SOUTH AFRICAN ASSOCIATION OF WATER UTILITIES

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SOUTH AFRICAN ASSOCIATION OF WATER
UTILITIES
PRESENTATION TO THE PARLIAMENTARY PORTFOLIO
COMMITTEE OF WATER AFFAIRS AND FORESTRY ON THE
IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) AND
FREE BASIC WATER (FBW) ON WATER UTILITIES 04
JUNE 2003
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SAAWU BACKGROUND

• The South African Association of Water Utilities
• An Association not for gain, representing public
  sector water service providers in SA.
• Represents 18 water boards and 5 other public
  sector institutions involved in water services
  provision.
• Water boards are organs of state.
• Principal objective of SAAWU is to
• Ensuring access to water services by all South
  Africans by promoting the need for efficient and
  effective public sector regional water utilities
  and ensuring effective integration, co-operation
  and mobilisation of resources and capacity within
  the water services sector.

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(No Transcript)
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SAAWU BACKGROUND (Continued)

• SAAWU and its members have played an active and
  leading role in providing inputs into the Draft
  white Paper on Water Services. In particular we
  support moving toward greater regionalisation of
  water services and building off the
  established/existing institutional capacity to
• To establish regional water utilities offering a
  full range of water services and water service
  delivery solutions, in support of municipal water
  service authorities, so that they are able to
  meet their water service delivery obligations.
• SAAWU will be requesting an opportunity to give a
  detailed presentation to the Portfolio Committee
  highlighting its views on the essential policy,
  legislative and implementation issues that should
  direct initiatives for regionalisation .

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IMPACT OF THE DIVISION OF REVENUE ACT (DORA) ON
WATER UTILITIES 04 JUNE 2003
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IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON
WATER UTILITIES

• SAAWU fully understands and accepts that the
  authority function for water services delivery
  is that of the appropriately delegated Municipal
  entity that is proclaimed as the Water Service
  Authority (WSA) for that area.
• In terms of existing legislation (Water Services
  Act and Municipal Structures and Systems Acts),
  water boards and other water utilities who are
  members of SAAWU are water service providers to
  the WSA.
• The existing water boards/utilities provide a
  range of water services such as bulk potable
  water, retail water, bulk waste water and retail
  waste water services in support of
  municipalities.

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IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON
WATER UTILITIES

• Many water utilities also operate and maintain a
  number of DWAF owned water supply schemes (both
  bulk and retail) on behalf of DWAF, or the
  municipal authorities who have been
  targeted/identified to receive transfer of these
  assets from DWAF.
• These arrangements exist in most instances where
  the WSA (municipal authority) lacks the capacity
  and resources to provide the service themselves.
• In many instances these arrangements are not
  formalized in terms of appropriate contacts or
  agreements.
• In many of these cases where the water utilities
  act in support of municipalities they receive a
  direct subsidy from DWAF for the operation and
  maintenance of these schemes.

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IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON
WATER UTILITIES
Some water utilities provide services to
primarily the rural poor (in ex-homeland areas
and others in a more urban environment) where
existing municipalities simply do not have the
capacity or resources to deliver the services.
In these instances most consumers are unable to
pay for services and water utilities are reliant
on subsidies from DWAF to cover operating and
maintenance costs and for financial survival.
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IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON
WATER UTILITIES

• Section 8 of the DORA makes it clear that An
  organ of state in the national or provincial
  sphere of government may only provide funds for a
  municipal service to the relevant municipality
  directly.
• The understanding of SAAWU is that in term of
  DORA the subsidies currently paid to water
  utilities directly by DWAF for water services
  provided to communities will , in future, be
  directed to the local municipal authority.

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IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON
WATER UTILITIES

• In a significant number of situations where water
  utilities are providing services to consumers
  this arrangement is consequent to agreements
  between DWAF and the utility.
• In these instances there are NO contractual
  agreement in place between the municipality (WSA)
  and the water utility as the WSP. Given these
  circumstances the practical reality of complying
  with Section 8 (2) of DORA is considered remote.

