Presentation to the Water Affairs and Forestry Portfolio Committee 29 October 2004

1. Presentation to the Water Affairs and Forestry Portfolio Committee29 October 2004 WATER SERVICES TRANSFERS

2. Purpose of this presentation • To outline challenges and constraints to implementing the transfer process • To locate the transfer of water services within the broader municipal context • To provide some snap shot findings from financial assessments and analyses • To highlight recommendations towards ensuring the sustainable transfer of water services assets

3. Our Goal • SALGA and receiving municipalities are all committed to a common goal: • To successfully take transfer to achieve sustainable water services to communities

4. From policy to implementation • An enabling policy framework for transfer is in place • Good working relations and an ethos of co-operative governance among partners – DWAF, SALGA, dplg • Municipal commitment to the process and to the final outcome of transfer is evident • HOWEVER – in achieving sustainable transfer a number of very real implementation constraints are encountered

5. The implementation challenge The transfer targets are tight. The transfer process did not anticipate the many decisions to be addresed to ensure sustainbility Ensuring sustainability requires addressing the broader municipal context within which water services are delivered – which requires TIME

6. What are the implementation constraints to transfer? Making sure the right water services provider arrangements are in place [section 78 processes] Making sure the financial arrangements are sustainable Addressing personnel issues to ensure the right skills, COS, remuneration, benefits (pension, medical aid) Ensuring sustainable infrastructure

7. Factors for Sustainability The right water services provider Sustainable water services Sustainable infrastruc ture Sustainable financial arrangements Personnel issues finalized

8. Transfer in the broader context Transfer must be viewed in the broader context of: • Equitable share • The revenue raising potential and fiscal capacity of individual municipalities • Indigents and free basic services (impact of free basic services on ES) • Water services provider arrangements and management capacity • The impact of increased personnel on municipal organograms and budgets • Infrastructure status and maintenance impact

9. Financial Sustainability Sustainable financial arrangements • SALGA has undertaken focussed research to establish the adequacy of funding to ensure the sustainable transfer of DWAF’s assets • The research highlights budgetary gaps after taking into consideration: • Estimated operating and maintenance costs of the schemes • Human resources related costs • Revenue estimates • Grant funding • Required capital expenditure

10. Long term financial implications of transfer Policy Issue • The Joint Transfer Policy does not address the long-term financial implications of transferred schemes and related staff on municipal finances HOWEVER • It places an onus on National Government to make arrangements for ongoing conditional grants where it is not possible to recover the costs of operating and maintaining the water services works • IDTC agreement is required on how this policy principle will be operationalised, as indicated in the policy • SALGA`s research aimed at contributing towards achieving clarity on this critical matter

11. Functional Assessment • In addition, DWAF`s Functional Assessments and related cost estimates needed to be verified due to: • The values in DWAF`s Functional Assessments being determined through desktop studies and not field inspections • Elements being left out of the assessments in some cases • Cases where the estimates are materially inaccurate • Municipalities have initiated limited verification activities to date

12. Snapshot research • Undertaken in: • Mopani DM • Albert Luthuli LM • Chris Hani DM • Moses Kotane LM • The findings affirmed by WSA`s

13. Personnel WS Operating Subsidy Technical Revenue Equitable Share Personnel Umgeni Water/ Phambili Consulting Functional Assessment DWAF Functional Assessment Division of Revenue Act Financial Model Budgetary Gaps Albert Luthuli LM Methodology O&M

14. Albert Luthuli LM key assumptions • Effective date of the transfer of DWAF Assets - 1st July 2004 • Estimated Revenue from DWAF Functional Assessment used but actual collection rates applied • Estimated refurbishment cost in DWAF FA distributed evenly over three years, starting in year 2004/05 • Umgeni/Phambili Consulting Joint Venture Functional Assessment Study used regarding personnel costs • Approximately 127 DWAF staff to be transferred to the municipality • Increase in Equitable Share allocated to Water services budget as it is assumed that this is the phasing in of Water Operating subsidies • ES data sourced from DoRA, 2004

15. Example Albert Luthuli Local Municipality • The total estimated operating subsidy over the next years (2004/5 to 2009/10) is R14,3 million • The estimated operating costs are R73,8 million for the same period (maintenance and operating costs) • This shows an operational shortfall in the subsidy of approximately R59,5 million • The operational loss on the DWAF schemes to be subsidised by the municipality is estimated at approximately R6m in year 2006/7, R7,8m in 2007/8, R9,2m in 2008/9, and is expected to escalate accordingly under current circumstances

16. Example Chris Hani DM • The total estimated operating subsidy over the next six years (2004/5 to 2009/10) is R18,3 million • The estimated operating costs are R35,7 million for the same period • This shows an operational subsidy shortfall of approximately R17,3 million • The operational loss on the DWAF schemes to be subsidised by the municipality is estimated at approximately R11,7m in 2007/8, R11,9m in 2008/9

17. Our Findings • In all four cases net financial deficits occurred within the initial years of taking transfer • Increased financial deficits occurs in the fourth year due to the fact that the subsidies decrease and the revenue base in the municipality is too small • Both these scenarios indicate unsustainable water services operations • This evidence has raised concerns that the current O&M subsidy COULD be inadequate

18. Value of O&M subsidy • SALGA has formally placed on record with the IDTC a request that the O&M subsidy requires review • Process to prepare submission to National Treasury under way with DWAF • SALGA proposes that subsidy values be negotiated on a case-by-case basis in Transfer Agreements, and not rely solely on DWAF estimates informed by the Functional Assessment • In the longer term the adequacy of Equitable Share would also need to be determined on a case-by-case basis

