City of Cape Town

1. City of Cape Town An Update of the Water Services Financial Model 26 October 2006

2. Background • At the end of 2005 a report was presented that was the culmination of work done to determine: • What is affordable and sustainable capital expenditure for water services? • What are implications for: • Financing (how funds are secured) • The service (what can and can’t be done) • Tariffs (impact on consumer) • What are the key strategic issues facing the service in order to get water services onto a sustainable footing? • This was done using 2003/04 data .

3. Outcomes from previous work • Financing issues • Water services needs too secure an appropriate share of MIG funds • Cost of capital • Current cost of capital for sanitation to high (15%) , must negotiate with the City to reduce this • Will need to look at project finance for some of the larger projects (continue dialogue with MIIU and DBSA) • For a sustainable service the following is required: • Basic services for all • Adequate provision for rehabilitation • Adequate provision for maintenance • Improved collections and debt management • Higher tariffs are necessary for a sustainable services • Capital programme will need to be fit for purpose (and trimmed down from current needs assessment)

4. Request for model update • PDG was requested to work with the City to update the data in the model based on the 2005/06 financial year. • The scope of work did not include any discussion and revision of the model assumptions, except a revision of the population projections and the LTWD forecast. • What was proposed to the City was to: • engage in a series of strategic discussions for each of the key ‘sub business’ areas addressed in the model for example network management (UAW; meter replacements), water demand forecasts, basic services programme, etc.

5. Model update • Results • Demand • Operating costs • Capital costs • Tariffs

6. Demand – for connections • Population growth: 1.1 % (Dorrington’s projections) • New household formation: approximately 23 000 • Backlog (informal settlements): eradicated for water and 40 000 for sanitation Primarily affects -- reticulation infrastructure CAPEX -- staffing and maintenance OPEX

7. Demand – for connections

8. Demand for water • Affects: • Water sales, production and wastewater treatment • Bulk infrastructure requirements • Bulk water purchases • Chemical and energy costs • Revenue

9. Demand for water Long term Water demand forecast (CoCT)

10. Operating costs Change to: maintenance assumption • Staffing levels and costs • Assume efficiency gain of 5% • Maintenance • Fixed at 1 % of asset value (may be too low?) • Bulk purchases • Exogenous; significant real increases (from Berg River and new sources (figures to be confirmed) Updated Berg River figures still need to be obtained

11. Operating costs

12. Staff costs

13. Maintenance &bulk costs Significant impact in early years

14. Opex outcomes • Staff costs too high? • Note real reduction in “other” costs

15. Capital programme

16. 4 scenarios • City of Cape Town (needs based) • Model (calculated using unit costs and demand) • “Affordable” (not implemented as yet) • Choice The “choice” option allows user to choose one of the three options for each of the major components of the system (bulk water expansion, bulk water renewals etc)

17. Comparison of scenarios

18. Assessment of CoCT scenario over ambitious too low

19. Tariffs required

20. CoCT CAPEX R 7 /kl

21. Strategicconclusions Modeling process Designmodel Sensitivity Refinedata Collate and input data Outcomes Refinescenarios Demandassumptions Tariffrequirements Operating costs CAPEX programme Financialtargets

22. Model design Demand Capex Scenario Manager Opex Assets SummaryPages IS BS CF Debtors & collections