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IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON
WATER UTILITIES

• SUMMARY OF KEY IMPACTS OF DORA ON WATER UTILITIES

• The arbitrary re-direction of all national
  government (DWAF) subsidies to the relevant
  municipal authority could have a significant
  impact on the provision of water services to vast
  numbers of primarily rural South Africans in
  that
• The continued viability of service delivery
  where this is provided by water utilities will be
  subject to the municipality providing the
  requisite subsidy to water utilities.
• Current experiences with the allocation of a
  portion of the equitable share to fund water
  services do not support optimism in this regard
  and the financial viability of some water
  utilities will be severely impacted.

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IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON
WATER UTILITIES

• SUMMARY OF KEY IMPACTS OF DORA ON WATER UTILITIES

• The capacity and willingness of municipalities to
  enter into formal agreements with water utilities
  for the provision of water services is a
  significant constraint to effective
  implementation of DORA.
• (SAAWU and SALGA are currently developing a model
  WSP contract and guidelines for contracts between
  water utilities and municipalities and it is
  hoped that this will help resolve some of the
  immediate contractual problems.)
• There is an urgent need to put in place a
  practical and rational phasing process or
  mechanism that will enable a viable and
  sustainable transition to the situation where
  national an provincial subsidies for water
  service are directed through municipalities.

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IMPACTS OF THE DIVISION OF REVENUE ACT (DORA) ON
WATER UTILITIES
EXAMPLES OF SUBSIDIES PAID BY NATIONAL GOVERNMENT
TO WATER UTILITIES FOR WATER SERVICE RENDERED ON
BEHALF OF MUNICIPALITIES
Lepelle Northern Water R20.2 million 20.9 of
revenue Sedibeng/North West Region R22.4
million Sedibeng/Qwa Qwa R18.3 million
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IMPACT OF THE IMPLEMENTATION OF FREE BASIC WATER
(FBW) ON WATER UTILITIES 04 JUNE 2003
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IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER
(FBW) ON WATER UTILITIES

• THE FREE BASIC WATER (FBW) POLICY
• SAAWU fully supports the principle of FBW as an
  initiative to improve the quality of life of
  South Africans, specifically the indigent and
  rural poor.
• SAAWU supports the principal of municipal
  authorities being the most appropriate
  institutions to implement FBW, supported,
  wherever possible by other spheres of government.

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IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER
(FBW) ON WATER UTILITIES

• POSSIBLE CONTRIBUTIONS BY WATER UTILITIES TO THE
  IMPLEMENTATION OF FREE BASIC WATER (6kl)
• Many Water Utilities have expertise that can be
  mobilised to support Municipal Authorities in the
  implementation of FBW such as
• Water loss management
• Technical and financial management
• Water demand management
• Customer management and credit control
• Operation and maintenance of services

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IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER
(FBW) ON WATER UTILITIES

• POSSIBLE CONTRIBUTIONS BY WATER UTILITIES TO THE
  IMPLEMENTATION OF FREE BASIC WATER (6kl)
  (Continued)
• Water Utilities can
• Be used as a regional/sub-regional vehicle for
  cross subsidisation in some areas due to the fact
  that they do operate over provincial and
  municipal political boundaries.
• Where they act as water service providers to
  municipal authorities,they can implement and
  manage the FBW for the municipal authority.
• Can provide financial, technical and management
  expertise for low (basic) level water schemes in
  rural areas, ie boreholes, hand pumps, flow
  limiting technology etc.
• Can act as implementing agents for new
  infrastructure provision.

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IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER
(FBW) ON WATER UTILITIES

• CURRENT CHALLENGES TO FBW IMPLEMENTATION
• Municipal demarcation has not significantly
  improved the economic viability of all municipal
  areas (especially rural district municipalities).
• Many municipalities have also applied for a
  review of their boundaries.
• The equitable share and other resources are used
  to supply free basic water to those who are
  already benefitting from the receipt of services
  at the expense of the un-served
• Universal metering and full cost recovery above
  6kl is critical for municipal financial
  viability, ongoing FBW implementation and the
  viability of the entire water sector. This
  requires significant additional capital
  investment.

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IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER
(FBW) ON WATER UTILITIES

• CURRENT CHALLENGES TO FBW IMPLEMENTATION
  (Continued)
• Unauthorised/illegal connections continue to
  destroy the viability of schemes and undermine
  FBW provision in many areas.
• The process of allocation of funding to capital
  projects is unwieldy.
• Many municipalities lack the capacity/resources
  to implement FBW effectively.
• Full cost recovery for water services in most
  rural and some urban environments is not taking
  place.

