National Treasury May 2010

1. Portfolio Committee on Water and Environmental AffairsNational Treasury’s Assessment of the Water Boards’ 2008/09 Annual Reports National TreasuryMay 2010

2. Outline of presentation PFMA Requirements Financial Analysis Operational Challenges Capital Budgets Tariff Review MFMA: Monitoring municipal payments for bulk water supply

3. PFMA* Requirements (1/2) Financial Statements: Water boards submit their annual report, audited financial statements and auditors report within five months of the end of a financial year (30 November) to the National Treasury and to the Executive Authority (DWEA) The annual report and financial statements must include particulars of: Any material losses through criminal conduct and irregular expenditure and fruitless and wasteful expenditure as well as criminal or disciplinary steps taken as a result Any losses recovered or written off Any financial assistance received from the state and commitments made by the state on its behalf The Executive Authority (DWEA) must table the annual report and financial statements and the audit report in the National Assembly * Public Finance Management Act

4. PFMA Requirements (2/2) Corporate plans: submit to the Executive Authority (DWA) and to the National Treasury, at least one month before the start of its financial year (31 May) A projection of revenue, expenditure and borrowings for that financial year in the prescribed format Borrowing plans Risk management and fraud prevention plans Materiality and significance frameworks Treasury Regulation (Practice note on section 52 of the PFMA) Paragraph 10.1 under Financial Plan The corporate plan must include a detailed projected income statement, cash flow statement and balance sheet of the public entity for the next three years. Longer term projections will be welcomed, especially where the nature of the public entity’s business requires a long term outlook. Financial forecasts for the current year should also be provided. A complete tariff analysis cannot be done without this information

5. Financial Analysis: Income Declining profitability: Costs are growing more than revenue Tariffs are not cost reflective Increasing bad debts Modest volume growth • The difference between the gross profit margin and the net profit margin indicates high expenditure on costs other than cost of sales • Results in lower accumulated surplus to fund capital

6. Financial Analysis: Capital Generally Water Boards have low levels of debt Umgeni & Rand Water only real players in the capital markets. Water Boards with most significant Gearing Ratios are Umgeni, Sedibeng, Bloem and Mhlathuze High debt ratio due to trade and other payables (creditors) • Significant Capital Expenditure required in the next 5 years by the Water Boards, however declining profitability, low reserves and weak cash flows suggest the majority of the Water Boards can not sustain high debt levels

7. Operational Challenges identified in Annual Reports

8. Impact of Operational Challenges Ageing infrastructure Impact on capital funding requirement Increasing demand for water Impact on infrastructure capacity Impact on capital funding requirements Lack of technical skills Impact on sustainability and staff costs.. and profitability Reduced quality of raw water Impact on costs.. and profitability

9. Capital Budget • Ambitious capital expenditure plans for this financial year (2010)

10. MFMA Section 42: Price increases of bulk resources for provision of municipal services Submission by water boards must include Motivation for the reasons for increase How inflation targets will be met and other macro-economic policy considerations Steps taken to improve its competitiveness or efficiency to reduce costs Other objectives or targets in any corporate or other governance plan Submissions by water boards often not detailed enough to provide for the analysis required Corporate plans and sect 42 applications often contradictory In evaluating a request for a tariff increase by a water board, consideration is given to Sustainability considerations of water boards Service delivery vs expenditure/revenues vs efficiency Appropriate manner to finance future infrastructure requirements Maintenance and refurbishment of existing infrastructure Affordability considerations of water service authorities (municipalities) End users as a collective and individual customer groupings Economic sectors (e.g. agriculture) National priority programmes, such as the protection of vulnerable communities/groups (e.g. Free Basic Services) Alignment with Government priorities and policies Smooth in tariff increases to avoid high increases in a particular year Deadlines prescribed by MFMA and NT are therefore important to ensure a thorough analysis can be done

11. Water Board Tariff Applications i.t.o s42 • Albany Coast’s incorporation with Amatola is supported • Namakwa’s situation not sustainable, therefore an alternative long term solution needs to be considered

12. MFMA Circular 51 Municipalities are encouraged to review level and structure of water tariffs to ensure: Tariffs are fully cost reflective – if not fully cost reflective should develop phase-in strategy over period of time Tariffs are structured to protect basic levels of service Tariffs are designed to encourage efficient and sustainable consumption Providing clean water and managing waste water Required to include new section on “Drinking water quality and waste water management” in their 2010/11 budget documentation supporting information

13. Grant funding for the Water and Sanitation Functions – 2010 DoRA* Local Government Equitable Share – (unconditional grant) To enable municipalities to provide free basic services to poor households Subsidy 3x estimated cost and increases to 5x over the MTEF * Division of Revenue Act

14. Grant funding for the Water and Sanitation Functions – 2010 DoRA Municipal Infrastructure Grant (MIG) 75% for water and sanitation infrastructure Additional R2.5 bill in 2012/13 Regional Bulk Infrastructure Grant additional R554 mill allocated over MTEF* Rural Households Infrastructure Grant rollout of on-site water and sanitation services to very poor households allocated R1.2 bill over MTEF* * Medium Term Expenditure Framework

15. Monitoring Payment for Bulk Water Supply MFMA* Sections 41 and 44 Water boards must within 15 days after end of each month report on Amounts to be paid by municipalities for bulk resource Arrears owing by municipalities and age profiles of such arrears Actions taken by organ of state to recover arrears NT also engages with Municipalities and Water Boards to facilitate settlement of disputes and payments, upon request Issued guidance to all WB on mechanisms and processes to resolve disputes of a financial nature * Municipal Finance Management Act

16. Monitoring Payment for Bulk Water Supply Specific action taken by NT during 2009/10 to assist Met with Bushbuckridge WB and Municipalities (partly resolved, meters to be repositioned, new SLA drafted) Met with Sedibeng WB, Tsantsabane (partly resolved), engaged with Phokwane, Gamagara Khathu (payment or arrangements made) Engaged with Lepelle WB, Capricorn (payment or arrangements made) Engaged with Bloem WB, Kopanong (payment or arrangements made) Engaged with Rand WB, Ngwathe (payments or arrangements made)

17. General Findings on Arrears - Non existence or poorly drafted service level agreement require amendments - Limited metering of water consumption, poor positioning and location of water meters - Misalignment of water service authority functions, between DM and LM - Transfer of functions between municipalities incomplete - Non enforcement of credit control policy by WB - Municipalities delaying payment Need to strengthen roles of sector departments in a coordinated manner DWA assist parties with service level agreement and technical issues related to water meters COGTA assist with authorisation of water services powers and functions Improve oversight over Water Board and enforcement of credit control policies 17

18. Thank You