Tariff determinations by water boards & South African Local Government Association

Meeting report

Introductory comments

Co-Chairperson Semenya accepted the apologies of the Minister of Human Settlements, Water and Sanitation Ms Lindiwe Sisulu, and Deputy Minister, Mr David Mahlobo, and said the purpose of the meeting was for the Department of Human Settlements, Water and Sanitation (DHSWS) to present a unified view on the matter of water tariff determinations, after conflicting views had emerged among the Department and other stakeholders, including several local water boards and the South African Local Government Association (SALGA), at the meeting on 2 June.

Mr Mbulelo Tshangana, Director-General, DHSWS, said the Department would respond precisely to the questions that had been raised by Committee Members at the earlier meeting. The Department had met with SALGA and had managed to reach some agreements, although some disagreements remained. The Department had then taken a decision on how to deal with those areas of disagreement.

He explained some of the facts that had informed the decision. Firstly, the pricing of any commodity, water included, became a challenge if the economy as a whole was not doing well, and this needed to be taken into account so that the best decisions could be made for the communities and institutions involved. Secondly, the current raw water tariff had been set by the Department on 1 April 2020. The fact that this tariff had been set by the Department gave rise to the impression that it was both the referee and a player. The bulk water tariff was set by the water boards on 1 July 2020, on the same day that municipalities set their budgets. These decisions could not be reversed.

The presentation would outline three scenarios, and make a proposal on how to cushion municipalities from the impact of water price increases. Among the three principal stakeholders -- municipalities, water boards and the Department -- the water boards did not receive government subsidies and the legislation was clear that the tariffs they set should reflect their costs. However, the country was experiencing an economic meltdown as a result of COVID-19, and there could be no question of going ahead as if it was business as usual.

However, reversing decisions that had already been made would have a huge impact on ongoing investments and projects. SALGA understood that the above-inflation increases in the bulk water tariffs set by the water boards reflected the above-inflation increases in their input costs, but the country needed to find a way to cushion municipalities and communities. The increases would cause some municipalities to default. It was also important to look not only at percentages, but also at Rands and cents, as even if all the water boards reduced the increase in their bulk water tariffs to 6.6%, this would still be a significant increase.

It was now a good time to debate the matter. Whatever decisions were taken could be reflected in the municipal budget adjustment in January 2021, or in the budget for the financial year 2021/22, which would give enough time after the provincial and national budget adjustments in October 2020, but changing tariffs that had already been set would have huge consequences. It might be helpful to examine the legislation that governed the process of setting water tariffs. The Department wanted to amend the National Water Act and the Water Services Act to institute a deadlock-breaking mechanism and improve the consultation process by, in particular, providing an opportunity for Parliament to participate earlier in the process. National Treasury might also need to look at subsidising the water boards, otherwise they would have no choice but to set tariffs that reflected costs over which they had no control. Municipalities were in a position to cushion communities because they did receive subsidies.

Water tariff determination

Ms Sizani Moshidi, Chief Director: Economic and Social Regulation, DHSWS, described three scenarios for the way forward. The scenarios took five factors into account: citizens’ constitutional rights to access to water; the legislation that determined the tariff regime; financial factors resulting from COVID-19; operations; and implications for consumers, municipalities, water boards and the Department. She mentioned a proposed intervention for each scenario.

The first scenario was to continue implementing the approved tariffs. This would lead to municipal non-payment and increasing debt. If non-paying consumers had their supply cut, there was the possibility of protests. Consumers would need to be given relief for loss of income due to COVID-19. The intervention would need to encourage consumers to reduce their consumption and reward consumers that paid for and minimised their consumption.

The second scenario was to cancel all tariff increases, and the third scenario was to revise the tariffs downward. Both would result in a revenue loss in the current financial year and necessitate huge increases in the next. One possible intervention -- approaching the Solidarity Fund to assist the water boards -- had already been ruled out.

Ms Moshidi outlined four broad areas of intervention to prevent future conflicts among stakeholders: policy and legislative review, institutional review, finance and corporate governance. There was general agreement with SALGA on these interventions.

The presentation included written responses to Committee Members’ questions from the previous meeting, including responses from the Umgeni, Bloem and Amatola Water Boards to questions directed at them, such as the reasons for different water boards setting different bulk water tariffs, the reasons for the above-inflation increases, and why Parliament was not included as a stakeholder in consultations around the determination of tariffs.

Mr Khomotso Letsatsi, Chief Officer: Municipal Finance, Fiscal Policy and Economic Growth, SALGA, said that a lot of work had been done, and agreement had been reached on numerous issues. SALGA remained concerned about the increase in the number of distressed municipalities and the impact of COVID-19 on households. It was important for everyone involved in setting tariffs to ensure that their assumptions matched these realities.

Discussion
Mr L Basson (DA) said that if the tariffs had already been decided, then the meeting had been a waste of time. He understood the challenges facing water boards, but many people had lost their jobs as a result of COVID-19, and they also could not afford to pay.

