITATION A presentation at the 2 nd African Water Week Gallagher Convention Centre 9 November 2009 Presented by: Helgard Muller Fred van Zyl Department Water Affairs Republic of South Africa

2 Why talk of water supply and sanitation as a business? (even if it is a subsidised business) Water is both a Social and Economic Good Ongoing-non stop service- 24/7/365 A service for -people, mining, commerce, tourism, industry Some clients can pay; others not- their supply subsidised or free BUT – all water supply a cost

3 Why water as a business? (even if it is a subsidised business) Business: product to be treated and transported and distributed-bulk systems- distribution- infrastructure-all needs to be managed All these elements a cost The books of the business must balance or else not sustainable- same cash flow problems as in any other business

4 Main elements of a water supply business Access to water and sanitation i.e. the infrastructure (a tap or a toilet) The ongoing service from such a facility. (operations) The quality of such a service (depends on assets) The quantity of such a service – e.g. l/p/day or kl/hh/month (available resources) The free part of such a service (management) Funding of such a service/viability of service Cost recovery/credit control of service Communication between municipality and residents

5 SA Water Supply and Sanitation Business 49 million people served by more than 800 supply schemes/systems Municipalities responsible National oversight, leadership and regulation (Department Water Affairs) Service Providers (mostly public-water boards and municipal entities)

6 SA -% Households with Access to: Water, Sanitation & Cell Phones % Households with Access to Water % Households with Access to Cell Phones % HH Coverage as % of HH 32.2% 72.9% 73% 88% 59% 73% 48% % Households Access to Sanitation

7 Funding of water supply and sanitation 1. SOCIAL  Infrastructure- dedicated and committed ring fenced grants Basic services (MDG’s) (MIG, Housing, schools) Bulk infrastructure (Grant for regional bulk)  Sustainable management: Equitable share: operating grant for the poor Cross subsidisation from paying consumers  Dedicated leadership and governance  Donor support for capacity building and support programs

8 Funding of water supply and sanitation 2. ECONOMIC-  Self financing  Loan funding  PPP arrangements and services  Cost recovery; tariffs  Cross subsidisation; tariffs

9 OPERATING CAPITAL Operating grants (Primarily equitable share) Capital grants (MIG) Own sources (user charges; rates; levies etc.) Own sources (capital funds, loans etc.) Basic service social Higher service level- economic MUNICIPAL FINANCIAL FRAMEWORK

10 REGIONAL BULK INFRASTRUCTURE GRANT date: Massive program to connect households. Initial spare bulk capacity exhausted- bulk insufficient. Not realised by project managers Huge gap developed for funding of bulk infrastructure (between water resources infrastructure and retail infrastructure) New grant developed for regional bulk

11 REGIONAL BULK INFRASTRUCTURE GRANT Two components:  Social for poor people that cannot pay full costs  Economic for consumers that can pay. Insufficient funding for social component. Economic component needs loans but expensive and difficult to put a deal together

12 Lessons learned from SA system Established a central grant for basic services- extremely positive--allocated for Water and Sanitation The Equitable Share Grant as an unconditional grant is substantial but often not used for its intended purpose; i.e. operations of basic services “Municipalities have become too dependant on grant funding”- SALGA in Parliament

13 Lessons learned from SA system Good policy but implementation challenge- lack of capacity at some municipalities Leakage of funds a threat Sustainability challenge- short term vs. life cycle costs Interdepartmental co-operation essential Moving targets- rapid urbanization

14 Higher service levels What happens after the MDG’s have been achieved? Is there a need for service level> basic? What are the needs over and above basic levels for economic development Arguments for more water-over and above basic-preliminary studies- economic development- benefits>costs

15 8 Aug 2009 DWA Workshop on "The Costs and Benefits of Increasing the Basic Water Services Standard" 15 Increased benefits for Consumer:  More healthcare direct and indirect  Time lost due to sickness  Impact of mortality  Human pipes and pumps factor  Crime, property value, food production  Fire damage

16 8 Aug 2009 DWA Workshop on "The Costs and Benefits of Increasing the Basic Water Services Standard" 16 Increased WSS benefits: Households that have to carry their water home suffers more due to less hygiene, more illness, more exposure, shorter life span, time lost to carry water, more crime, lower property value, fire risk, unhealthy food and food preparation

17 8 Aug 2009 DWA Workshop on "The Costs and Benefits of Increasing the Basic Water Services Standard" 17 Increased benefits for Employer:  Absenteeism, Productivity, Labor turnover, Lower returns, increased taxes  Work place safety and accidents Benefits for Government:  Education – training days,  Health – primary health care  Labor – provisions for unemployed  Treasury – investment and subsidies

18 Lessons learned from Soweto (Mazibuko) Court case Free Basic Volume as well as use of pre-paid meters challenged in court High Court-Supreme Court of Appeal- Constitutional Court. A municipality must do the best from its own resources (water and money) The basic volume must be set by government and not by the courts Progressive realisation of Constitutional rights Pre-paid meters are not unconstitutional and can be used

19 Cost of the Business PlanningDesignProcureConstructOperateMaintainRefurb. 0,2% 2%17%44% Typical % of Total Cost over the Life of Water Supply Infrastructure 37% Financing Cost Based on actual local government case study (Paul le Roux)

20 Conclusions Asset management critically important- value those assets! Water supply and sanitation to be ring- fenced as a single business Never under-estimate own income Tariffs realistic- too low tariffs resulting in a business that cannot expand and cope with economic growth.

21 Conclusions Sustainable Water Supply and Sanitation= financial viability Social component must also be financial viable- effective and efficient use of grants Minimise misuse and leakages of grants

22 Conclusions Financing planning over total life cycle of a system- Remember design and build may only be 20% of the total life cycle cost

23 Thanks!