Click to edit Master subtitle style Bulk Water Tariff Review 2013/14 17 APRIL 2013

Outline Compliance to section 42 Impact of previous SALGA recommendations Summary of proposed increases and analysis Key Issues Recommendations (Highlights of each WB review)

3 Compliance to Section 42 Water Board Compliance to section 42 Quality of the submission Response to SALGA comments Final Submission to the Executive Authority – Compliance Section 42 (3) c & d Rand Water Good Umgeni Water Good X Lepelle Water Acceptable but can be perfected X Bloem Water Acceptable but can be perfected X Magalies Water Acceptable but can be perfected X Sedibeng Water Acceptable but can be perfected X Pella Water Requires significant improvement X Mhlathuze Water Acceptable but can be perfected X Amatola Water Acceptable but can be perfected X Botshelo Water Requires significant improvement X Overberg Water Requires significant improvement X X Bushbuckridge Water Requires significant improvement Section 42 (3) (c) Any written comments received from the National Treasury, organised local government or any municipalities (d) an explanation of how such comments have been taken into account.

Response to previous recommendations Water Board2010/ /11 SALGA* 2011/ /12 SALGA 2012/ /13 SALGA Amatola8,4%6,7%8,3%7.96% 9.26% 9% Bush Water12,466,7%7,27% 7.25% 5% Bloem Water10%6,7% 9.17%11.4%9% Botshelo16%6,7%18%9,81%12%9% Lepelle Northern6,5%6,7%10,228,69%7.55%7% Magalies18%6,7%16,6%11,5%8,2%8% Mhlathuze18%6,7%14% 9,4%9% Namakwa43%6,7%10,2% -- - Overberg9,95%6,7%15%12%4.36%0% Pelladrift20%6,7%20% -15%- Rand Water14,10%6,7%12,9%10,78%11.3%9% Sedibeng12%6,7%8,5% 13%8,4%7% Umgeni6,2%6,7%6,1% (5.6) 16,9%9% 4

Response to previous recommendations 5

Response to previous recommendations In March 2010, the conclusion of the PC on Water and Environmental Affairs, after presentations by DWA, Water Boards and SALGA was that DWA needs to engage SALGA before finalising the adjustments. This did not happen. Water Boards implemented tariffs as per the presentation of DWA to parliament. A question has to be asked as what is really supposed to be the role of parliament in this process. 6

Previous recommendations still to be implemented Establishment of an independent regulator - work underway in the sector to be completed by 2014 Review of water pricing policy for whole value chain - work underway in the sector to be completed by 2014 Bulk water tariff determination should be a multi-year process - had discussions with DWA Water Boards require balanced Medium and Long-term Capital Investment Programmes Expense parameters should be set by DWA – especially for Energy and Staff Tariff Policy is required to standardise approach to funding of assets and operations Water Board funding models to be reviewed – over-reliance on debt? 7

Summary of proposed tariff increases Water Board Proposed Tariff (ave) 2013/14 Increase requested Previous year’s increase SALGA projected 9.3% elect. increase Rand WaterR %12.90%8.59% Umgeni WaterR %16.90%8.44% Lepelle WaterR %12.25%10.10% Bloem WaterR % 9.83% Magalies WaterR % 9.78% 10.35% Sedibeng WaterR % 7.69% Pella WaterR % 9.15% 3.71% Mhlathuze WaterR % 9.40% 8.47% Amatola WaterR %5.9%7.88% Botshelo WaterR %11.30%12.62% Overberg WaterR %0.00%13.30% BushbuckridgeR %5.50%11.50% 8

Absolute values of tariffs

Components of tariff

Analysis of Net Profit Margin – 2013/14

Key findings Affordability of above inflation increases Impact of energy increases Chemical cost increases Interest cover (surplus) requirements Debtor management Tariff Structure?

Affordability of above inflation increases Increases now typically in excess of inflation as well as in excess of equitable share increases Household expenditure increasing at a greater rate than household income (2005/06 – 2010/11) Ratio analysis shows many examples of increasing debtor balances, and increase in ‘Debtors’ days’. R2.4bn owed to WB’s of which R1.34bn is in arrears (and mostly owing for more than 120 days).

CASE OF TWK Tariff componentIncrease Consumption chargeBetween 18% - 40% Basic levy44% Capital levy100% Effective Increase37%! As opposed to 16% as suggested in the DWA submission

Effect of new tariff structure

Bottom line 37% effective increase 16% increase as stated not true reflection Inordinate increase in basic levy – 44% New capital levy – 6% of total cost Higher basic levy encourage higher usage to obtain better unit rate Sliding scale discourage higher usage

Impact of energy increases Electricity now a major cost driver Eskom increases unavoidable Consider task team to look at initiatives that can be applied at other Water Boards – e.g. Umgeni’s consideration of a methane gas harvester to generate up to 40% of their energy needs at the plant. Energy should be a driver (incentive) to: –Improve efficiency –Reduce water loss What evidence is there that WB’s are pursuing these options?

