TCTA A new word for water 2012/2013 Bulk potable water tariffs setting forum October 2011

1. TCTA • A new word for water • 2012/2013 Bulk potable water tariffs setting forum • October 2011

2. Contents Background TCTA the organisation Water supply chain and collection of revenue Tariff Principles Other considerations in the determination of tariffs Tariffing setting LHWP: Income Agreement with DWA Tariff setting process Vaal River tariff review 2012/13

3. Background • To consult with stakeholders on input assumptions applied to calculating tariffs for 2012/13 • Although tariffs are expressed, it is by no way binding as it serves as a platform for discussion only and may be subject to revision • Stakeholder consultation meetings already undertaken: • Major Vaal stakeholders forum • TCTA management • DWA management • National Treasury • SARB

4. TCTA - The Organisation

5. TCTA the organisation Established under the Water Act Special purpose vehicle for the funding and implementation of off-budget raw water infrastructure on behalf of DWA State owned entity - Schedule 2 Public Entity per PFMA Board is appointed by the Minister of Water and Environmental Affairs Non profit-taking organisation Recover actual costs – no profit or loss or reserves Break-even of revenue to costs over a specified period No balance sheet Transfer risks to parties and sectors best suited to manage it

6. Water Supply Chain & Revenue Collection

7. Tariff Principles

8. Tariff principles TCTA recovers raw water tariff as capital unit charge to repay debt Full cost recovery from water sold to end-users Based on water sold out of system and not on water delivered into the system (supports demand management initiatives) Constant tariff in real terms which increases with: CPI annually Triggers as per the Income Agreements Repayment of debt within reasonable period (eg 20 years) Affordable structure to the end-user Tariff setting takes account of funding principles and risk management principles in combined approach

9. Other considerations in the determination of tariffs National Water Pricing Strategy Administered prices – inflation targeting Stakeholder consultation outcomes Affordability to end-users (phasing-in of large adjustments) Input data supplied to TCTA as follows: BER for long-term economic forecasts (inflation, real interest rates etc.) DWA on water demand forecasts (high and low scenarios) DWA on system yields DWA on future schemes and projected costs

10. Tariffing Setting End user affordability Debt outstanding • 20 year repayment period • Peak of debt in relation to value of asset (limit interest capitalisation) • Risk transfer to end-user – trigger adjustments if input assumptions change • Water sector debt profile – debt overlap with future schemes • Interest rates mostly fixed • Under recovering in early years • End-user pays on actual use • Constant tariff in real terms approach – CPI targeting • Phasing-in of large tariff adjustments over 2-3 years • Take account of future augmentation – future affordability • No reserves built into tariffs • Actual cost transfer – TCTA not profit taking and no consultancy fees

11. LHWP: Income Agreement with DWA Automatic and negotiated adjustments CPI annually Other tariff review triggers in the Income Agreement Changes in water demand Changes in timing and cost of future augmentation schemes (dependant on system yield) Changes to operations and maintenance costs Change in input assumptions that increase/decrease final repayment date 4.5% 7.5% Negotiated adjustment Negotiated adjustment Automatic adjustment Floor Cap

12. 4. Participation 1. Planning Process 2. Sensitivity Analysis & Stress Testing 3. Consultation • Rand Water Services Forum • Other Major stakeholder forums • Input data Demand, system yield, economic fundamentals, cost and timing of future augmentation schemes • Long-term projections DWA compiles long-term demand projections based on coordinated approach with DWA – various departments involved, Water Boards’ Planning and Budgeting departments, Large industrial users, Muni’s etc • Sensitivity Analysis Inflation, real interest rate, timing of future augmentation schemes and repayment periods • Stress Testing Lower inflation, changes in yield of system, higher real interest rate, zero growth in demand etc • Stakeholder validation Demand projections, system yield, economic fundamentals, cost and timing of future augmentation schemes • Consultation with National Treasury and SARB on administered prices • Consultation with DWA management structure Tariff Setting Process – May to August

13. Vaal River Tariff Review 2012/13

14. Demand and yield assumptions & Impact of timing of future schemes

17. Debt curve per project phase – Low demand Scenario II

18. Debt curve per project phase – High demand Scenario IV

19. 2012/13 Vaal River Raw Water Tariff

20. Notes to the 2012/13 Tariff Review Demand Forecast: DWA Low demand Scenario II forecast used for tariff determination Average annual growth from 2013 to 2022 1.09% Base volume 1 526 million m3/a for 2012/13 Growth after 2030 used as 1% per annum for low growth Timing of next scheme: Timing of the next scheme used as 2020 Earliest possible date for implementation even though low demand assumes 2023 Phasing-in of the LHWP-2 tariff to minimize debt overlap and paying off of two debts simultaneously Period of phasing-in stretched to 2020 (previously 2018) Economic forecast: New 30-year BER economic forecast incorporated Average real interest rates decreased from 3.34% previously to 2.85% new forecast Average CPI increased from 5.15% previously to 5.36% new forecast

21. Notes to the 2012/13 Tariff Review LHWP-1 and LHWP-2 split LHWP-1 Debt curve shown separately from LHWP-2 6c/m3 charged for LHWP-2 in 2011/12 taken out form LHWP-1 debt curve and accounted for under LHWP-2 Tariff charged for LHWP-1 to cover debt outstanding by 2023 LHWP-2 Debt curve shown separately from LHWP-1 Tariff charged for LHWP-2 to cover costs expensed under LHWP-2 Cost estimate used as supplied by DWA for 2020 implementation Tariff based on Scenario II demand with 1% annual growth after 2030 Administration cost is shared with LHWP-1 until debt in repaid under LHWP-1 – made provision for additional administration cost during construction which forms part of standard project budgeting

22. Conclusion on the 2012/13 Tariff LHWP-1 Inflation: 4.60% May 2011 CPI – 4.6% - automatic adjustment – falls between cap and floor level No triggered adjustments LHWP-2 Phase-in of tariff: 1.98% LHWP-2 phase in to be implemented over 9 years instead of 6 because earliest implementation date for LHWP-2 is 2020. LHWP-2 tariff to be phased in until 2020 and then the full 37 c/m3 (PV terms) will commence from 2021. 2012/13 portion 2 of 9 of the phase-in amounts to 3.86 c/m3 or 1.98% additional to LHWP-1 increase Tariff increase for 2012/13: 6.58% Supports end-user affordability Phasing-in of tariff for further augmentation over longer period No additional triggers required as input assumptions did not change substantially Supports impact on debt overlap and end-user affordability in future

23. TCTA Tariff adjustment 2012/13 Increase c/m3

24. Vaal River Raw Water Tariff 2012/13 a) Costs: i) State schemes 43.14 39.71 8.60% ii)Augmentation schemes 207.33 194.52 6.58% Total state and augmentation schemes 250.47 234.23 6.93% 2012/13 2011/12 Increase % b) Water pricing: i)Total development and use of water works 250.47 234.23 6.93%

25. LHWP tariff history

26. LHWP historical tariff adjustments

27. LHWP historical tariff adjustments

28. Questions……… Contacts: Hombisa Mbokotho Project Financier hmbokotho@tcta.co.za Alicia Keyser Senior Project Finance Manager akeyser@tcta.co.za Telephone: (012) 683 1200 Thank you!