1. Portfolio Committee on Water Affairs and Forestry
Free Basic Water:
Sustainablity, Tariffs
and Subsidisation
Prepared by Rand Water
and the Gauteng Water Services Forum
Presented by R Duvel & J Ferreira
30 May 2001

2. Contents Background Tariff comparisons Tariff concepts Implications
Task team objectives
Current situation
Conclusion
Tariff comparisons
Tariff concepts
Implications
Conclusions

3. Background

4. Role of Rand Water
No tariff adjustment, bulk customers have not requested it
Co-ordination of Gauteng municipalities through Water Services Forum Task Team
Directly involved in:
Odi Retail Water with Tshwane
Amanziwethu with Maluti a Phofung
Assisting municipalities with actual calculations (Madibeng, Randfontein, Kestell)

5. Objectives of the Task Team
To assist municipalities by showing that Free Basic Water (FBW) could be funded:
Within municipalities by cross-subsidisation, and
Within the water sector through national or regional subisidies
To produce a tariff model
To agree on tariff policy principles

6. Current Situation Metro’s on track for 1 July?
District and Local Municipalities are further behind
Financial analyses are taking place (realities are coming through)
Outstanding issues:
At what level do tariffs become too high for the paying customers
Infrastructure provision to the unserved

7. Infrastructure Audit / Requirements -Informal Settlements and Peri-Urban Areas
people in Gauteng with RDP or less service levels, they will not benefit from this policy
Illegal connections are causing more than basic level of consumption in poor areas e.g. Klipgat = 70 Kl p.m.
Consumption control is necessary
Imbalance between water and sanitation can be problematic i.r.o. public health

8. Infrastructure Audit / Requirements- Urban areas
Yard connections in formal areas must be metered
Management information and billing systems are not standardised or integrated
Lack of zonal ring-fencing (metering and valves)
Need for improved efficiencies: water loss management and credit control

9. Conclusions
Rising block tariffs without a basic charge are inappropriate for most municipalities
National resource pricing strategy is not assisting municipalities (and under revision – small concessions may be removed)
The subsidy from Equitable Share is not sufficient for poorer municipalities
Cross-subsidiation within municipalities can provide limited funding
If tariff increases become too high to provide the balance of the funding, large users will reduce consumption. Sustainability problems.

10. Tariff
Comparisons

11. Tariffs: Monthly Bills Am’wethu

12. Tariffs: Rising Block Am’wethu

13. Tariffs: Reducing Block Am’wethu

14. Tariff
Concepts

15. Tariff Structure
Tariff Structure is a local decision: “Who pays for what?”
Average Tariff (for each customer)
Effect of tariff policy on various customers
Larger, non-indigent households, industries
Very high Average Tariffs will require regional or national subsidisation additional to current Equitable Share

16. Tariff Structure Issues: Definitions
Tariff block: The range of consumption volumes at which each kilolitre is charged at the same tariff
Economic volumes: Non-free kilolitres that are charged at non-zero tariffs to ensure income from customers
Economic customers: Those customers that contribute towards the cross-subsidisation of others by being billed for their non-free volumes
Break-even consumption: The consumption at which a customer starts contribution towards the cross-subsidy [where average tariff starts exceeding average cost]

17. Average Tariff (to customer)
A consumer’s
monthly bill
Kilolitres used in
the month
Average Tariff =
Average tariff: The average tariff (R/kl) a customer is charged on his full monthly bill [His total monthly bill divided by his total monthly consumption]

18. Average Cost Average Cost = Full cost plus non-payment
Total Kiloliters sold
Average Cost =
Average cost: The average cost for the service provider to provide services [The total cost of water services to be recovered through the tariffs divided by the total volume of billed sales (R/kl billed)]

19. Economic Tariff Economic Tariff= Full cost plus non-payment
Total No of “non-free”
Kilolitres
Economic Tariff=
Economic tariff: The theoretical average tariff at which all non-free kilolitres should be charged to neutralise the effect of free kilolitres [The total cost of water services to be recovered through tariffs divided by the non-free volume of billed sales (R/ non-free kl billed)]

