Rand Water

TARIFF CONSULTATION PROCESS

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PROCESS AND IMPORTANT TIMELINES

DWS / TCTA raw water pricing 9th October 2014

Customer consultation and information sharing 14th October 2014

Submission to Treasury and SALGA for input 14th October 2014

Customer notification 8th December 2014

Submission to DWS for Parliamentary approval 25th January 2015

Parliamentary approval 15th March 2015

DRIVERS

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• Municipal Finance Management Act: 6 months advance notice

• National Treasury & SALGA: 40 days for consideration

• Bulk Water Supply Contract: prior consultation and information sharing

• DWS must table tariff increases to Parliament on or before 15th March 2015

• Implementation on 1st July 2015

OVERALL INTERNAL INFLATION

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 The projections provided by the Bureau for Economic Research (BER) show that CPI will remain very close to the upper limit of the key CPI range of 3 per cent – 6 per cent. In 2014, CPI is projected at 5.9 per cent and 5.7 per cent in 2015, both very close to the upper limit.

4.0%

6.0%

8.0%

10.0%

12.0%

2010 2011 2012 2013 2014 2015

10.0%

5.9% 5.7% 5.9% 5.6% 5.7%

Consumer Price Index

CPI and PPI Forecasts By Bureau for Economic Research (BER)

Financial Year Beginning 1st July 2014 2015 2016 2017 2018 2019

CPI (headline) 5.9 5.6 5.7 5.6 5.6 5.6

PPI 7.7 6.0 5.7 5.5 5.3 5.3

RAW WATER TARIFF INCREMENT

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2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

TCTA Vaal River tariffCapital Unit Charge (CUC)

LHWP1 tariff 1.98 2.09 1.69 LHWP2 tariff 0.10 0.11 0.11Combined CUC (incl LHWP1 & 2, AMD) 2.08 2.20 1.80 1.69 1.82 1.65 1.61 1.79

Bulk Operating and Royalties (BO&R) charge - - 0.5176 0.6000 0.68 0.67 0.70 0.74 Total Augmentation (TCTA) Vaal River tariff 2.08 2.20 2.32 2.29 2.50 2.33 2.31 2.53

State SchemesAMD O&M tariff 0.23 0.28 0.65 0.92 0.98State schemes O&M 0.46 0.50 0.54 0.58 0.61 0.64 0.67

DWS 0.46 0.50 0.77 0.86 1.26 1.56 1.65Total raw water tarif 2.67 2.81 3.06 3.36 3.59 3.87 4.18

TCTA Vaal River tariff 5.91% 5.21% -1.01% 8.89% -6.92% -0.48% 9.29%DWS 6.85% 54.93% 12.06% 46.71% 23.58% 5.90%Total raw water tarif 5.49% 8.84% 9.68% 6.81% 7.98% 7.93%

Actual R/m3 Proposed R/m3

Rand Water received an effective raw water tariff increment of 8.77 per cent. This is an increment from R2.8182 cents per kilolitre to R3.0654 cents per kilolitre for the financial year beginning 1st April 2015. This is composed of the TCTA component which is decreasing by 1% from R2.32 to R2.29. The DWS component introduces a new element, i.e. AMD. Therefore this is an increase from R0.5 cents per kilolitre to R0.77 cents per kilolitre, an effective 55% increment. The raw water charge is 23 cents as shown in the table below.

RAW WATER TARIFF INCREMENT

These projections place a challenging consultation process in front of Rand Water. The effective tariff increment of 8.77% is way above the inflation range of 3 – 6%. It is important to remember that raw water constitutes above 47% of Rand Water’s cost structure.  The additional challenge is that over the years, this has varied wildly, as shown below. This makes any multi-year tariff exercise extremely difficult.

2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16History of DWA Raw Water Tariff Increments -5.30% 0% 3.10% 15.70% 28.60% 6.50% -24.18% 8.67% 8.00% 6.27% 55.93%

-5.30%

0%

3.10%

15.70%

28.60%

6.50%

-24.18%

8.67%

8.00%

6.27%

55.93%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

History of DWA Raw Water Tariff Increments

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CHEMICAL COSTSAn important component of chemical costs is that some of the chemicals are imported. Therefore, the strength of the Rand with regards to chemical cost projections is important. There is an expectation that as the US economy continues to recover, this will put more pressure on the Rand. If the Rand devalues, this will increase chemical costs. Taking into consideration CPI, chemical costs are expected to increase by 13%.

BER Forecast Exchange rates 2014 2015 2016 2017 2018 2019

R/$ 10.76 11.08 11.29 11.32 11.25 11.30

Staff costs Staff costs excl Inc Headcount

2009 827,763 827,763 29902010 950,782 872,555 5% 3029 1%2011 1,056,891 964,909 11% 3030 0%2012 1,269,889 1,087,336 13% 3153 4%2013 1,462,072 1,232,162 13% 3214 2%

2014 FC 1,422,365 1,422,365 15% 3284 2%2015 BU 1,515,197 1,515,197 7% 3551 8%

LABOUR COSTS• The increasing capital expenditure requires that Rand

Water’s labour pool matches this increasing crucial requirement.

