Water Regulations: public hearings

Meeting report

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This Report is a Contact Natural Resource Information Service
Taking Parliament to People, and People to Parliament
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The aim of this report is to summarize the main events at the meeting and identify the key role players. This report is not a verbatim transcript of proceedings.

WATER AFFAIRS AND FORESTRY PORTFOLIO COMMITTEE
4 October 2000
WATER REGULATIONS: PUBLIC HEARINGS

Documents handed out:
Submission on the Water Regulations from COSATU / SAMWU
Submission on Draft Regulations from Municipal Infrastructure Investment Unit (See Appendix 1)
Submission from Rural Development Services (RDSN) and South African NGO Coalition (SANGOCO)

SUMMARY
Chairperson Sonjica said that the goal of the public hearings is an attempt to get private companies to be responsible for local water services. SAMWU and COSATU, MIIU, RDSN and the Department of Water Affairs and Forestry made presentations and questions of clarity were then asked.

MINUTES
SAMWU and COSATU
Ms S van Niekirk representing the South African Municipal Workers Union (SAMWU) began the joint presentation from SAMWU and COSATU by stressing that the availability of water to all "not only those who can afford, together with the provision of 25 litres/person/day is a basic right and is acknowledged as such in the White paper on Water and Sanitation" (COSATU submission). She recommended to members that while the regulations have been published for public comment, they should be tabled at NEDLAC like similar regulations are and like the Water Services Act (WSA) itself was. The regulations as they stand undermine the spirit and intention of the WSA and they should be measured against the National Framework Agreement. She referred the committee to Clause 19.2 of the WSA, which seeks to consider the public sector as the preferred service provider. Ms van Niekirk stated that treating the public and private sector the same becomes problematic, and although both need to be regulated there should be different criteria used for each. She pointed out that private sector models are profit-orientated while public sector providers are driven by the aim to meet social needs. People's basic need for water should not undermine their ability to pay for it, and privatisation and the overall commercialisation of services will only contribute to the cycle of poverty. Because it is unprofitable for the private sector to provide services to the poor, exclusive reliance on the private sector will exclude a greater proportion of people from water and sanitation services. The poor will receive inferior services because they cannot afford the expensive private sector services.

Ms van Niekirk recommends setting up a system of "lifeline service of water" irrespective of income, which allows 25litres/person/day within 200m cartage and a ventilated improved pit latrine, and that basic services such as water and sanitation should be retained within the public sector. All efforts should be directed at strengthening rather than weakening the public sector. If the private sector is utilised it should be for a limited time and used to bolster the public sector, rather than displace it. She also noted that the regulations as they stand do not address current contracts with the private sector that have already been signed (e.g. Nelspruit and Dolphin Coast).

One of COSATU's core concerns regards the use of incentives for water service providers and the danger of these decreasing the quality of water for users. There was a concern that any incentives take into account the objectives of the WSA in particular to section 2A, which refers to universal right of access to basic water and sanitation. Any incentives should also not undermine the provisions of lifeline service. Another core concern involved Point 4A which allows contracts to continue for a maximum of 30 years from the effective date of contract. COSATU recommends that the duration of contracts be decreased to no longer than five years, in order to correspond with councilor's term of office. In this way, new council will not find themselves tied to a contract they cannot amend and were not involved with initiating. In this way contracts will also be linked to the Integrated Development Plan, which must also be reviewed every five years.

Discussion
Mr G B D McIntosh (DP) expressed concern about if the committee should support legislation that is negotiated by NEDLAC and if this will compromise their accountability to voters. He also requested practical proposals from COSATU. He disagreed with their position that 5-year contracts would be beneficial, and observed that sometimes 30 year contracts are necessary to allow time for large amounts of money to be paid back in lesser installments. He also stated that privatisation will create jobs and that most employees will retain their jobs.

Mr D S Maimane (ANC) commented that privatisation is not illegal nor should be considered threatening to the state. He asked COSATU representatives for clarity as to exactly what problems with 30-year contracts they foresee. He also wanted to know how these regulations would accelerate the process of privatisation.

Chairperson Sonjica then asked COSATU how 5-year proposals would effect the 30-year contracts already in place.

At this point Mr N Coleman (COSATU) noted that these regulations contradict the intentions set within the National Framework Agreement (NFA) and the WSA. Parliament reserves its sovereignty and may accept or reject any piece of legislation that comes its way. Ms van Niekirk added that COSATU sees the private sector with a limited role in the regulations, because it is driven by profit and water delivery is a major concern for poor rural areas which are not profitable. Although the private sector may be utilised, most efforts must be aimed towards building the capacity of local governments to develop their own skills, training and physical infrastructure to be able to deliver their own effective water services. Privatisation will only serve to undermine local municipalities own delivery capacities.

