Effective Cost Recovery: Municipal Demarcation and Free Basic Water Policy

1. WATER RESEARCH COMMISSION Recent Findings • Effective cost recovery: Before municipal demarcation and the Free Basic Water Policy • Effective cost recovery: After demarcation and the introduction of the Free Basic Water Policy Presented by Lansana Marah Sigodi Marah Martin RESEARCH FOR DEVELOPMENT 1st Floor, Everite House, 20 De Korte St, Braamfontein, 2001 Tel: +27 11 403-5830 • Fax: +27 11 403-5781 www.smmdc.com

2. SIGODI MARAH MARTIN Current Projects • Sigodi Marah Martin is conducting the following research: • Water Research Commission • Identifying Examples of Successful Cost Recovery Approaches in Low-income, Urban and Peri-urban Areas • Cost Recovery in a Changing Institutional and Policy Environment: Municipal Demarcation, the “Free Basic Water” Policy, and Financially Sustainable Service Delivery (in progress) • Institutional and Socio-economic Review of the Use/Application of Electronic Prepaid Meter Technology in the Provision of Water Supply Services to Urban and Peri-urban Areas (WRC) (in progress)

3. RESEARCH MOTIVATION • With the advent of democracy all South Africans were granted constitutional rights to access basic social and economic services • Government expressed this commitment to these rights to delivering basic services to all subject to the availability of financial resources • The Department of Water Affairs and Forestry (DWAF), through its White Paper, paid careful attention to the financial dimension of service delivery -- premised on the recovery of recurrent cost of service provision • DWAF’s own limited resources was devoted to capital expenditure on expanded basic service infrastructure • Some allowance was made for municipalities to offer subsidised “lifeline tariffs” to the very poor, but financial responsibility of these subsidies was assigned to municipal governments

4. RESEARCH MOTIVATION • Successful cost recovery through user fees was thus essential to the 1994 DWAF approach to redressing historical inequalities • However, difficulty in securing user payments threatened the financial viability of extending basic water services • By identifying the sources of successful cost recovery to those municipalities experiencing difficulties, the cost recovery challenge could conceivably be met.

5. RESEARCH STRATEGY • Draw on existing South African and international research to develop a framework for analysing the determinants of cost recovery • To identify examples of successful cost recovery • Compile information about cost recovery outcomes and their potential determinants of South African municipalities before and after the new municipal demarcation and the introduction of the Free Basic Water Policy • Use appropriate statistical techniques to identify and quantify the effects of the various determinants and present them accessibly to decision-makers • Conduct in-depth case studies

6. PROJECT OBJECTIVES • To audit (countrywide) successful cost recovery for water services provision before and after the new municipal demarcations as a frame of reference. • To establish the institutional, social, economic, and political contributions to successful water service provision and how these contributions have adapted to policy changes. • To formulate indicators of components which strengthen cost recovery for the water service sector.

7. CONCEPTUALISATION Concept Paper PROJECT APPROACH Literature Survey NATIONAL SURVEY CASE STUDIES Questionnaire Municipalities Replies Selected case studies Selection criteria Analysis - Results Municipal Profiles MODELLING SET OF DETERMINANTS Multivariate Statistical Causal Model Overall Benefit SYNTHESIS Socio- economic/ institutional context SYNTHESIS OF ALL OUTPUTS Service delivery characteristics Factors that improve cost- recovery Billing & payment practice Guidelines

8. COST RECOVERY IN A TYPICAL MUNICIPALITYSimulation results conducted before and after demarcation and the Free Basic Water Policy • Upgrading service infrastructure • Introducing penalties for non-payment • Other billing and payment “best practices” • Combined effects of available interventions • Differing poverty profiles • Expanding basic services to the poor

9. EFFECTIVE COST RECOVERY Before demarcation and the Free Basic Water PolicyMajor findings • Success with cost recovery at the municipal level varies widely, with the percentage of household consumers paying regularly ranging from near 100 to near 0. • Interventions available to decision-makers have large effects on payment rates, with the difference between pursuing “best” and “worst” practices generally between 30 and 40 percent. • The most important intervention for improving of cost recovery is using service restriction to penalise non-payment, preferably within 90 days. • Other practices, such as Masakhane campaigns, progressive tariffs, and offering convenient payment facilities, improve cost recovery, but their effects are more modest.

