Water Sector Value Chain Pricing and LG Water Funding Research

1. Water Sector Value Chain Pricing and LG Water Funding Research Seminar on tariffs, costs & regulation in LG water services Victor Ngobeni, National Treasury | 14 June 2013

2. Outline • Water Sector Value Chain Pricing • Water LGES, Water Tariffs and Municipal Debt

3. Part A: WSVC Pricing • To determine the amount of costs that each stage of the WSVC imposes on consumers • Emphasise the need to implement sector reforms RAW BULK RETAIL

4. Stage 1: Raw Water Charges • DWA sets the levels of water resources development and management charges (raw water) • Raw water tariffs differ country-wide from water board to water board, depending on factors such as location, raw water quality, volumes, etc. • Raw water tariffs are very infinitesimal when compared to both bulk and retail tariffs. • At this stage, water is still very raw and untreated.

5. Levels of Raw Water Charges

6. Raw Water: Proportion of Bulk Tariffs

7. Stage 2: Bulk Water Services Charges • WBs purchase raw water from DWA & incur raw water costs. • WBs traditionally set the levels of bulk water tariffs in areas where they are bulk water services providers. • They add value by purifying and distributing potable water to municipalities (industries) • Bulk water costs • Raw water costs • Purification costs & energy costs • Labour costs • Capital costs • Other costs

8. Bulk Water Services Charges • Bulk costs steadily increased over the years from R3.03 to R4.59 • Mhlathuze Water is the cheapest over the period • Sedibeng Water is the most expensive. • Others like Rand, Lepelle, Bloem, Amatola are also high • Tariffs vary widely due to the availability of water, distance distribution, raw water quality and costs. • WBs that incurred high raw water costs are seemingly charging high bulk tariffs. • At this stage water is treated and in potable state

9. Bulk Water Costs: Proportion of Retail Tariffs On average WBs passed on between 44% and 50% to LG

10. Stage 3: Retail Water Services Charges • Municipalities purchase potable water from WBs and incur bulk water costs. • They perform the bulk function and set own bulk tariffs where they are not serviced by WBs (comparison with Cape Town renders the model unfavourable) • Similarly municipalities facing high bulk water tariffs charges consumers high retail tariffs. • Retail costs: • Bulk water costs; • Operating and maintenance costs; • Capital costs; • Reasonable rate of return; • Provision for bad debts; • Depreciation; and • Other costs. • At this stage water is distributed to consumers for use.

11. Retail Water Services Tariffs • The 4 selected metros on average charged R7.27 and R12.18. • eThekwini is the cheapest while Joburg was expensive over the period. • The 6 selected locals on average charged slightly lower than the metros between R5.98 and R9.40. • Mafikeng LM was the cheapest while Matjhabeng LM has been the most expensive • Mafikeng took high bulk water costs from Botsh but is the cheapest, what does this imply?

12. Summary of Water Tariffs

13. Main Findings • Raw water costs contributes minimally to total water costs. • Raw water costs formed between 11% to 14% of total water costs • Bulk water costs form a significant portion to total water costs. • These ranged between 43% and 47%. • Retail costs also added a significant portion to total water costs. • These were between 39% and 44% over the period • The water services components of the value chain comprised between 86% and 89% of total water costs over the period

14. Deductions • Varying raw, bulk and retail water costs lead to varying water prices country-wide. • Disparities are observed in the pass-through of costs across the 3 stages of the WSVC. • Reforms on price regulation are necessary. • General debate for standardised water tariffs, is this possible? • General consensus to move to cost-reflective tariffs for water, is this possible?

15. Part B:Municipal Water Funding • To analyse the relationship between water LGES, bulk water purchases, and total municipal revenue from water services in municipalities • 9 municipalities owed 80% of R1.3bn owed to WBs (Aug 2012) • Cross subsidisation may exist on both income and expenses from other services

16. Limitations LGES is unconditional therefore allocations can be used for other municipal functions. All income figures are thus indicative. Bulk water provided by Water Boards may or may not cover the entire municipal area i.e. the municipality may also perform the bulk water function with related expenses Municipalities don’t separately account for their water function and thus retail expenses unknown

17. Water Income vs. Bulk Water Expenses Own revenue + water allocation

18. Deductions • Water allocations were not adequate to cover bulk water expenses for 4 of the municipalities while they were adequate for the remaining 5 municipalities. • In some instances own revenue from water tariffs alone has been adequate to cover bulk expenses (5 municipalities) while in others it has been inadequate. • For all the 9 selected municipalities total water income has been sufficient to cover bulk expenses. • Retail costs have not been included • Effective municipal pricing, collection, enforcement and proper channeling of water LGES is a sine qua non

19. END