Chemical cost increases Heavily influenced by Exchange Rates due to high import component Water Boards need to be more explicit about how they’re trying to generate cost savings (or efficiencies) in this area.

Interest cover (surplus) requirements Some Water Boards are budgeting for high profit margins in order to satisfy the banks with respect to interest cover Surplus funds are taken to Reserves – creates a mismatch for a user between what he/she must pay, and the benefit that he/she receives Do Reserves ever end up getting used if Lenders are focused on interest cover and not contributions from Reserves?

Bad debts still a concern Most Water Boards base their tariff models on the assumption that debt collection will improve. However the actual history of the past 3 years reveals regular non-payment in some cases and evidence of reduced collection efficiency. Support the task force that has been convened to assist with a centralised process for arbitrations of disputed amounts, and sharing of best practice.

Issues relevant to certain Water Boards Capex plans often not supported by growth projections - lower return on assets –Umgeni, Overberg, Magalies Secondary work distracting from the primary - cost of secondary work imparting on bulk water pricing –Magalies, Amatola

Capex plans not supported by growth projections Water Boards such as Umgeni, Overberg and Magalies are providing for significant CAPEX over the next 5 years, but are not projecting a proportional increase in water sales. Leads to a lower Return on Asset Requires a higher tariff since the same volume is having to pay for a larger asset base Is correct for refurbishment/replacement, but augmentation should lead to increased volumes

Secondary work distracting from the primary Water Boards are allowed to do ‘section 30’ (Secondary) work as long as it does not impact on their ability to deliver on their primary mandate, and as long as it is ring-fenced. Magalies: Loss of secondary contracts led to significant increase in the overhead allocation to water schemes – implies that the s30 work was not fully ring-fenced. Amatola: s30 work is loss making and therefore impacting on sustainability of the WB – who is paying for the loss?

Summary of recommendations Water Board Increase appears reasonable Consider a lower increase Additional Comments Rand Water Adjust for 25% water loss Umgeni Water Work on lower interest cover Lepelle Water Need to see evidence of improved efficiencies at Head Office level Bloem Water Intervention required Magalies Water Affordability and sustainability concerns Sedibeng Water Recommendations need to be implemented Pella Water Continue move to long-term sustainability Mhlathuze Water Reduce depreciation? But tariff is lowest in country. Amatola Water Smooth tariffs reduce 2014 Botshelo Water Clarity on institutional status required Overberg Water Renegotiate fixed rate with customers Bushbuckridge Water Smooth tariffs reduce 2014 DWA Decision Approved all tariffs as per the water boards submissions

Recommendations Regulator needs to intervene on Interest Cover benchmark (to curb growing reserves) Need policy guidance on inter-area subsidisation of social development costs Continued focus required on Debtor management Task force to share ideas on best practice and innovative solutions with respect to reduced energy use, chemical use and other efficiencies. 2626

Thank you

Findings for each Water Board

Justification required for increasing profit margin. Projected water losses of 25% for 2013/14? Possible to delay capital investment plans to cater for WC/DM initiatives? Reduce interest cover without impacting on debt covenants? Conclusion: Adjust downwards 2929 Justification required for increasing profit margin. Projected water losses of 25% for 2013/14? Possible to delay capital investment plans to cater for WC/DM initiatives? Reduce interest cover without impacting on debt covenants? Conclusion: Adjust downwards Water Board Proposed Tariff (ave) 2013/14 Increase requested Previous year’s increase Rand WaterR %12.90%

Lower interest cover possible? Social development to be funded by the fiscus Recognise accounting loss on retirement fund immediately Flat volume growth too conservative? UW says no. Conclusion: Adjust downwards (work on lower interest cover) 3030 Lower interest cover possible? Social development to be funded by the fiscus Recognise accounting loss on retirement fund immediately Flat volume growth too conservative? UW says no. Conclusion: Adjust downwards (work on lower interest cover) Water Board Proposed Tariff (ave) 2013/14 Increase requested Previous year’s increase Umgeni WaterR %16.90%

Very high overhead allocation (22% for some plants). Water sold appears to exceed water purchased in some cases Cash reserves being built up, no plans for further debt? Is cross-subsidisation based on fair principles? Conclusion: Consider accepting but need to see evidence of improved efficiencies at Head Office level 3131 Very high overhead allocation (22% for some plants). Water sold appears to exceed water purchased in some cases Cash reserves being built up, no plans for further debt? Is cross-subsidisation based on fair principles? Conclusion: Consider accepting but need to see evidence of improved efficiencies at Head Office level Water Board Proposed Tariff (ave) 2013/14 Increase requested Previous year’s increase Lepelle WaterR %12.25%