10. EFFECTIVE COST RECOVERY Before demarcation and the Free Basic Water PolicyMajor findings • The combination of basic service levels and poor consumers is usually a recipe for failed cost recovery, an unfortunate finding, given the expectation that improved cost recovery would finance the expansion of basic services to the poor. • Recent developments, the Free Basic Water Policy and municipal restructuring (demarcation), alter the challenge of cost recovery, but do not diminish it.

11. Payment rate Shaded areas contain 80 percent of simulated outcomes .06 Assumptions: BEGIN with an otherwise typical municipality where: Roughly 20% of household consumers lack private, metered connections; Non-payment is not penalised through service restrictions; There is not a progressive tariff, payment at supermarkets, nor an active Masakhane campaign. THEN: Upgrade existing consumers to private connections, introduce penalties for non-payment and other billing and payment “best practices” .04 Density .02 0 0 0 10 10 20 20 30 30 40 40 50 50 60 60 Percentage change Payment rate .06 .04 Density .02 0 Percentage change TYPICAL MUNICIPALITYThe effects of replacing “worst” with “best” practices Replacing “worst” with “best” practices in an otherwise South African municipality can be expected to improve the payment rate by 26%

12. EFFECTIVE COST RECOVERYAfter demarcation and the Free Basic Water PolicyMajor findings • Payment rates in a typical municipality • Impact of Masakhane programmes, strong penalties and progressive tariffs • Adopting these practices and policies would improve cost recovery by roughly 21% • Masakhane and progressive tariffs • Moving from absence to full implementation of these measures is likely to result in an increase in payment rates of about 11% • Strong penalties • A municipality moving from no penalties to strong penalties would improve cost recovery by 9% on average.

13. EFFECTIVE COST RECOVERYAfter demarcation and the Free Basic Water PolicyMajor findings • Strong penalties, progressive tariffs and the abolition of flat rate billing. • Payment rates will increase by about 23% • Current payment rates (based on simulating for a typical municipality) are only 57%.

14. EFFECTIVE COST RECOVERYAfter demarcation and the Free Basic Water PolicyMajor findings Relationship between proportion of water loss and cost to household The symbols indicated in the graph show the demarcation board classification of municipalities.

15. EFFECTIVE COST RECOVERYCHALLENGES FOR MUNICIPAL OFFICIALS • Profound changes in the institutional and policy environment -- including municipal demarcation and Free Basic Water -- have forced South African municipalities to revise their approaches to cost recovery substantially. • Municipal demarcation has reduced the number of primary local and metropolitan authorities from more than 800 to less than 300 -- creating larger units characterised by much greater internal social and institutional heterogeneity than their predecessors. • The Free Basic Water Policy obliges municipalities to find alternative ways to finance basic water service provision. • Municipal officials’ challenge is not only to integrate and administer the disparate cost recovery arrangements they have inherited, but also to generate revenues to cover the costs of providing basic services free.

16. EFFECTIVE COST RECOVERYPRACTICAL IMPLICATIONS • Prior cost recovery initiatives geared toward the lower end of the market are increasingly overshadowed by the implementation of the Free Basic Water Policy. • For example, the use of prepayment water meters now focusses on monitoring consumption under the Free Basic Water Policy, rather than securing payment for basic services. • Within new municipalities, the cost of free basic water must be offset by payments collected for services consumed above the free basic level. • The effective implementation of penalties against non-indigent consumers who fail to pay a progressive, volume-related tariff, takes on increasing importance.

