P A L M E R D E V E L O P M E N T G R O U P

P D G

City of Cape TownCity of Cape Town

An Update of the Water An Update of the Water Services Financial ModelServices Financial Model

26 October 200626 October 2006

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BackgroundBackground

At the end of 2005 a report was presented that was At the end of 2005 a report was presented that was the culmination of work done to determine:the culmination of work done to determine:– What is affordable and sustainable capital What is affordable and sustainable capital

expenditure for water services?expenditure for water services?– What are implications for:What are implications for:

• Financing (how funds are secured)Financing (how funds are secured)• The service (what can and can’t be done)The service (what can and can’t be done)• Tariffs (impact on consumer)Tariffs (impact on consumer)

– What are the key strategic issues facing the What are the key strategic issues facing the service in order to get water services onto a service in order to get water services onto a sustainable footing?sustainable footing?

This was done using 2003/04 dataThis was done using 2003/04 data . .

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Outcomes from previous workOutcomes from previous work

Financing issuesFinancing issues– Water services needs too secure an appropriate share of Water services needs too secure an appropriate share of

MIG fundsMIG funds– Cost of capitalCost of capital

• Current cost of capital for sanitation to high (15%) , must Current cost of capital for sanitation to high (15%) , must negotiate with the City to reduce thisnegotiate with the City to reduce this

– Will need to look at project finance for some of the larger Will need to look at project finance for some of the larger projects (continue dialogue with MIIU and DBSA)projects (continue dialogue with MIIU and DBSA)

For a sustainable service the following is required:For a sustainable service the following is required:– Basic services for allBasic services for all– Adequate provision for rehabilitationAdequate provision for rehabilitation– Adequate provision for maintenanceAdequate provision for maintenance– Improved collections and debt managementImproved collections and debt management– Higher tariffs are necessary for a sustainable servicesHigher tariffs are necessary for a sustainable services– Capital programme will need to be fit for purpose (and Capital programme will need to be fit for purpose (and

trimmed down from current needs assessment)trimmed down from current needs assessment)

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Request for model updateRequest for model update

PDG was requested to work with the City to update PDG was requested to work with the City to update the data in the model based on the 2005/06 the data in the model based on the 2005/06 financial year.financial year.

The scope of work did not include any discussion The scope of work did not include any discussion and revision of the model assumptions, except a and revision of the model assumptions, except a revision of the population projections and the LTWD revision of the population projections and the LTWD forecast.forecast.– What was proposed to the City was to:What was proposed to the City was to:

• engage in a series of strategic discussions for engage in a series of strategic discussions for each of the key ‘sub business’ areas addressed in each of the key ‘sub business’ areas addressed in the model for example network management the model for example network management (UAW; meter replacements), water demand (UAW; meter replacements), water demand forecasts, basic services programme, etc.forecasts, basic services programme, etc.

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Model update Model update

ResultsResults

– DemandDemand

– Operating costsOperating costs

– Capital costsCapital costs

– TariffsTariffs

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Demand – for connectionsDemand – for connections

Population growth: 1.1 % (Dorrington’s projections)Population growth: 1.1 % (Dorrington’s projections) New household formation: approximately 23 000New household formation: approximately 23 000 Backlog (informal settlements): eradicated for water and Backlog (informal settlements): eradicated for water and

40 000 for sanitation40 000 for sanitation

Primarily affects Primarily affects

-- reticulation infrastructure CAPEX-- reticulation infrastructure CAPEX

-- staffing and maintenance OPEX-- staffing and maintenance OPEX

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Demand – for connections Demand – for connections

Domestic water and sewer connections

-

200,000

400,000

600,000

800,000

1,000,000

2006 2008 2010 2012 2014 2016

water connections sewer connections

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Demand for waterDemand for water

Affects:Affects:

– Water sales, production and wastewater Water sales, production and wastewater treatmenttreatment

– Bulk infrastructure requirementsBulk infrastructure requirements

– Bulk water purchasesBulk water purchases

– Chemical and energy costsChemical and energy costs

– RevenueRevenue

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Demand for waterDemand for waterLong termLong term

Water demand forecastWater demand forecast(CoCT)(CoCT)