Ms H Mkhaliphi (EFF) asked what the role of the Committees was, because it seemed as if the tariffs had already been decided on.

Co-Chairperson Semenya replied that the Committees had not known that the tariffs had already been decided on. The Committees needed to make sure that the procedure was different in the next financial year, and that Members of Parliament were involved before the tariffs were approved. Parliament could not be used as a rubber stamp.

Mr K Ceza (EFF) said that the Department needed to amend the Public Finance Management Act (PFMA) and the Municipal Finance Management Act (MFMA), to make it compulsory for spheres of government to directly provide services in areas such as water supply. The government also needed to look at localising the industries involved in providing water treatment chemicals. He did not understand how these could be imported. Water boards should look at recovering debts from government departments and municipalities. He also drew attention to a forensic report into allegations that the chief executive officer (CEO) of the Amatola Water Board had inflated tender prices to an amount of R230m. This money could be paid to water boards.

Mr I Groenewald (FF+) observed that recycling water was quite expensive, and asked when last Blue Drop/Green Drop assessments had been done, and when the next ones would be done.

Mr M Mashego (ANC) said that the Constitution had been written in a certain way because the government at the time had acted without consultation. It had been built around the ideas of mandate-taking and listening to people. For this reason, he found it hard to accept that Parliament had not been taken into account. The Department had pointed out that the law did not require it to consult Parliament when setting water tariffs, but if Parliament was not included in the budget consultation process, why should be part of the voting on the budget? He found it unbecoming that Parliament could be told that consultation was just a favour. The three spheres of government were independent and none was subordinate to another. Parliament should be consulted and have a say in setting the tariffs.

The current above-inflation increases had been set before COVID-19, but now the rules were different. Why was the Committee not trying to reduce the tariffs for the benefit of municipalities and the people on the ground? The Committee had already been told in June that the horse had bolted and had not accepted it then, but had demanded that the tariff increases should take COVID-19 into account. Councillor Thami Ngubane, Chairperson: Water and Sanitation, SALGA, had told him that the tariffs were simply unaffordable. The Department, SALGA, and the Department of Co-operative Governance and Traditional Affairs (COGTA) needed to work together and come up with a tariff that took COVID-19 into account.

Ms N Sihlwayi (ANC) said that there seemed to be areas of agreement. However, the real issue was not with SALGA, it was with the end-users -- the communities -- who were being burdened. The other issue was how it could be possible for the Minister to sign off on new tariffs without the input of the Portfolio Committee. There had been emergency budget adjustments, and stimulus packages had been given to various departments, but there had been nothing about water tariffs. The Minister needed to handle this matter. It was critical and should not be delegated to a deputy minister. She understood that the Minister was very busy, but if the current tariffs remained, the people would be put in danger. They would be evicted, humiliated and undermined by the government itself. She proposed that the tariffs be put on hold, and the Minister be summoned to the Committee.

Ms M Tlou (ANC) supported Ms Sihlwayi’s proposals. The proposed tariffs would cause a serious problem for financially distressed municipalities and end-users.

Ms N Tafeni (EFF) said that the report had been presented to the Committee to be rubber-stamped, and the Minister was not taking the Committee seriously.

Ms M Mohlala (EFF) agreed that the Minister did not take the Committee seriously. She never attended its meetings. The possibility of an independent regulator for the entire water value chain had been raised by the Committee for almost ten years, and it was always reflected in the Department’s strategic plan, but nothing had happened. What had the Department been doing for the last ten years? There needed to be an audit of the water sector regulation unit.

Mr Basson agreed with other Members’ concerns. He suggested that the Committee should reject the report and summon the Minister. What did the Department think about the Committee? The Minister needed to explain her handling of the matter. It was unacceptable to bring a report that had already been implemented and expect the Committee just to tick the box. The Committee served the people, not political parties or the Department.

Ms C Seoposengwe (ANC) said that it was irresponsible for municipalities not to attend, as it was a legislative imperative. It was also important for the Committee to know which municipalities had not participated in the process. She also asked whether municipalities’ incorrect billing problems had been resolved.

Department’s response

Mr Tshangana replied that the Department had presented the Committee with three tariff options, and had explained the implications of each one. He had hoped that the Committee would provide guidance on the preferred option, and that the Minister would then apply her mind to the problem. Whatever preference the Committee indicated, there would be financial implications which the Department would have to discuss with National Treasury. The process by which the raw water tariff had been approved in April had been passed by Parliament as lawmaker. The water boards had approved their budgets, but they had not yet implemented the bulk water tariffs that they had asked for.

It was for the Minister to make the final decision on the water tariffs. As a technocrat, his job was to advise and explain the implications of different possibilities. Parliament was not being asked to be a rubber stamp. However, the legislation was very tight. He wanted Parliament to be involved earlier in the process of setting the raw water tariff, as this was the biggest cost driver for the water boards, and the law required their tariffs to be cost-reflective. If Parliament indicated that this cost-reflective tariff was unaffordable, then it would have to be changed.