17. EFFECTIVE COST RECOVERYCONCLUDING REMARKS • Reconfiguration of municipalities, coupled with the implementation of the free basic water policy has had a marked influence on how recovery of costs can be enhanced. • On the one hand initiatives geared toward the lower end of the market are increasingly overshadowed by the implementation of the free basic water policy. • On the other hand the implementation of punitive sanctions against non-indigent consumers who fail to pay a progressive, volume-related tariff, takes on increasing importance. • As punitive sanctions become increasingly necessary, they also become more expensive to implement. • The abolition of flat rate billing is advised.

18. EFFECTIVE COST RECOVERYCONCLUDING REMARKS • The abolition of flat rate billing is advised. • There is a limit to how much cost recovery can be improved by increasing the per litre charge to consumers as increasing the charges results in a greater proportion of water being “lost” in distribution • The focus for effective cost recovery should thus shift to ensuring that all consumers who use more than the free basic provision are billed for what they consume.

19. THANK YOU Sigodi Marah Martin RESEARCH FOR DEVELOPMENT 1st Floor, Everite House, 20 De Korte St, Braamfontein, 2001 Tel: +27 11 403-5830 • Fax: +27 11 403-5781 www.smmdc.com

21. Service Infrastructure • Examples: • Extent of existing infrastructure • Private and public connections • Metering mechanisms • Social and Institutional Context • Examples: • Prevalence of poverty • Degree of socio-economic inequality • Urban and rural • History of local politics and local government institutions • Cost Recovery Outcomes • Examples: • Percentage of accounts regularly paid on time • Ratio of current to total debt • Avoidance of chronic non-payment • Billing and Payment System • Examples: • Tariffs and indigent policy • Individual and collective incentives for payment and penalties for non-payment • Convenience of payment options CAUSAL MODEL Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

22. THE DATASET Sources • A national survey of municipal cost recovery • Census-based municipal social profiles The realised sample • Response rate • Geographical and social representivity • Absence of significant selection bias Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

23. SAMPLE COMPOSITION BY PROVINCE Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

24. SAMPLE COMPOSITION BY SOCIAL CATEGORY Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

25. municipal data, Municipal data, mean multiply-imputed unweighted weighted by household data, unweighted mean, with consumers, with mean, with standard deviation standard deviation standard deviation (N) (N) (N=310) Payment rate 60.7 60.3 60.6 23.6 21.0 23.4 (306) (291) Ratio current to total consumer debt Consolidated 21.7 21.4 21.3 19.6 15.2 19.4 accounts (259) (250) Water only 25.4 20.8 26.0 22.9 23.0 12.0 (153) (148) Note: Source is national survey of municipal cost recovery, 2000. Measures of dispersion around the mean (standard deviations and errors) are in italics. Numbers of non-missing observations are in parentheses. DESCRIPTIVE DATA ON COST RECOVERY OUTCOMES Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

26. Household consumers in Likely household consumers municipal sample in national population (National survey, 2000) (OHS, 1999) Household consumers (total) 60.5 61.9 (1.3) (0.7) With private connections 67.5 72.2 (0.3) (0.7) Without private connections 31.9 24.6 (1.4) (1.4) Note : Breakdown by service level using national survey data (2000) based on estimates of an ecological-inference model. Breakdown for likely consumers in the national population using the October Household Survey (OHS) assumes that households with main water supply “piped water in dwelling,” “piped water on site or in yard,” “public tap,” and “water carrier/tanker” are likely municipal consumers — and that those with piped water in dwelling, on site, or in yard have private connections. Standard errors are in parentheses. PAYMENT RATES FOR WATER SERVICES Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

27. SELECTED DESCRIPTIVE DATAInfrastructure, billing and payment Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

28. Payment rate Shaded areas contain 80 percent of simulated outcomes .4 .3 Assumptions: BEGIN with a typical municipality where: 82 percent of household consumers have private connections; 78 percent of household consumers have metered connections. THEN: Upgrade all existing household consumers to private, metered connections. Density .2 .1 0 -2 0 2 4 6 8 10 12 Percentage change Debt ratio .4 .3 Density .2 .1 0 -2 0 2 4 6 8 10 12 Percentage change TYPICAL MUNICIPALITYEffects of upgrading existing service infrastructure Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