In response to Mr Maimane's question, Ms van Niekirk stressed the high administrative costs involved with continually amending 30-year contracts every new term. If we address the financial abilities of local governments to cater to its own water delivery, then 30-year contracts become unnecessary. Mr N Nchabelews (COSATU) also added that the role of the state is to provide basic rights like water and sanitation services to the poor. In reference to Mr McIntosh's comment, he emphasised that privatisation will not lead to job creation and that we have learned from past experience that when the state privatises it tends to downgrade and retrench workers. In this way privatisation will only serve to exacerbate the problems we are already facing.

Chairperson Sonjica noted that the presenters concerns regarding 30-year contracts are referred to in clause 4(D-G) of the regulations which lists provisional requirements upon termination of contracts.

Municipal Infrastructure Investment Unit (MIIU)
Ms K Breytewbach and Mr B Jackson reviewed the submission from MIIU and then responded to questions from the members. Mr Jackson observed a need for private sector service to municipalities and expressed agreement with the previous presenters on the need for firm regulations. He also stipulated that most of the concerns from COSATU can be addressed through well-constructed contracts. He warned against the danger of over-regulation however, saying it is more dangerous than under-regulation in that it risks stifling private sector interest in involvement. Protection of the consumer is essential but must also ensure sound procurement procedures that include things like the lowest possible tariffs, roll-out programs, monitoring and enforcement procedures, and reasonable negotiation periods.

In response to the COSATU's proposal that contracts not exceed 5-year terms, Mr Jackson stated that a five-year period is normal for management contracts but investment contracts need to be longer in order to allow contractors to pay out large sums of money over a period of time. Contracts may be renegotiated every five years but they do not need to be terminated every five years. Mr Jackson emphasised that MIIU's mandate from the government is to mobilise private sector finance. It has been their experience that private sector investors are more willing to invest through a public or private sector service provider, operating within a well-constructed contract and a predictable regulatory environment. Because the risks involved with over-regulation are serious (i.e. a lack of private sector operators and financiers willing to get involved and therefore creating an inefficient sector unable to raise the capital expenditure needed to serve the un-served poor) MIIU is recommending that regulations be kept to a minimum.

Lastly, Mr Jackson proposed that, in the interests of clarity, these regulations be divided into those that will apply to every water service provider and those that are restricted to different categories of contractual arrangements. MIIU also encourages the committee to consider issues that hinder private sector financing, such as those provisions in the WSA which allow the minister to set national norms and standards with respect to profit or surplus funds generated by water tariffs.

Discussion
Mr P M Mathebe (ANC) asked what difficulties are predicted for municipalities when accessing loans. He wanted clarity as to the socioeconomic conditions of areas being referred to. Lastly, he asked MIUU representatives if they consider private sector involvement as the only option.

Mr P H K Ditshetelo (UCDP) asked the MIUU what incentives are in place to foster privatisation. He pointed out that it is government policy to include private sectors in the framework.

It was also pointed out that water supply to rural areas must not be framed through economics because water is a basic human need that is critical for the sustenance of life. The question was posed to the MIIU as to how they see WSA contractual obligations to districts that are difficult to access and unable to pay for the service.

Mr Jackson responded by saying that in regards to municipal access to loans, the same rules apply as to any loan transaction. Financers want to know that they are dealing a predictable regulatory regime. If the Minister were to change the contractual obligations every five years, the financers will not be enthusiastic. The Development Bank of South Africa is concerned with being able to charge tariffs that will recover costs. He also stated that the public and private sector should be treated the same, and that if the public sector does not charge enough for their service than they will not be able to provide adequate service it cannot afford. There must be a "working financial model" in place before long-term agreements are signed (eg. roll-out programs), and there must be regulatory process which deals with the final impact on consumers in order to count costs before they happen. In reference to the privatisation of the Dolphin Coast, Mr Jackson affirmed that no one has lost jobs in this process. He stated that the private sector does not mind tight regulations but they will not negotiate with unpredictable regulations. The level of service must meet the needs of what the community is able to pay, along with a focus on sustainable development and "sensible restrained legislation".