• Rand Water is proud that it continues to meet its annual capital expenditure (in Rand terms and actual work undertaken).

• Rand Water and the water sector are represented by the same organised unions.

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2008 2009 2010 2011 2012 2013 2014Target 95% 95% 95% 95% 95% 95% 95%Actual 90% 95.0% 93.0% 90% 102.6% 108.0% 96.2%

95%95%

95% 95% 95% 95% 95%

90%

95.0%

93.0%

90%

102.6%

108.0%

96.2%

85%

90%

95%

100%

105%

110% 9. Capital expenditure (as a % of budget) (Stretch is limited to 5% variance from budget)

2014 2015 2016 2017 2018 2019

Project Expenditure (R m) 2,322 2,750 2,766 2,929 2,988 2,306

Tariff Versus Input Cost Inflation

2010 2011 2012 2013 2014 2015Tariff 14.10% 12.90% 11.30% 9.82% 8.10%Energy - Eskom 35.0% 25.2% 16.7% 15.0% 10.1% 17.1%Energy - Municipalities 35.0% 37.7% 29.2% 15.0% 10.1% 18.5%Raw Water 9.2% 7.4% 8.5% 8.7% 6.2% 11.1%Chemicals 11.6% 10.0% 12.5% 8.9% 9.4% 13.0%Labour 8.1% 10.7% 8.2% 8.0% 8.5% 8.7%Other 10.0% 5.9% 5.7% 5.9% 5.6% 5.7%CPI 10.0% 5.9% 5.7% 5.9% 5.6% 5.7%

5%

10%

15%

20%

25%

30%

35%

40%Tariff Versus Input Cost Inflation

Tariff

Energy - Eskom

Energy - Municipalities

Raw Water

Chemicals

Labour

Other

CPI

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Tariff Versus Input Cost Inflation

2010 2011 2012 2013 2014 2015Tariff 14.10% 12.90% 11.30% 9.82% 8.10%Energy - Eskom 35.0% 25.2% 16.7% 15.0% 10.1% 15.1%Energy - Municipalities 35.0% 37.7% 29.2% 15.0% 10.1% 16.5%Raw Water 9.2% 7.4% 8.5% 8.7% 6.2% 22.3%Chemicals 11.6% 10.0% 12.5% 8.9% 9.4% 11.3%Labour 8.1% 10.7% 8.2% 8.0% 8.5% 8.7%Other 10.0% 5.9% 5.7% 5.9% 5.6% 5.7%CPI 10.0% 5.9% 5.7% 5.9% 5.6% 5.7%

5%

10%

15%

20%

25%

30%

35%

40%Tariff Versus Input Cost Inflation

Tariff

Energy - Eskom

Energy - Municipalities

Raw Water

Chemicals

Labour

Other

CPI

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2010 2011 2012 2013 2014 2015Tariff 14.10% 12.90% 11.30% 9.82% 8.10%Energy - Eskom 35.0% 25.2% 16.7% 15.0% 10.1% 17.1%Energy - Municipalities 35.0% 37.7% 29.2% 15.0% 10.1% 18.5%Raw Water 9.2% 7.4% 8.5% 8.7% 6.2% 11.1%Chemicals 11.6% 10.0% 12.5% 8.9% 9.4% 13.0%Labour 8.1% 10.7% 8.2% 8.0% 8.5% 8.7%Other 10.0% 5.9% 5.7% 5.9% 5.6% 5.7%CPI 10.0% 5.9% 5.7% 5.9% 5.6% 5.7%

5%

10%

15%

20%

25%

30%

35%

40%Tariff Versus Input Cost Inflation

Tariff

Energy - Eskom

Energy - Municipalities

Raw Water

Chemicals

Labour

Other

CPI

COMPARISON BETWEEN RAND WATER AND SALGAPROPOSED TARIFFS

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In the previous tariff cycle, Rand Water noted that there were no differences. This can be attributed to two important points; • Continuous cycle

of engagements

• This year, SALGA attended the assessment of water boards session held on 3rd – 5th September 2013

2008 2009 2010 2011 2012 2013 2014Rand Water Proposed Tariff

Increment 5.60% 11.30% 14.10% 12.90% 13.50% 9.82% 8.10%

SALGA Proposed Tariff Increment 4.50% 8.00% 8.50% 8.40% 8.00% 9.49% 8.10%Difference 1.10% 3.30% 5.60% 4.50% 5.50% 0.33% 0.00%