29. Payment rate Shaded areas contain 80 percent of simulated outcomes .12 .09 Density Assumptions: BEGIN with an otherwise typical municipality that: Does not penalise non-payment by restricting services. THEN: Introduce service restriction as a penalty for non-payment, applied to consumers by the time their accounts are 60 days overdue. .06 .03 0 -5 0 5 10 15 20 25 30 Percentage change Debt ratio .12 .09 Density .06 .03 0 -5 0 5 10 15 20 25 30 Percentage change TYPICAL MUNICIPALITYEffects of introducing penalties for non-payment Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

30. Payment rate Shaded areas contain 80 percent of simulated outcomes .08 Assumptions: BEGIN with an otherwise typical municipality that: Does not have a progressive tariff; Does not allow payment at supermarkets; Does not have an active Masakhane campaign. THEN: Introduce a progressive tariff, payment at supermarkets, and an active Masakhane campaign .06 Density .04 .02 0 -10 0 10 20 30 40 Percentage change Debt ratio .08 .06 Density .04 .02 0 -10 0 10 20 30 40 Percentage change TYPICAL MUNICIPALITYEffects of introducing specific billing and payment “best practices”. Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

31. Payment rate Shaded areas contain 80 percent of simulated outcomes .09 .06 Assumptions: BEGIN with an otherwise typical municipality where: One-third of household consumers fall below the “Poverty Line” THEN compare with an otherwise typical municipality where: Two-thirds of household consumers fall below the “poverty line” Density .03 0 -30 -20 -10 0 10 Percentage change Debt ratio .09 .06 Density .03 0 -30 -20 -10 0 10 Percentage change TYPICAL MUNICIPALITY Effects of differing municipal poverty profiles Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

32. Shaded areas contain 80 percent of simulated outcomes Payment rate .6 .4 Density Assumptions: BEGIN with a typical municipality: Extend basic services to poor households equal to one tenth of existing household consumer base. .2 0 -8 -6 -4 -2 0 Percentage change Debt ratio .6 .4 Density .2 0 -8 -6 -4 -2 0 Percentage change TYPICAL MUNICIPALITYEffects of extending basic services to poor households Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

33. Measure Category Comment payment rate for water services cost-recovery outcome behavioural indicator of cost-recovery outcomes. financial indicator of cost-recovery outcomes. debt ratio for water services cost-recovery outcome social composition of household consumers: income profiles capture consumer characteristics related social and institutional context proportion below poverty line to capacity to pay for water services; $ (all groups) proportion above poverty line income combined with racial classification captures $ (African) features of municipalities’ political and institutional proportion above poverty line histories. $ (Coloured/Asian/Unspecified) proportion above poverty line $ (White) number of household consumers service infrastructure indicator of the administrative scale of cost recovery. proportion of household consumers with private service infrastructure indicator of prevalence of high service level. connections proportion of household consumers charged a flat rate service infrastructure indicator of prevalence of metered connections (consumers with metered connections generally not charged a flat rate). existence of a progressive tariff schedule billing and payment practices indicator of whether small consumers charged less per kiloliter on average than large consumers. use of service restriction to penalize nonpayment: billing and payment practices indicator of penalties for nonpayment. within 90 days; $ more than 90 days; $ never. $ existence of an active Masakhane campaign billing and payment practices indicator of use of collective incentives for payment. existence of option of paying at supermarkets billing and payment practices rough indicator of convenience of payment options (not feasible for municipalities without supermarkets). DESCRIPTION OF MEASURES INCLUDED IN OPERATIONALISEDMODEL OF COST RECOVERY OUTCOMES Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

