NDM Water Master Plan

Chapter 6

  1. ECONOMIC AND FINANCIAL STATUS

6.1 Economic Analysis

It was indicated earlier in this report that Steve Tshwete and Emalahleni LM’s each contribute roughly ten times more than the other LM’s to the economy of the NDM, while Emakhazeni and Steve Tshwete LM’s have the fastest growing economies in the region. The Thembisile and Dr JS Moroka LM’s being slightly above Delmas en Emakhazeni LM’s in the share of the economy, are nevertheless comparing unfavourably considering their relative population sizes compared to Delmas and Emakhazeni LM’s.

The comparative economic advantages of the different LM’s are expressed in the table below:

Table 6.1: Comparative economic advantages of the different LMs.

Dr JSM / Thembisile / Delmas / Steve Tshwete / Emalahleni / Emakhazeni
Agriculture / $ / $ / $ / $
Mining / $ / $
Manufacturing / $
Electricity / $
Construction / $ / $ / $ / $ / $
Trade / $ / $ / $ / $ / $
Transport / $ / $ / $ / $ / $
Finance / $ / $ / $
Comm Serv / $ / $ / $ / $

It is evident from the table above that the Construction, Trade and Transport economic advantages are playing a big role in most of the municipalities. Construction as an economic advantage is apparent taking into consideration the governments drive to eradicate backlogs and reaching the determined millennium targets.

In general the NDM’s own financial income base generated from tariffs etc is very small (will be presented later in this chapter) and is therefore dependent on a large % of its budget on government subsidies and grants, making it vulnerable regarding the long term sustainability.

6.2 Government funding

The Capital budget and Operating budget for water and sanitation for the different municipalities are expressed in the table below.

Table 6.2: Total Capital and Operating budget.

LocalMunicipality / Capital budget / Operating budget / Block Tariff / FBW implementation
Income / Expenditure / Income / Expenditure
Delmas / R 24,000,000.00 / R16,579,000.00 / R22,445,610.00 / R 16,319,831.00 / Yes / No
Dr. JS Moroka / R 25,958,854.00 / R30,575,211.00 / R12,380,000 / R9,686,340 / No / No
Emalahleni / R 105,200,000.0 / R98,264,550.00 / R 80,000,000.00 / R65,292,000.00 / Yes / No
Emakhazeni / R13,901,760.00 / R 10,810,212.00 / R6,518,760.00 / R 6,572,036.18 / Yes / No
Steve Tshwete / R 49,467,715.00 / R46,789,600.00 / R 57,634,934.00 / R44,177,108.00 / Yes / Yes
Thembisile / R 20,783,228.00 / R 32,890,000.00 / R 52,508,996.00 / R10,396,125.00 / Yes / No

The sources of projected capital and operating income for water and sanitation for the different municipalities will be expressed later in this chapter. It is however important to note that Thembisile has a substantial difference between the income and expenditure for the capital budget. In the case of Thembisile LM the Operating Expenditure includes the O&M money received from DWAF as stipulated in the transfer agreement for the transfer of bulk assets to TLM. It should however be noted that the budgeted operating income for TLM of a circa R52,508,996.00 comprises of approx R18M equitable share and approx R34M for consumer charges. This is an unrealistic figure as only approx R12Million of bills are sent out annually and the actual payment rate on the bills are below 10%.

From the table above it is evident that all the municipalities except Dr. JS Moroka LM has implemented a block tariff system. It is also evident that only the Steve Tswhete LM has implemented free basic water (FBW).These are factors that could have a significant impact on the generated income and budgeted operating expenditure of municipalities of which the importance will be discussed later in this chapter.

6.2.1Sources of capital income

The main source of income for capital expenditure in most of the instances for the local municipalities will be grant funding from MIG and the NDM as expressed in the figure 6.1 below.

Figure 6.1: Capital income for municipalities.

It is evident the majority of municipalities are dependant on subsidies received from government with only Emakhazeni and Steve Tshwete Local Municipalities generating noteworthy capital income from other sources.

