Reassessing Policy vs Managing Demand

1. Reassessing Policy vs Managing Demand Legislation and Regulation Presented by Ryan Norden

2. Contents • Part One – Private vs Public Water Service Provision • Private Water Service Provision • Public Water Service Provision • Conclusion • Part Two – The Tariff Setting Process and Implications for Market Processes • Introduction • Before Water Service Provision • WSP Water Service Tariff Setting • Conclusion

3. Private vs Public Water Service Provision Part One

4. PrivateWaterServiceProvision • Private sector water service provision has increased from 5% (1999) to 12% (2010) • Water sector is seen as a natural monopoly • Resulting in one bulk water provider, one water service provider and one wastewater service provider • Four failures of Private Provision • Abuse of Dominance in Pricing • Abnormal profit making and inefficient Allocation • Undersupplied wastewater management • Disinterest in indigent household service provision • Legislation is already in place in South Africa that combats these failures (1;2) • Water services pricing practices (IBT, UPR, etc) negate the seriousness of these failures, as does cost recovery methods (Cost-plus, Price-Cap) (2,4) • Combining charges for water service provision and wastewater services fix (3).

5. PublicWaterServiceProvision • Predominant provider used in global water service provision • Suffers from two major problems • Rent-seeking behaviour • Lobbyists utilize resources to increase rent, instead of allowing these resources to be better used elsewhere. • Lobbyists can also affect adjacent providers negatively if they are successful • Inefficiency and Innovation concerns • Monopoly Public providers have no incentives to be efficient or to innovate to guarantee market share • Encourages bail-outs and grants • Public provision also suffers from free-rider (wastewater service provision) and indigent household problems • Public provision suffers from an incentive structure that is less cost effective and efficient than a private provision • Public provision, by design, is less concerned about full cost recovery

6. Conclusion • There is no evidence that private provision is worse than public provision. • If the legislation is enforced, the majority of complaints against private providers falls away • The remainder are solved by regulation and government grants (theoretically in place and soon to be improved upon) • There is evidence that PPP can work, and work better if the private firm has control outside of South Africa in other countries

7. The Tariff Setting Process and Implications for Market Processes Part Two

8. Introduction • The methods used to set tariffs in the current environment leave themselves open to question. • Issues with tariff setting from the start of the process are compounded and carried through to the end • The WSP are left with unfair burdens to recover costs due to abuse of dominance earlier in the chain • The three main charge setting phases are • DWA Raw Water Tariff Setting • Water Board Provision Charges • Water Service Provision Tariff

9. Before Water Service Provision • The quality of water delivered is not of similar quality around the country, nor of similar scarcity • The RWPS allows for the recovery of a scarcity cost • This cost is not recovered by the DWA, instead is left to be recovered at a later stage • Water boards are sometimes unable to achieve supply agreements with the DWA • There is no defined standard for supply agreements between water boards and WSA • Water board tariffs ranged from R2.78 to R7.26 per kilolitre in South Africa in 2011

10. WSP Tariff Setting • The tariff charged is supposed to • cover the cost of raw water or bulk potable water • the cost of overhead and operational costs • the cost of capital and the cost of replacement, refurbishment and extension. • The Tariff charged is • Limited by an upper bound from the National Treasury • This prevents full cost recovery and discourages cost calculations • There is also no clear agreement among how many blocks need to be set, nor how large these blocks should be

11. Conclusion • At the start of the tariff setting process • Costs are ignored that affect revenue collection later on • Water boards are under pressure to provide water at rates above cost prices to ensure continued production • Water boards are sometimes unable to secure supply agreements, harming their agreements for supply forward with WSA • WSP are unable to recover costs effectively to ensure continued production • The water sector is not operating to guarantee Operational Efficiency and Economic Viability • Threatens the success of Private producers who would need to cover this shortfall if they were to produce