20. Tariff Structure Definitions: Average Cost & Economic Tariff
Break-even point (28kl/m)
Economic Tariff (R5-20)
Average Cost (R4-00)
Average Tariff (Varies)

21. Implications

22. First Implication Strict Credit Control/ Cost Recovery
FBW provides for people’s minimum requirements
Consumers must pay for water consumed above FBW
Failure to do so will make municipalities bankrupt = failure to deliver services
Municipalities and their service providers need to be ruthless on consumers who do not pay for amounts consumed in excess of FBW volume

23. Second Implication: Maximum Income Tariff
This is the maximum economic tariff that can be effectively applied in an area
This will bring in the maximum income for the municipality
At a higher tariff consumers will reduce consumption thus reducing the municipality’s income
A lower tariff will bring in lower income as consumption will not increase
It varies from consumer to consumer, but there is an average for an area

24. Maximum Income Tariff Kilolitres Tariff Income High Tariff Kilolitres
Low tariff
Kilolitres
Tariff
Maximum Income Tariff

25. Maximum Income Tariff and Subsidy
If Maximum Income Tariff is charged
And,
The municiplaity cannot cover the costs of providing the service
It cannot obtain more income by increasing tariffs
It needs another source of income = Subsidy

26. Third Implication
Calculate the economic tariff and compare it to the Maximum Income tariff
If the economic tariff > max Income tariff
The difference will be the subsidy required by the municipality
If the economic tariff < max Income tariff
The difference will be the subsidy that can be provided by the municipality to another
E.g. Tshwane’s max tariff = R5.00 and Welkom’s = R Perhaps the metro can assist towns like Welkom by increasing its tariff

27. Fourth Implication FBW for ALL
FBW for ALL domestic consumers
Second Block (6 – 12 Kl) you pay for the Kilolitres used above 6
Third block you pay for all water consumed including first 6
Above third block you pay extra to create subsidy

28. Fifth Implication % of FBW to Total Water Billed
Percentage fo FBW consumption to total consumption
The higher this figure is, the higher the tariffs and/or the subsidy must be
This is the most important ratio in determining subsidy requirements
It can be used to compare all towns from metros to villages

29. Fifth Implication % of FBW to Total Water Billed
Average cost: R 4-00 /kl billed
Policy: Free volume= 6kl to all households: This amount is the FBW
Determine the FBW as a percentage of total water sold, e.g. say it is 29%
71% of volume must now ensure full income
Economic tariff: R 7-02/ non-free kl billed [= R4/(1-29%)]

30. Metro vs Small Town Free / Non-free Volumes

31. Maximum Realistic Tariff
Additional
subsidy
Maximum Realistic Tariff
Cross-subsidy
Includes Equitable
Share already
Ave Cost to Municipality – no FBW

32. Conclusion

33. Conclusion – Enforcing Payment
FBW provides a mechanism to meet the minimum needs of people
People must pay for the water they consume in excess of FBW
If people abuse the basic right – they forfeit it. This means they can be cut off or restricted

34. Conclusion – Tariff Structures
Rising block tariffs may result in very high tariffs for the larger consumers – unaffordable (if regulations are promulgated this will be compulsory)
Other tariff structure options have to be considered, like reducing block, two-step (economic) tariff and basic charges.
Sustainability and affordability will require regional or national subsidies for marginal municipalities and districts

35. Conclusion- Sustainability and Tariffs
Average cost influenced by
losses
non-payment
subsidies (Equitable Share, etc) received
subsidies payable by water to other municipal services
Sustainability is influenced by:
Percentage fo FBW consumption to total consumption
Tariff structure itself
Break-even point between being subsidised and contributing towards subsidy
Highest average tariff charged to customers
Availability of additional subsidies to avoid excessive tariffs

36. Conclusion- Prerequisites for Implementation
Need for metering
Need for improved efficiencies
National subsidisation required where economic tariff exceeds the maximum income tariff

37. THANK YOU

38. Contact Details Rowan Duvel Retail Water Operations Manager Rand Water
Tel: (011)
Fax:(011)
Cell:(082)