6.2.2Sources of Operating Income

The majority of the local municipalities (excluding Delmas and Steve Tshwete) rely heavily on income generated from equitable share as highlighted in the figure 6.2 below.

Figure 6.2: Operating income for municipalities.

Own income generated by the municipalities such as Dr JS Moroka, Thembisile and Emakhazeni is not expected to rise substantially in the medium term as cost recovery has not been successfully implemented in a meaningful way. To elaborate on this the Operating income generated from tariffs (bills sent out) can be reflected in the figure below. The importance of cost recovery implementation will be discussed later in this chapter.

Figure 6.3:Payment rate of bills sent out.

According to the information available Steve Tshwete LM and Emalahleni and Delmas have high rate of payments whilst Thembisile and Dr JS Moroka are extremely poor in this regard. Ways to improve billing and payment rates goes hand in hand with proper and well informed tariff structures, indigent policies and FBW implementation the rate at which water is sold and the debt collection rate. These attributes will be discussed in more detail later in this chapter.

6.2.3Future Trends and Goals

6.2.3.1Capital expenditure: water

The planned expenditure up to 2010/2011 on new bulk water as per the IDP and WSDP list of projects totals some R 612M worth of projects. It is important to notice that the bulk water supply systems within the NDM need to be designed based on a comprehensive Water Master Plan for the district.

As was presented earlier in this report the STLM has the smallest backlog to address i.t.o water. However, in general there is a continued drive towards the installation of yard connections, removal of illegal connections and installation of meters for billing purposes within the various municipalities and these projects form part of the identified project list. The project list as compiled by the team can be found as an Annexure of this report.

6.2.3.2Capital expenditure: sanitation

The planned capital expenditure up to 2010/2011 on new sanitation system and basic sanitation provision as per the IDP and WSDP’ of the local municipalities totals a circa R600Million.

A huge backlog exists on the provisioning of basic sanitation services throughout the NDM and eradication of this forms part of the governments drive to meet millennium targets.

6.2.3.3Operating costs: water and sanitation

The Operating cost per HH (taking into consideration the water and sanitation budget) for the various municipalities are reflected in the figure below:

Figure 6.4: Operating cost per HH for the municipalities

The Steve Tshwete LM and Delmas LM has the highest associated operating cost per Household, which could be contributed to the high levels of service encountered throughout these LM’s and also better budgeting on the operational expense side for water and sanitation. The figure below highlights the Operating cost in terms of water provision (R/Kl) for each LM. CTMM and Nelspruit tariffs are also included to serve as a comparative figure.

Figure 6.5: Actual Water Consumer Charges (R/Kl)

From figure 6.4 and figure 6.5 it is evident that a strong correlation exists between the operating cost per household for the municipalities and the actual water consumer charges (R/Kl). It should be noted that Thembisile has to date not adopted a rising block tariff system. Cognisance should be taken to the fact that in municipalities such as Dr JS Moroka, Emakhazeni and Thembisile the actual water consumer charges are very low and the actual consumer charges are not related to the actual cost of water provision. Low operating cost per household in these municipalities as indicated in figure 6.4 can be contributed to insufficient or a lack of proper budgeting on the operating expense side for water and sanitation. In the executive summary and chapter 7,8 a financial model will be presented that will propose required consumer charges (R/Kl) to ensure the different LM’s can provide water and sanitation services on an affordable and a sustainable basis. This model will take into consideration the following attributes:

  • Cost of water service delivery (R/kl)
  • Annual funds available – Equitable Share, MIG, Operating income, loans, etc
  • Associated Operation and Maintenance (O&M) costs – Based on scheme replacement values
  • Indigent Register (Unit cost of water supplied to indigents)
  • Free Basic Water Implementation
  • Cost Recovery & Dept Collection strategies

A recent study by the Development Bank of South Africa (DBSA) highlighted the need for authorities to make provision for recurring costs stating that the majority of municipalities will have difficulty with recurrent costs, and when budget deficits affect operations and maintenance this may lead to the premature deterioration (or collapse) of expensive assets, environmental damage and it can even retard local economic growth. Even the modest levels of service may prove hard to sustain in an environment of low affordability and an obligation to provide free basic services.