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IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER
(FBW) ON WATER UTILITIES

• CURRENT CHALLENGES TO FBW IMPLEMENTATION
  (Continued)
• The reality is that water is not free and someone
  has to pay for the 6kl of FBW supplied to
  consumers.
• In municipal areas where there is not a healthy
  mix of high volume urban users to low level rural
  users, cross subsidisation of FBW via the
  consumer tariff is not viable.
• Most parts of rural South Africa fall into this
  category.
• In these areas the only source of revenue to
  cover the costs of FBW is the equitable share.

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IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER
(FBW) ON WATER UTILITIES
CURRENT CHALLENGES TO FBW IMPLEMENTATION
(Continued)

• The allocation (quantum) and discretionary use of
  the equitable share does not guarantee that
  sufficient funding is made available by
  municipalities to cover FBW implementation costs
  to the rural/urban poor.
• Where cross subsidisation is implemented there is
  a critical requirement for reasonableness to
  prevail, failing which, the negative impacts
  will cause industrial, commercial and domestic
  users to consider other alternatives.
• Most rural water supply schemes run by water
  boards on behalf of DWAF or municipalities have
  effectively been rendered non viable by the FBW
  implementation.

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IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER
(FBW) ON WATER UTILITIES
CURRENT CHALLENGES TO FBW IMPLEMENTATION
(Continued)

• Municipalities currently owe water utilities more
  than R 200 million for water services rendered
  that have not been paid for. In many cases these
  are municipalities with a large rural base who
  are unable to get full cost recovery for services
  provided to consumers.
• In some areas water utilities are supplying water
  services directly to consumers due to the fact
  that municipalities lack the capacity and
  resources to undertake this function. In most
  cases these services are not paid for and the
  water utility relies on subsidies from DWAF in
  order to cover the costs of delivering the FBW
  and basic water services.

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IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER
(FBW) ON WATER UTILITIES

• CHALLENGES ASSOCIATED WITH THE USE OF THE
  EQUITABLE SHARE ALLOCATION TO MUNICIPAL
  AUTHORITIES TO FUND FBW
• It is an unconditional allocation to municipal
  authorities.
• Use of funds is largely discretionary.
• Administrative capacity is not always sufficient
  at municipal level.
• Equitable share allocations are in-sufficient to
  meet all service needs.
• A portion of the equitable share is not always
  used by municipalities to pay water service
  providers for services rendered.

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IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER
(FBW) ON WATER UTILITIES

• SUMMARY OF THE IMPACTS OF FBW ON WATER UTILITIES
• The challenge now is to ensure that sufficient
  revenue is available through cross subsidies via
  the tariff or the allocation of the equitable
  share to enable municipal authorities/water
  service providers to recover the full costs of
  water service provision.
• It is critical that all consumers pay for all
  services received that exceed the BFW limit of 6
  k/lt per house hold per month.
• The entire water sector is dependent on the
  revenue from the consumer for services rendered.
• If municipalities do not pay water utilities who
  are acting as the service provider for the
  service rendered the water utilities will
  ultimately fail along with the rest of the water
  service sector.

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IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER
(FBW) ON WATER UTILITIES

• CONCLUSION
• The impact of FBW implementation on water
  utilities are primarily financial.
• This impact is, however, not insurmountable but
  will require rational and resolute decision
  making, total commitment and the cooperation of
  all role players and stakeholders.
• SAAWU and individual water utilities pledge their
  full support, capacity and skills to assist in
  ensuring the successful implementation of the
  Free Basic Water Policy.

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IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER
(FBW) ON WATER UTILITIES
Some examples of arrears owed to water utilities
operating in significant rural areas Amatola
Water R8,057,000 Magalies Water
R6,535,703 Midvaal Water R4,778,759 Lepelle
Northern Water R26,300,826 Sedibeng Water
R3,451,152 Rand Water R285,012,283 City of Cape
Town R2,227,025 Bloem Water R24,193,201
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IMPACTS OF THE IMPLEMENTATION OF FREE BASIC WATER
(FBW) ON WATER UTILITIES
Thank You for Your Time and Attention.