5.60%

11.30%

14.10%

12.90%

13.50%

9.82%

8.10%

4.50%

8.00%

8.50% 8.40%8.00%

9.49%

8.10%

1.10%

3.30%

5.60%

4.50%

5.50%

0.33%0.00%0%

2%

4%

6%

8%

10%

12%

14%

Tariff Versus Input Cost Inflation

Rand Water Proposed Tariff Increment

SALGA Proposed Tariff Increment

Difference

Proposed Tariff

2016

Price Forecast Percent WeightedYear-End ~ 30 June increase 2016 of total

% R m % %

DWA 43.7% 1122 12.0% 5.2%TCTA 3.2% 3306 35.2% 1.1%Raw Water 11.1% 4428 47.2% 6.3%Energy - Eskom 17.1% 1057 11.3% 1.9%Energy - Municipalities 18.5% 936 10.0% 1.8%Chemicals 13.0% 347 3.7% 0.5%Multi-Partnered Uncontrollable Costs 13.1% 6768 72.1% 10.6%Labour 8.7% 1647 17.6% 1.5%Depreciation 25.5% 353 3.8% 1.0%Other 5.7% 615 6.6% 0.4%Total 9383 100.0% 13.5%

Target bulk tariff increase 13.5%

Bond Raised (R m) 1340

Rand Water Tariff = Rand Water Internal Inflation for Financial Year Ending 30th June

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OVERALL INTERNAL INFLATION

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Rand Water is also expected to enter capital markets to raise at least R1.340 billion.

The proposed 2015/16 potable water tariff will thus be as follows:

Municipalities Current Tariff

(1 July 2014 – 30 June 2015)

New Tariff

(1 July 2015 – 30 June 2016)

C/kl C/kl

Tariff 595.520224

Excluding VAT at 14 per cent

675.915454

Excluding VAT at 14 per cent

THE WATER DEMAND MANAGEMENT FUND

Non revenue water among Rand Water’s municipal customers has continued to worsen rather than improve. In 2005, the national average stood at approximately 27%. In Gauteng, the challenge was to improve these water losses to 15%. However, the national average now stands at 36.8%. The table below shows that non revenue water in Gauteng has worsened from 21.8% in 2005 to 35.9% in the 2011.

Name 2005 2011

Joburg Metro 20.6% 38.2%

Ekurhuleni Metro 23.8% 39.8%

Tshwane Metro 14.0% 26.5%

Emfuleni 47.6% 44.4%

Mogale 18.2% 26.0%

Metsimaholo 35.2% 17.2%

Rustenburg 32.3% 39.0%

Midvaal 23.0% 26.2%

Merafong 25.9% 26.0%

Randfontein 12.5% 21.9%

Westonaria 10.3% 29.7%

Lesedi 14.9% 8.2%

Ngwathe 1.2% 24.9%

Kungwini 28.7% 43.0%

Gauteng 21.80% 35.90% 13

THE WATER DEMAND MANAGEMENT FUND

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However, this fund will only be applicable if all municipalities agree to it. If one of the municipalities do not agree to the continuation of this fund then it does not apply at all.

This is because of the inter-connectedness, economies of scale and financial implications that Rand Water will face by charging different tariffs to different municipalities. The challenges of any municipality that will not be part of this fund will be incorrectly associated with this fund.

2014 2016

Ml / d R m Ml / d R mCity of Joburg 1565 30.4 1771 37.1Ekurhuleni 967 18.8 1095 23.0Tshwane 605 11.8 685 14.4Emfuleni 209 4.1 237 5.0Mogale City 83 1.6 93 2.0Metsimaholo 48 0.9 54 1.1Rustenburg 88 1.7 100 2.1Highveld East 44 0.9 50 1.1Midvaal 36 0.7 41 0.9Merafong 28 0.5 31 0.7Randfontein 26 0.5 29 0.6Westonaria 16 0.3 18 0.4Lesedi 17 0.3 19 0.4Ngwathe 6 0.1 7 0.1Delmas 11 0.2 12 0.3Royal Bafokeng 16 0.3 18 0.4Madibeng 7 0.1 8 0.2Thembisile 36 0.7 41 0.9Total Municipal 3808 74.0 4309 90.4

Financial Year Ending 30th June

The 2014 figures are subject to final audit process.

• Centralised revenue collection by Rand Water• This has a huge impact on project finance, given that

• Smaller municipalities struggle to raise capital• Most municipalities have qualified audits• Most municipalities do not have a positive record with regards to repaying such funds

• Available project finance is typically lower than available commercial paper• The Water Management Demand alternatives that have been utilised by municipalities have not

been sustainable, given a number of competing needs.

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 In line with a well-established approach, Rand Water’s internal inflation is 13.5 per cent. Rand Water therefore proposes a 13.5 per cent tariff increment for the 2015 / 16 financial year with another 1 per cent allocated to the establishment of a Water Demand Management Fund. In total Rand Water proposes a 14.5 per cent tariff increment.

CONCLUSION – PROPOSED TARIFF

Municipalities Current Tariff

(1 July 2014 – 30 June 2015)

New Tariff

(1 July 2015 – 30 June 2016)

C/kl C/kl

Tariff 595.520224

Excluding VAT at 14 per cent

681.870656

Excluding VAT at 14 per cent

A new approach to tariff setting is crucial• Stepped tariff based on volumes• Stepped tariff based on non revenue water

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Thank You