The operating cost of water and sanitation throughout the NDMis expected to rise in future due to the following factors:

  • The drive to connect more people to the supply system.
  • Upgrading of the levels of service of water to yard connections.
  • Increased costs associated with the provision of sanitation services by VIP toilets as the life cycle of these toilets are estimated to be between 4 to 15 years and the maintenance requirement of cleaning every 4 – 5 years.
  • Ageing of the infrastructure which will require increased maintenance and refurbishment interventions.
  • Installation and maintenance of bulk water meters, telemetry systems and intelligent control systems across most of the municipalities.
  • Installations of consumer meters across some of the municipalities which may prove to be a high maintenance item.
  • Increasing the personnel complement to meet the needs of operating and maintaining the systems throughout the NDM.

6.2.3.4Operating income: subsidies

Equitable share is a major source of income for most of the municipalities as highlighted earlier. Because of the importance of the equitable share (which is highlighted in the previous section of this chapter) it is of utmost importance that the municipalities within the NDM such as Thembisile and Dr JS Moroka where the indigent policy has not been implemented, ensure that they have and maintain the information on poor households with and without water, sanitation, refuse removal and electricity. This will assist the municipalities in obtaining the correct portion of the equitable share as updated information will be used.

6.2.3.5Non Revenue Water

The figure below highlights the water distribution and water losses for the different municipalities. Dr. JS Moroka and Thembisile LM’s have the highest percentage of Un-accounted water (UAW); whilst Steve Tshwete and Delmas have the highest percentage of water billed of the water that is distributed. Non Revenue Water (NRW) can be seen as water that is metered but not billed. After consultation with Emakhazeni LM it became evident that this information is not available and cannot be expressed.

The quality and degree of management of water resources and bulk systems can be reflected in the percentage (%) of Un-accounted water (UAW) and Non revenue water (NRW) in the LM’s.

Figure 6.6: Water Distribution and losses

In general it is felt that the percentage NRW presented in the figure above could be much higherwithin the district as exact water losses are not known and can be attributed to two main factors, i.e.:

  • High volumes of leakage within the bulk and reticulation networks which was also discussed in chapter 4 of this document.
  • Low rates of cost recovery in these municipalities such as Dr JS Moroka and Thembisile LM.

The implementation of WC and WDM in combination with effective cost recovery within the NDM is the only way to bring the current situation back to acceptable norms. The NDM and differentWSA’s have the responsibility to promote the optimal use of water as a scarce resource.

It is important that water services policies need to be implemented and revised throughout the various municipalities with the aim to meet the following basic principles:

  1. Increasing all the levels of service to at least yard/house connections over a period of time. This should reduce the level of illegal connections, the consequent high water losses and improve access to water services. This would increase the revenue that the various municipalities can collect based on a rising tariff block structure for non indigent residents.
  2. The implementation of a rising tariff block systems throughout the NDM. Rising tariff block systems and water awareness campaigns would encourage efficient use of the existing water supplies.
  3. The cost of bulk provision is to be reduced by the implementation of water loss control strategies.
  4. To ensure effective and efficient service provision, the water services policy undertakes to develop a customer care and customer charter strategy.
  5. Addressing the water losses through the implementation of a WC and WDM strategy as proposed in chapter 4.
  6. The continuous monitoring and repair of infrastructure through the implementation of infrastructure condition monitoring and repair teams.
  7. Complete water and infrastructure capacity balance.

It is evident that the income from revenue water is dependent on the following factors:

  • The volume of water available
  • The rate of water losses
  • The number of indigents
  • The actual water used by the indigents
  • The rate at which water is sold to consumers
  • The debt collection rate

It is therefore imperative that the above attributes be accurately managed to ensure own generated operating income.