34. MAJOR FINDINGS • Realised sample consists of 301 municipalities serving roughly three million household consumers (+ 40% of entire population) • The geographic and social composition of the realised sample is very similar to the population • Success with cost recovery at the municipal level varies widely, with the percentage of household consumers paying regularly ranging from near 100 to near 0. • Interventions available to decision-makers have large effects on payment rates, with the difference between pursuing “best” and “worst” practices generally between 30 and 40 percent. • The most important intervention for improving behavioural and financial indicators of cost recovery is using service restriction to penalise non-payment, preferably within 90 days. Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

35. MAJOR FINDINGS • Other practices, such as Masakhane campaigns, progressive tariffs, and offering convenient payment facilities, improve cost recovery, but their effects are more modest. • The combination of basic service levels and poor consumers is usually a recipe for failed cost recovery, an unfortunate finding, given the expectation that improved cost recovery would finance the expansion of basic services to the poor. • Recent developments, the Free Basic Water Policy and municipal restructuring (demarcation), alter the challenge of cost recovery, but do not diminish it. Comprehensive thinking of tariff schedules within new municipal boundaries requires informed expectations about cost recovery if financial sustainability is to be achieved. Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

36. CASE STUDIES • To examine the cost recovery successes of four representative municipalities: • Durban, Kwa-Zulu Natal • Mogale Local Municipality, Gauteng • Adelaide, Nxuba Municipality, Eastern Cape • Middleburg, Mpumalanga Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

37. CASE STUDIES - METHODOLOGY • Collection of preliminary data • Two questionnaires were developed: • a household questionnaire designed for quantitive analysis • a qualitative questionnaire for use during focus group discussions Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

38. CASE STUDIES - METHODOLOGY • The case studies addressed the following: • assessed the roles and relationships of local structures and their bearing on water supply management in the community • documented the broad socio-economic context in which cost recovery programs are implemented; • examined the linkage between quality and levels of service and rates of cost recovery; • identified former (and alternate) water supply arrangements and assess their impact on current cost recovery; Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

39. CASE STUDIES - METHODOLOGY • determined consumer awareness and perceptions about the cost of service in relation to current tariffs and test overall acceptance of the ‘user pays’ principle; • assessed the roles and relationships of local structures and their bearing on water supply management in the community • got an overview of different cost recovery systems, with their strong and weak points; • identified the main constraints to cost recovery; • identified the mechanisms and strategies being applied at community level to encourage and enforce payment; Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

40. CASE STUDIES - METHODOLOGY • determined consumer awareness and perceptions about the cost of service in relation to current tariffs and test overall acceptance of the ‘user pays’ principle; • got an overview of different cost recovery systems, with their strong and weak points; • identified the main constraints to cost recovery; • identified the mechanisms and strategies being applied at community level to encourage and enforce payment; • gained insight into water management roles and decision making at household level. Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

41. CONCLUDING REMARKS • Findings can guide municipalities • Simulate the effects of replacing “worst” with “best” practices in an otherwise typical South African municipality • Statistically quantify the extent to which improvements in cost recovery can be obtained by applying the recommended principles of best practice. • Feedback from Case Studies • Each different • Three sets of factors common to all • Rationale • To establish its current level of cost recovery; • Compare with statistical estimates • Set cost recovery targets Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

42. CONCLUDING REMARKS • Strategy to address • Poverty/socio-economic implications • Affordability • Refusal to pay • Basic water loss • Vandalism • Illegal connections • Central theme • Ongoing involvement of the community • incentives Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas

43. CURRENT AND FUTURE WORK • Sigodi Marah Martin is conducting further research for the Water Research Commission based on the findings presented today. The title of the research project is: • Cost Recovery in a Changing Institutional and Policy Environment: Municipal Demarcation, the “Free Basic Water” Policy, and Financially Sustainable Service Delivery • In addition, Sigodi Marah Martin is conducting research on: • Institutional and Socio-economic Review of the Use/Application of Electronic Prepaid Meter Technology in the Provision of Water Supply Services to Urban and Peri-urban Areas (WRC) • The Costs of Water from Raw Water through to User Charges (DWAF) Identifying examples of successful cost recovery approaches in low-income, urban and peri-urban areas