Rural Development Services Network and SANGOCO
Mr S Madikane and Mr C Taho's presentation focused on international trends (i.e. the Build, Operate, Train and Transfer program - BoTT) which have confirmed the fallibility of the myth of the private sector as the most efficient and effective form of delivery. They expressed outrage that despite stated commitments from the Minister and the Department of Water Affairs about a consultative approach to policy-making, consultations thus far have left out concerns from the South African population and rural communities in particular. The RDSN is in support of the submission made by SAMWU and discourages the Minister from embarking on a process which fundamentally changes the spirit of the WSA.

Mr Madikane noted that the public sector remains the preferred option of water provision for both developed and undeveloped countries. Also that there is an international trend towards private sector "roll-back" in which cities are reclaiming privatized services. Under Point 4.1(b), which states that services will be financed through cost recovery and available subsidies such that they operate in a sustainable fashion, RDSN is concerned about the sustainability of a service that runs on cost recovery in an area with high unemployment and poverty. Under Clause 4.2 which states that there must be universal coverage for people which are "willing to pay". Mr Madikane says there is a huge difference between being willing to pay for something and being unable to pay for something. He calls for deletion of this clause both from the policy note and from the regulation. RDSN supports the proposal from COSATU that public and private service providers must not be treated the same. Their submission suggests that because the two are guided by fundamentally different motivations, regulations which effect them must also carry fundamental differences.

Of particular concern to RDSN involves Section 4.4(e) of the regulations which state that "a lawful agreement entered into prior to the promulgation of section 19(5) regulations will not be voided". Noting the fact that major concessions have already been made to the private sector (i.e. Nelspruit and Dolphin Coast contracts), Mr Madikane says that if government is serious about regulatory function then all lawful agreements entered into prior to its passing must be subject to it and its consequences. After going through the proposed regulations point by point with proposed amendments, Mr Madikane concluded by prompting the committee to reject privatisation in all its forms and to encourage and support public sector initiatives. RDSN emphasizes a need to hold local governments accountable for water and sanitation delivery within an integrated rural development strategy and calls on government to build the capacity of local governments. They undertake to engage in a program of mass mobilization through education, media and information campaigns that will include provincial workshops, and form a broad alliance which would include NGOs, CBOs, trade unions and other progressive formations against privatisation. Lastly, RDSN notes the need to monitor, evaluate and take the necessary action regarding current privatized contracts such as the BoTT.

At this point in the meeting, Chairperson Sonjica inquired that as the regulations stand now, how can we ensure a balance between profit making and the protection of the poor. Mr Madikane responded that there are no clear mechanisms on how to avoid this struggle. The state should be the driving force of the process and has an obligation to deliver basic services to its people. Ms Sonjica then asked that given the competing concerns of the state, is it legitimate for the state to regulate alone? She also reminded the committee that the state promotes a relationship between the public and private sector. Mr Madikane stated that the government should guard against entering into agreements of privatisation to do with basic resources. Chairperson Ms Sonjica expressed agreement with this sentiment and then allowed Mr W Dacks from the National Treasury to speak to members.

Informal Presentation by Mr W Dacks
Mr W Dacks (National Treasury) spoke to members about the framework with which public/private agreements take place. The treasury doles out money to services and Departments over a three-year period. He agreed with the statement from MIIU that private investors prefer to deal with simple and consistent regulations. Agreements must be made case-by-case and he asked the committee members to have trust in government processes at various levels that they will make sound decisions.

Chairperson Sonjica asked Mr Dacks how much participation from the private sector is necessary. She also wanted clarity as to how much these regulations take care to control private sector participation.

Mr Dacks stressed that while the private sector's strength lies in entrepreneurial and specialized skills, the government is strong when it comes to policy making and enforcing legislation. They must work cooperatively in order to create economic growth and practical regulations.

At this point Ms Sonjica requested a copy of Mr Dack's informal presentation to be given to committee members. Attention was then turned towards the presentation from the Department.

Department of Water Affairs and Forestry
Ms H Muller and Mr T Mfotulo opened their presentation by observing that the proceedings are now turning towards more practical regulations regarding water services. The Minister has tried to address the concerns of NGOs and understands that the control and responsibilities of basic services usually falls to local governments. Mr Mfotulo distinguishes this responsibility from operational control which has more to do with the actual running of the system (as opposed to ownership of the system), i.e. authority vs the provider. The WSA allows for both public and private sector participation but the debate concerns the regulations and how contracts are written up. The Department recognizes the need to protect the consumer against public sector inefficiencies, unattainable tariffs, and service monopolies. Mr Mfotulo stressed the importance of recognizing the difference between ownership and running of water services when drawing up contracts.

Mr Mathebe (ANC) asked what would happen to parties upon termination of contract where debt has accrued. Mr Mfotulu responded by saying that the contract must state in clear terms how to act accordingly. It is difficult when drawing up contracts to foresee every possible future circumstance.

Chairperson Ms Sonjica thanked the Department and everyone involved for their participation in the meeting. She acknowledged the need to provide safe and affordable service while considering the very small budget the committee has to work with (approximately R270 million). The committee members understand the need to include the private sector but must guard against the full privatisation of water services. The control must be in the hands of the public. She supported the suggestion from COSATU that the proceedings should be taken to NEDLAC as this is what has happened before. The meeting was then adjourned.

Appendix 1
Municipal Infrastructure Investment Unit (MIIU)
October 3 2000

SUBMISSION ON DRAFT REGULATIONS IN TERMS OF SECTION 19(5) OF THE WATER SERVICES ACT
The MIIU is a Section 21 Company with Government as the sole shareholder, and its directors are appointed by the Minister of Provincial and Local Government. It was set up to assist municipalities to mobilise private sector investment in infrastructure through the formation of municipal service partnerships (MSPs). There is enormous interest among municipalities in the use of MSPs to improve water services, both in terms of extending coverage and improving the quality of service. Since the MIIU was created 2 ½ years ago it has assisted with finalising and implementing the water services concessions in Dolphin Coast and Nelspruit, and has supported feasibility studies and project preparation for over 15 water services MSPs that are underway, including at least two public-public partnerships.
For this reason we have a keen interest in the regulatory framework in which the MIIU's clients must operate and have participated in several such regulatory processes. In particular we have been part of the team that drew up the draft regulations in terms of Section 19(5) of the Water Services Act, and we look forward to assisting with finalising them for your further consideration.
The purpose of this submission is to impress upon the Portfolio Committee our concern that these regulations must not in any way be an impediment to the potential role of private sector financiers and public or private sector service providers in the water sector. The MIIU mandate from Government is to mobilise private sector finance. This may be achieved through well-run credit-worthy public institutions such as water boards, but there are few such entities today in South Africa, and few municipalities will qualify in the near future. Our experience to date is that private sector investors are more willing to invest through a public or private sector service provider, operating within a well-constructed contract and a predictable regulatory environment, than through a municipal service provider whose balance sheet is tied up with the rest of the municipality.
Our proposal to the Portfolio Committee is that these regulations should be kept to a minimum; that they should err on the side of under-regulation rather than over-regulation. The risks of under-regulation in this area are very small - larger municipalities will employ a team of lawyers to prepare contracts. All municipalities will have access to the expertise of the MIIU and will probably base their documents on contracts already in use such as those in Nelspruit and Dolphin Coast. The risk of over-regulation is less obvious but more serious - a lack of private sector operators and financiers willing to get involved in the sector; an inefficient sector unable to raise the capital expenditure needed to serve the un-served poor.
There is a natural concern for the welfare of consumers of water services. It is our considered opinion that consumers are best protected by a transparent competitive bidding process (resulting in the lowest feasible tariff), a carefully specified, affordable roll-out programme, and a well-constructed contract (the subject of these regulations) that is properly monitored and enforced, with periodic negotiations to re-base the tariff.
On a specific note, in the interests of clarity, the regulations could be divided into those that apply to EVERY water service provider, from a village water committee to a multi-national; and those that would apply to different categories of contractual arrangements. There are some proposed regulations that clearly apply to a service provider that deals directly with consumers (ie a concession contract) that would not be relevant to a BOT (Build Operate Transfer), a management contractor or one providing a specific technical service.
Finally, there is a debate on the financial regulation of water services concessions. It is not yet resolved. Current provisions of the Water Services Act allow the Minister to set national norms and standards with respect to profit or surplus funds generated by water tariffs. As it now stands, this provision (§10(2) of the Act) is a substantial barrier to private sector financing of water service providers, be they public or private. One of the outcomes of the drafting sessions in which the MIIU participated was a decision to examine issues that hinder private sector financing of water services infrastructure. We urge this Committee, as part of its examination of the issues attendant to contracting with third party service providers, to begin to address this matter lest there be no contracts to which these contracts may apply.
Should the Committee require further information, or wish to discuss these matters further, Mr Barry Jackson of the MIIU will attend the hearing on Wednesday October 4^th.

Ms GUGU MOLOI
Chief Executive Officer
Municipal Infrastructure Investment Unit

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