19. Commencement date of the decreasing O&M subsidy • In terms of the transfer policies the starting date for the three year decreasing O&M subsidy is 1 July 2002 (being the beginning date of the national transfer programme) • The need to determine water services provider arrangements for the transferred schemes (in accordance with the section 78 process outlined in the Municipal Services Act) meant that municipalities could not take transfer on 1 July 2002 • This means that most receiving municipalities will not benefit from the full 3 year O&M subsidy period indicated in the transfer policy

20. Proposal commencement date of O&M subsidy • We propose that the date at which the transfer subsidy commences is either: • the date on which the Municipal Council takes its Section 78 resolution in terms of the service provider mechanism that will provide its water services OR • the date that the WSA takes transfer (where a S78 assessment is not undertaken) • This proposal links the transfer process to the section 78 assessments, where relevant

21. Replacement costs • Asset depreciation and future replacement cost once the assets have reached their useful life was not addressed in the Joint Transfer Policy • Financial modelling undertaken at Moretele LM has shown that the replacement costs in 10 to 15 years time could push tariffs to over R10/kl in similar municipalities that have no financial reserves • Policy augmentation to address this component of the programme has been tabled with DWAF

22. Personnel Subsidy and Staff Costs • There are concerns that the personnel subsidies could be insufficient Example Chris Hani DM • The current personnel subsidy will be inadequate once the staff are transferred: • The total personnel subsidy over the next six years (2004/05 to 2009/10) is approximately R49,7 million • The total salaries for the same period amounts to R61,6 million on the DWAF COS • The current gap in subsidy is approximately 23,9%

23. Refurbishment Value • Reviews of DWAF’s Functional Assessments, including the condition of assets, have found that the current allocations for refurbishment may not be adequate Example: Mopani DM • The grant for refurbishment presented by the Water Services Operating Subsidy is approximately R18,9 million • However the total estimated refurbishment cost for the schemes is R68,6 million to be rolled evenly over the next 3 years (starting in 2004/05) • This shows a shortfall of R46,7 million in the DWAF allocation to adequately cover refurbishment

24. Proposal for Refurbishment • With regard to Refurbishment, SALGA has proposed augmentation to the Transfer Policy   • The Policy should make provision for the Transfer Grant, including refurbishment values to be jointly negotiated between the receiving WSA and DWAF and not necessarily be the value determined in the DWAF Functional Assessment • DWAF would agree that Transfer Grants and refurbishment values in the DORA should be regarding as provisional to guide local discussions

25. Staff Transfers The right personnel • SALGA’s position is that transfer of water services staff must be negotiated centrally • As far as possible staff transfers should occur on a uniform basis • Transfer of staff is an inextricably linked component of the transfer of a water service – it therefore cannot be separated from the overall transfer agreement • SALGA contends that whatever approach is taken in terms of the transfer of staff a narrow interpretation of S197 of the Labour Relations Act cannot apply

26. Ensuring integrity of collectively agreed positions • Individual municipalities cannot negotiate a departure from collectively agreed positions on issues reserved for centralized bargaining in the SALGBC. This right is reserved for SALGA as the employer body. • Where there are issues that require departure from collectively agreed positions, it is proposed that either: • negotiations should involve members of the SALGBC or • agreed positions should be forwarded by SALGA to the SALGBC for ratification

27. Staff transfers according to the needs of the service • It is SALGA and its members’ policy position that staff should be transferred: a) according to the needs of the new service (which will be consulted with DWAF) b) into an approved organisational structure appropriate for the needs of the new service to be undertaken • Questions such as the number of staff to be transferred, precisely which staff, qualification levels and so on, must be determined before transfer of staff occurs • DWAF and SALGA have agreed to a central process to come to conclusion on this component of the programme

28. Institutional Reform and Section 78 The right water services provider • Deciding the delivery mechanism (or institutional arrangement) to provide the water services is one of the most important decisions in terms of sustainability • Staff cannot be transferred until it is clear which WSP they will be transferred to • The institutional reform and section 78 processes provide an opportunity for decision making around sustainable institutional arrangements

29. Section 78 key part of Transfer • The institutional arrangements for the operation, maintenance and management of the transferred schemes is an integral part of sustainable transfer • Deciding the most appropriate delivery mechanism and ultimately the WSP through the section 78 process is thus a critical step in the transfer process • It must be recognised that the institutional reform and section 78 decisions are long term decisions which often involve complex processes • Institutional reform and decision making requires realistic time-frames

30. Receiving municipalities and S78 assessments • SALGA commends DWAF for commitment to supporting S78 assessments • Receiving municipalities making steady progress include: - Buffalo City - Chris Hani DM - OR Tambo - Mopani DM - Mangaung - Capricorn DM - Central DM - Vhembe DM - Moretele LM - Western Highveld

31. In Conclusion In his address to the National Conference of SALGA on 29 September this year, President Thabo Mbeki said that: “SALGA has to make an audit to assess whether the existing resources transferred to local government, such as equitable share transfers and infrastructure and capacity building grants, are sufficient for municipalities to provide free basic services, fulfil their constitutional mandate, and improve the quality of life of the citizen.” SALGA, as a key partner in the IDTC, remains committed to ensuring that municipalities are supported to achieve the objectives of the Transfer programme in a sustainable fashion