Very low margins projected for next 3 years will make it difficult to raise debt if required. At risk of slow Debtor payment Customers have very high water losses – impacts on their ability to pay their bulk charges Improvements in infrastructure required Conclusion: Accept increase – but intervention required Very low margins projected for next 3 years will make it difficult to raise debt if required. At risk of slow Debtor payment Customers have very high water losses – impacts on their ability to pay their bulk charges Improvements in infrastructure required Conclusion: Accept increase – but intervention required. Water Board Proposed Tariff (ave) 2013/14 Increase requested Previous year’s increase Bloem WaterR %

Low profit margins, declining ROA, and poor debt collection Funding secured yet for Pilanesberg Programme? Affordability of projected increases? High overheads after loss of s30 work – not ring-fenced? Low refurbishment budget – sustainable? Conclusion: Accept increase – but affordability and sustainability concerns 3333 Low profit margins, declining ROA, and poor debt collection Funding secured yet for Pilanesberg Programme? Affordability of projected increases? High overheads after loss of s30 work – not ring-fenced? Low refurbishment budget – sustainable? Conclusion: Accept increase – but affordability and sustainability concerns Water Board Proposed Tariff (ave) 2013/14 Increase requested Previous year’s increase Magalies Water Ave: R4.65Ave: 11.50% Ave: 9.78%

Differentiate between Municipal and Mining sectors to allow for cross-subsidisation/full cost recovery from mines Confirm DWA Grants for Namakwa Improve Debt collection Conclusion: Accept increase – but recommendations need to be implemented 3434 Differentiate between Municipal and Mining sectors to allow for cross-subsidisation/full cost recovery from mines Confirm DWA Grants for Namakwa Improve Debt collection Conclusion: Accept increase – but recommendations need to be implemented Water Board Proposed Tariff (ave) 2013/14 Increase requested Previous year’s increase Sedibeng WaterR %

Heavily reliant on the mine. Consider moving towards sustainability for the municipality Conclusion: Accept increase 3535 Heavily reliant on the mine. Consider moving towards sustainability for the municipality Conclusion: Accept increase Water Board Proposed Tariff (ave) 2013/14 Increase requested Previous year’s increase Pella WaterR % 9.15%

Accelerated depreciation results in higher tariffs Future sales growth very conservative Electricity increases appear to be in excess of Eskom rates Affordability concerns given trend of above-inflation increases. Conclusion: Consider a lower rate 3636 Accelerated depreciation results in higher tariffs Future sales growth very conservative Electricity increases appear to be in excess of Eskom rates Affordability concerns given trend of above-inflation increases. Conclusion: Consider a lower rate Water Board Proposed Tariff (ave) 2013/14 Increase requested Previous year’s increase Mhlathuze WaterR % 9.40%

Losses on secondary activities are over-shadowing the primary activities Cash-flow capex projections not supported by Business Plan Proposing a sharp increase, followed by 2 years of tariff reductions – why not a sustained (lower) increase? Significant drop in turnover predicted for 2013 – Secondary? Conclusion: Smooth tariffs – reduce Losses on secondary activities are over-shadowing the primary activities Cash-flow capex projections not supported by Business Plan Proposing a sharp increase, followed by 2 years of tariff reductions – why not a sustained (lower) increase? Significant drop in turnover predicted for 2013 – Secondary? Conclusion: Smooth tariffs – reduce 2014 Water Board Proposed Tariff (ave) 2013/14 Increase requested Previous year’s increase Amatola WaterR %0.00%

Very poor debt collection and hence liquidity issues Continued institutional uncertainty Conclusion: Support increase, but urgently need to resolve unsigned SLAs with customers and create clarity on institutional future Very poor debt collection and hence liquidity issues Continued institutional uncertainty Conclusion: Support increase, but urgently need to resolve unsigned SLAs with customers and create clarity on institutional future. Water Board Proposed Tariff (ave) 2013/14 Increase requested Previous year’s increase Botshelo WaterR %11.30%

Is a need to renegotiate water allocations with major customers Reduce fixed cost proportion of tariff Delay Capex plans Reduce Debtors’ days Conclusion: Adjust tariff down based on above 3939 Is a need to renegotiate water allocations with major customers Reduce fixed cost proportion of tariff Delay Capex plans Reduce Debtors’ days Conclusion: Adjust tariff down based on above Water Board Proposed Tariff (ave) 2013/14 Increase requested Previous year’s increase Overberg WaterR %0.00%

Risk of bad debts Consider smoother tariff increase Re-model to factor in debt finance Conclusion: Adjust tariff down for a smoother trajectory 4040 Risk of bad debts Consider smoother tariff increase Re-model to factor in debt finance Conclusion: Adjust tariff down for a smoother trajectory Water Board Proposed Tariff (ave) 2013/14 Increase requested Previous year’s increase BushbuckridgeR %5.50%