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

Outline

1. Water Sector Value Chain Pricing

2. Water LGES, Water Tariffs and Municipal Debt

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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

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RAW

BULKRETAIL

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.

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Levels of Raw Water Charges

Water Board 2008 2009 2010 2011 2012Amatola 0.95 0.98 1.07 1.15 1.22Bloem 0.20 0.23 0.25 0.29 0.34Botshelo # 1.58 1.67 1.84 2.15Bushbuckridge 1.01 1.33 1.50 1.64 1.73Lepelle 0.18 0.20 0.22 0.25 0.28Magalies # # 0.87 0.87 1.01Mhlathuze 0.28 # 0.79 0.85 0.85Rand 1.52 2.08 2.23 2.34 2.50Sedibeng 1.37 1.51 2.30 2.39 2.61Umgeni 0.18 0.18 0.19 0.22 0.37Average 0.71 1.01 1.11 1.18 1.30Median 0.62 1.16 0.97 1.01 1.11Minimum 0.18 0.18 0.19 0.22 0.28Maximum 1.52 2.08 2.30 2.39 2.61

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Raw Water: Proportion of Bulk Tariffs

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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

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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

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Water Board 2008 2009 2010 2011 2012Amatola 3.91 4.18 4.96 5.36 5.90Bloem 3.21 3.57 3.93 3.50 3.94Botshelo 2.66 3.58 4.33 5.10 5.78Bushbuckridge 2.94 3.05 3.45 3.70 3.90Lepelle 3.05 3.17 3.38 3.73 4.06Magalies 2.36 2.53 2.81 3.20 3.49Mhlathuze 1.29 1.47 2.48 2.83 3.10Rand 3.21 3.48 3.97 4.50 5.11Sedibeng 4.20 4.98 5.23 5.86 6.36Umgeni 3.01 3.21 3.47 3.64 4.24Average 2.98 3.32 3.80 4.14 4.59Median 3.03 3.35 3.70 3.72 4.15Minimum 1.29 1.47 2.48 2.83 3.10Maximum 4.20 4.98 5.23 5.86 6.36

Bulk Water Costs: Proportion of Retail Tariffs

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Water Boards 2008 2009 2010 2011 2012Amatola 52% 50% 54% 51% 49%Bloem 41% 41% 39% 32% 31%Botshelo 67% 84% 83% 91% #Bushbuckridge 48% 46% 48% 56% 52%Lepelle 41% 41% 41% 42% 39%Magalies 32% 32% 34% 35% 34%Mhlathuze 26% 24% 40% 40% 39%Rand 41% 40% 41% 42% 43%Sedibeng # 48% 51% 54% 58%Umgeni 50% 38% 55% 54% #Average 44% 44% 49% 50% 43%Minimum 26% 24% 34% 32% 31%Maximum 67% 84% 83% 91% 58%

On average WBs passed on between 44% and 50% to LG

Stage 3: Retail Water Services Charges

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• 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.

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?

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Metropolitan Municipality 2008 2009 2010 2011 2012Buffalo City 7.50 8.33 9.25 10.51 12.03eThekwini 5.99 8.47 6.32 6.79 #Johannesburg 7.86 8.79 9.59 10.62 11.86Mangaung 7.74 8.70 10.01 11.01 12.66Average 7.27 8.57 8.79 9.73 12.18Median 7.62 8.59 9.42 10.57 12.03Minimum 5.99 8.33 6.32 6.79 11.86Maximum 7.86 8.79 10.01 11.01 12.66

Local Municipalities 2008 2009 2010 2011 2012Mafikeng 3.98 4.24 5.22 5.58 #Mbombela 6.09 6.62 7.20 6.66 7.49Polokwane 7.35 7.80 8.25 8.85 10.44Moses Kotane 7.44 7.89 8.36 9.20 10.12Mhlathuze 5.03 6.03 6.14 7.12 8.05Matjhabeng # 10.27 10.27 10.88 10.88Average 5.98 7.14 7.57 8.05 9.40Median 6.09 7.21 7.73 7.99 10.12Minimum 3.98 4.24 5.22 5.58 7.49Maximum 7.44 10.27 10.27 10.88 10.88

Summary of Water Tariffs

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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

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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?

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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

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Limitations

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LGES is unconditional therefore allocations can be used for other municipal functions. All income figures are thus indicative.

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

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

Municipalities don’t separately account for their water function and thus retail expenses unknown

Water Income vs. Bulk Water Expenses

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Municipality Total income Bulk expensesLGES alloc % of bulk exp

Own revenue% bulk exp

Total income % bulk exp

Bushbuckridge LM 386,836 344,843 92% 20% 112%Capricorn DM 570,555 139,578 312% 96% 409%Ditsobotla LM 169,771 10,619 911% 687% 1599%Mafikeng LM 303,979 175,707 83% 90% 173%Matjhabeng LM 1,007,317 770,012 43% 88% 131%Mopani DM 1,166,491 234,805 303% 194% 497%

Nala LM 191,655 89,192 111% 104% 215%Naledi LM 68,205 21,681 123% 192% 315%Mangaung 1,910,478 890,175 59% 156% 215%

Insufficient to cover the costs of bulk expenses

Sufficient to cover the costs of bulk expens

Own revenue + water allocation

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

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END