The Department was not imposing its views on Parliament -- it was just describing the financial implications of various options. However, affordability did need to be balanced with maintaining the viability of institutions. He reminded the Committee that the raw water tariff had been set before the onset of the COVID-19 pandemic. If Parliament decided that it had to be changed, the Department would implement that decision.

Follow-up questions

Mr Mashego said that the Committee wanted to talk to the Minister. The issue it was raising was that the Committee’s preference seemed to have been ignored. The Department had consulted for several months, from October 2019 until March 2020, before it had decided on the raw water tariff, but it had not seen fit to consult with Members of Parliament during this time. This might be in line with the legislation, but the problem was that it was not democratic. It was embedded in the Constitution that South Africa was a representative democracy. The basis for the Committee’s dissatisfaction with the report was that it made the Committee irrelevant. The Committee had told the Department to revise its tariffs in response to COVID-19, and it did not accept the increases. Voters should not be punished because of COVID-19. The Department had to reduce the tariffs. He noted that municipalities could legally review their budgets if necessary. He reiterated that the Minister should appear before the Committee.

Co-Chairperson Muthambi agreed with Mr Mashego. The effect of COVID-19 on the economy could not be ignored. Citizens had lost their incomes. If the Minister of Finance could revise the country’s revenue projections downwards, why could water boards not do the same? What the Director-General was sharing was a recipe for disaster. The water boards needed to adjust their budgets, just like the departments. The Committee rejected the submission of the Department.

Mr Groenewald said that the reason the Blue Drop/Green Drop assessments were so important was that they would reveal why the water boards’ costs had increased so steeply.

Ms Mohlala commented that not all the questions had been answered, and confirmed that the Committee would not approve the tariffs. The people were suffering because of COVID-19.

Further responses

Mr Tshangana agreed with Ms Sihlwayi that communities were under pressure. Whatever tariffs were set, communities would bear the cost. This was why the Department had presented the three options. The decision was for the Minister to take. He did not think the Minister wanted to accept the increases either. The Committee had made its preference very clear. The Committee should discuss the matter with the Minister, and the Department would implement the decision.

Blue Drop/Green Drop assessments had been initiated, but there had been some financial challenges. The most recent assessments had been done in 2014. In Tshwane, for example, only two out of 15 waste water treatment plants were currently working optimally. The Department did sometimes take municipalities to court for polluting. He said only R70m out of the contested R230m at the Amatola Water Board had been disbursed. An investigation had been concluded, and the CEO was on suspension. The process should be allowed to take its course.

He explained that water boards did not import chemicals, but their suppliers did. Most of them were not produced in South Africa, and the prices were therefore determined by international markets. Subsidies were the only way for government to prevent the cost being passed on to consumers, but water boards did not receive subsidies. A solution to protect the people from these input costs needed to be found.

The Minister had clearly stated on several occasions that the effects of COVID-19 could not be ignored. He supported the idea of reviewing the relevant legislation to involve Parliament earlier in the process of setting tariffs, and also supported the idea that Parliament should be consulted early even if it was not a legislative requirement. Furthermore, Parliament had the power to approve or reject a proposed tariff.

Ms Moshidi observed that the PFMA and the MFMA were not for the Department to review. It had asked National Treasury to look at these Acts, but they had not been willing. Perhaps the discussion needed to take place at a different level. The Department had been working hard to try and resolve the issue of incorrect billing, and some progress had been made.

Mr Tshangana said that the Department was looking at incubating an independent water regulator prior to establishing it, as had been done with the human settlements ombud. It could start working on the regulatory aspects and report to the Minister, so that the Department did not remain the referee and a player. Part of the problem in establishing a regulator was there had been a lot of ideological discussions. For instance, labour had put forward the view that it was a first step towards privatising water supply. Administrators in the Department had prepared the business case for a regulator, but it had to be remembered that the final decision was political. At the upcoming summit called by the Minister, he would suggest an independent panel reporting directly to the Minister. He suggested that the delays might have been caused by personnel changes at ministerial level.

Conclusion

Co-Chairperson Semenya said that the Committee was not satisfied with the presentation, because it had wanted the Department to revise the tariffs downwards in response to the socio-economic changes brought on by COVID-19. The establishment of an independent regulator and other legislative changes were now more urgent than ever. The process of setting tariffs should be more participatory. A letter would be written to the Minister, expressing the Committee’s dissatisfaction with her absence.

Ms Mohlala said that the institutional governance and oversight of the DHSWS was weak. Why had the water sector regulation unit not been proactive in assessing risk in the tariff determination during COVID-19?

Co-Chairperson Muthambi said that the threat of COVID-19 needed to be responded to by the water boards, just as every other department and entity had done. She confirmed that the Committee rejected the proposed tariff increases and called for a downward revision. National Treasury would have to relax certain timelines to allow water boards to revise their tariffs. She called on the Department to brief the Committee on the steps that had been taken towards the establishment of a national water regulator.

The meeting was adjourned.