Demand growth (volumes)

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%

% p

a

water sales water production

Wastewater treated

Demand

-

100

200

300

400

2006 2008 2010 2012 2014 2016

mill

ion

kl p

a

water sales water productionwastewater treated

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Operating costsOperating costs

Staffing levels and costsStaffing levels and costs

– Assume efficiency gain of 5%Assume efficiency gain of 5% MaintenanceMaintenance

– Fixed at 1 % of asset value (may be too low?)Fixed at 1 % of asset value (may be too low?) Bulk purchasesBulk purchases

– Exogenous; significant real increases (from Berg Exogenous; significant real increases (from Berg River and new sources (figures to be confirmed)River and new sources (figures to be confirmed)

Change to:Change to: maintenance assumptionmaintenance assumption

Updated Berg River Updated Berg River figures still need to figures still need to

be obtainedbe obtained

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Operating costsOperating costs

Operating costs(nominal annual increase)

0%

5%

10%

15%

% in

crea

se p

a

Total operating costs Inflation

Operating costs(nominal annual increase)

0%

5%

10%

15%

20%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

% in

cre

as

e p

a

Total operating costs Inflation

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Staff costsStaff costsOperating costs

(real annual increase)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

% r

eal i

ncr

ease

pa

Total operating costs staff costs

Operating costs(real annual increase)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

% r

eal i

ncr

ease

pa

Total operating costs staff costs

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Maintenance &Maintenance &bulk costsbulk costs

Significant impact Significant impact in early yearsin early years

Maintenance and bulk water costs(Real annual increase)

0%

5%

10%

15%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Ma

inte

na

nc

e

0%

10%

20%

30%

40%

50%

Bu

lk w

ate

r c

os

ts

maintenance bulk water

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Opex Opex outcomesoutcomes

• Staff costs too high?Staff costs too high?• Note real reduction in “other” costsNote real reduction in “other” costs

Operating costs ("pure") - realwater and waste water (per unit water sold)

-

100

200300

400

500

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

c/kl

so

ld

staff maint bulk dwaf bulk skuifchem elec other

P A L M E R D E V E L O P M E N T G R O U P

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Capital programmeCapital programme

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4 scenarios4 scenarios

1.1. City of Cape Town (needs based)City of Cape Town (needs based)

2.2. Model (calculated using unit costs and demand)Model (calculated using unit costs and demand)

3.3. ““Affordable” (not implemented as yet)Affordable” (not implemented as yet)

4.4. ChoiceChoice

The “choice” option allows user to choose one of the The “choice” option allows user to choose one of the three options for each of the major components of three options for each of the major components of the system (bulk water expansion, bulk water the system (bulk water expansion, bulk water renewals etc)renewals etc)

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Comparison of scenariosComparison of scenarios

Capital investment (2004 Rands)

-

200

400

600

800

1,000

1,200

R m

illio

n p

a Selected

Affordable

CoCT

Model

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Assessment of CoCT scenarioAssessment of CoCT scenario

Capital investment (2004 Rands)

-

200

400

600

800

1,000

1,200

R m

illio

n p

a Selected

Affordable

CoCT

Model

over ambitiousover ambitious too lowtoo low

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Tariffs requiredTariffs required

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CoCT CAPEXCoCT CAPEX

Average tariff (real) (water and sewerage)

0.01.02.03.04.05.06.07.08.09.0

10.0

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

R/k

l (o

f w

ate

r s

old

)

R 7 /klR 7 /kl

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Modeling processModeling process

Collate and Collate and input datainput data

DesignDesignmodelmodel

RefineRefinedatadata

DemandDemandassumptionsassumptions

OperatingOperatingcostscosts

CAPEX CAPEX programmeprogramme

FinancialFinancialtargetstargets

OutcomesOutcomes

SensitivitySensitivity

TariffTariffrequirementsrequirements

RefineRefinescenariosscenarios

StrategicStrategicconclusionsconclusions

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Model designModel design

ScenarioScenarioManagerManager

SummarySummaryPagesPages

DemandDemand

OpexOpex

CapexCapex

AssetsAssets

ISIS BSBS CFCF

Debtors &Debtors &collectionscollections