6.2.4Strategic Gap Analysis

6.2.4.1Operating expenses:

The expenses associated with the operating and maintenance of the service provisioning of water and sanitation must be determined more accurately throughout the NDM. The most important strategic gap identified is the need to provide more trained and qualified personnel to ensure the proper management and monitoring of the bulk systems within the NDM. The ageing of the infrastructure require that proper condition statements be done on the entire infrastructure. Adequate provisioning for the associated maintenance costs for VIPs (R 200 per year) and consumer yard meters must be allowed for in the budgets.

6.2.4.2Operating income:

The municipalities could ensure the equitable share income by keeping the indigent register up to date. IN LM’s such as Thembisile and Dr JS Moroka the indigent policies of the LM’s need to be incorporated with the credit control and billing policy.

6.2.5Implementation Strategies

6.2.5.1Expenses:

The highest priority to successfully turn around the inefficiencies associated with the operating and maintenance of the water and sanitation services provisioning lies with the strengthening of adequately qualified and motivated resources. The filling of the strategic positions in all the LM’s are required to indicate the way forward in the technical and financial departments of all the LM’s.

The next priority is the establishment of proper condition statements of the water and sanitation infrastructure. Additionally, a planned maintenance system must be compiled. This is best done by producing an Asset Management Plan based on a complete up to date Asset Register. The Thembisile LM is one LM which is currently in the process of establishing the status quo of the infrastructure which will be used in a final refurbishment master plan.

The installation of new infrastructure like VIPs, yard connections, water meters and intelligent valves (e.g. pressure control valves) will require O&M budgets.These must be costed accordingly.

6.2.5.2Income:

The strategic approach to the enhancement of revenue collection in certain LM’s such as Thembisile and Dr JS Moroka and Emakhazeni where payment rates are low can be expressed in the figure below:

Figure 6.7: Strategic approach to revenue collection.

6.3Free Basic Water

The only LM which has implemented FBW successfully is Steve Tshwete LM. The national government has, following the announcement in September 2000 by President Thabo Mbeki,embarked on the drive to implement FBW and has mandated it by the following framework:

  • Constitution of the Republic of South Africa (Act No. 108 of 1996): Accordingly executive authority for water services is vested in local government. Everyone has the right to sufficient water and to a healthy environment.
  • The Local Government: Municipal Systems Act (Act No. 32 of 2000): The adoption and implementation of tariff policies (74), and bylaws (75).
  • Water Services Act (Act No. 108 of 1997): The minister prescribes norms and standards of services; basic water and sanitation.
  • The Local Government: Municipal Demarcations Act (Act No. 27 of 1998)

The various LM’s must balance its books, i.e. in order to provide FBW the subsidy potential must be feasible; e.g.: those consumers using more than 20 kl/month must be substantial. The respective LM’s must, therefore, determine the potential contribution from its own revenue generation towards subsidizing FBW to indigents and its dependence on equitable share in this regard.

Another major strategic decision for the LM’s relates to the method of regulating the provision of water supply to individual households, e.g. several advantages exist with controlled volume supply installations as no meter reading and billing is required.

The FBW process comprises of several steps for its successful implementation. Two distinct phases can be identified (see diagram below), i.e.:

  • The creation of reliable supply
  • The creation of sustainable service delivery

The following ten steps as depicted in the flow chart, provides guidance towards the implementation of FBW:

Figure 6.8: Implementing Free Basic Water in the NDM

In LMs such as Thembisile and Dr. JS Moroka a tariff policy was drafted, but still needs to be implemented. As was highlighted earlier in this chapter little to no water meter readings are done within these LM’s. In these municipalities the consumers pay only a basic charge for water. This tariff is applicable to all owners of stands in the municipal areas irrespective of whether stands have water meters or not.

The FBW initiative is considered to be of ultimate strategic importance to achieve the FBW goal in respective LM’s due to the following reasons: