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Presentation to the Water Affairs and Forestry Portfolio Committee

29 October 2004

WATER SERVICES TRANSFERS

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Purpose of this presentation To outline challenges and constraints to implementing

the transfer process

To locate the transfer of water services within the broader municipal context

To provide some snap shot findings from financial assessments and analyses

To highlight recommendations towards ensuring the sustainable transfer of water services assets

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SALGA and receiving municipalities are all committed to a common goal:

To successfully take transfer to achieve sustainable water services to communities

Our Goal

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An enabling policy framework for transfer is in place Good working relations and an ethos of co-operative

governance among partners – DWAF, SALGA, dplg Municipal commitment to the process and to the final

outcome of transfer is evident

HOWEVER – in achieving sustainable transfer a number of very real implementation constraints are encountered

From policy to implementation

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The implementation challenge

Ensuring sustainability requires addressing the broader municipal context within which water services are delivered – which requires TIME

The transfer targets are tight. The transfer

process did not anticipate the many

decisions to be addresed to ensure sustainbility

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What are the implementation constraints to transfer?

Making sure the right water services provider arrangements are in place [section 78 processes]

Making sure the financial arrangements are sustainable

Addressing personnel issues to ensure the right skills, COS, remuneration, benefits (pension, medical aid)

Ensuring sustainable infrastructure

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The right water services provider

Sustainable infrastructure

Sustainable financial arrangements

Personnel issues finalized

Sustainable water services

Factors for Sustainability

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Transfer must be viewed in the broader context of: Equitable share The revenue raising potential and fiscal capacity of individual

municipalities Indigents and free basic services (impact of free basic

services on ES) Water services provider arrangements and management

capacity The impact of increased personnel on municipal

organograms and budgets Infrastructure status and maintenance impact

Transfer in the broader context

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SALGA has undertaken focussed research to establish the adequacy of funding to ensure the sustainable transfer of DWAF’s assets

The research highlights budgetary gaps after taking into consideration: Estimated operating and maintenance

costs of the schemes Human resources related costs Revenue estimates Grant funding Required capital expenditure

Financial Sustainability

Sustainable financial arrangements

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Policy Issue The Joint Transfer Policy does not address the long-term

financial implications of transferred schemes and related staff on municipal finances

HOWEVER It places an onus on National Government to make

arrangements for ongoing conditional grants where it is not possible to recover the costs of operating and maintaining the water services works

IDTC agreement is required on how this policy principle will be operationalised, as indicated in the policy

SALGA`s research aimed at contributing towards achieving clarity on this critical matter

Long term financial implications of transfer

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• In addition, DWAF`s Functional Assessments and related cost estimates needed to be verified due to:– The values in DWAF`s Functional Assessments being

determined through desktop studies and not field inspections

– Elements being left out of the assessments in some cases

– Cases where the estimates are materially inaccurate• Municipalities have initiated limited verification activities

to date

Functional Assessment

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• Undertaken in:– Mopani DM– Albert Luthuli LM– Chris Hani DM– Moses Kotane LM

• The findings affirmed by WSA`s

Snapshot research

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Albert Luthuli LM Methodology

Financial Model

Division of Revenue Act

Budgetary Gaps

Umgeni Water/Phambili Consulting

Functional Assessment

DWAF Functional Assessment

Revenue Equitable Share

WS OperatingSubsidyPersonnel

Personnel Technical

O&M

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Albert Luthuli LM key assumptions

• Effective date of the transfer of DWAF Assets - 1st July 2004• Estimated Revenue from DWAF Functional Assessment used but

actual collection rates applied• Estimated refurbishment cost in DWAF FA distributed evenly over

three years, starting in year 2004/05• Umgeni/Phambili Consulting Joint Venture Functional Assessment

Study used regarding personnel costs • Approximately 127 DWAF staff to be transferred to the municipality • Increase in Equitable Share allocated to Water services budget as it

is assumed that this is the phasing in of Water Operating subsidies• ES data sourced from DoRA, 2004

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• The total estimated operating subsidy over the next years (2004/5 to 2009/10) is R14,3 million

• The estimated operating costs are R73,8 million for the same period (maintenance and operating costs)

• This shows an operational shortfall in the subsidy of approximately R59,5 million

• The operational loss on the DWAF schemes to be subsidised by the municipality is estimated at approximately R6m in year 2006/7, R7,8m in 2007/8, R9,2m in 2008/9, and is expected to escalate accordingly under current circumstances

Example Albert Luthuli Local Municipality

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The total estimated operating subsidy over the next six years (2004/5 to 2009/10) is R18,3 million

The estimated operating costs are R35,7 million for the same period

This shows an operational subsidy shortfall of approximately R17,3 million

The operational loss on the DWAF schemes to be subsidised by the municipality is estimated at approximately R11,7m in 2007/8, R11,9m in 2008/9

Example Chris Hani DM

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Our Findings

In all four cases net financial deficits occurred within the initial years of taking transfer

Increased financial deficits occurs in the fourth year due to the fact that the subsidies decrease and the revenue base in the municipality is too small

Both these scenarios indicate unsustainable water services operations

This evidence has raised concerns that the current O&M subsidy COULD be inadequate

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SALGA has formally placed on record with the IDTC a request that the O&M subsidy requires review

Process to prepare submission to National Treasury under way with DWAF

SALGA proposes that subsidy values be negotiated on a case-by-case basis in Transfer Agreements, and not rely solely on DWAF estimates informed by the Functional Assessment

In the longer term the adequacy of Equitable Share would also need to be determined on a case-by-case basis

Value of O&M subsidy

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In terms of the transfer policies the starting date for the three year decreasing O&M subsidy is 1 July 2002 (being the beginning date of the national transfer programme)

The need to determine water services provider arrangements for the transferred schemes (in accordance with the section 78 process outlined in the Municipal Services Act) meant that municipalities could not take transfer on 1 July 2002

This means that most receiving municipalities will not benefit from the full 3 year O&M subsidy period indicated in the transfer policy

Commencement date of the decreasing O&M subsidy

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We propose that the date at which the transfer subsidy commences is either:

the date on which the Municipal Council takes its Section 78 resolution in terms of the service provider mechanism that will provide its water services

OR the date that the WSA takes transfer (where a S78

assessment is not undertaken)

This proposal links the transfer process to the section 78 assessments, where relevant

Proposal commencement date of O&M subsidy

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Asset depreciation and future replacement cost once the assets have reached their useful life was not addressed in the Joint Transfer Policy

Financial modelling undertaken at Moretele LM has shown that the replacement costs in 10 to 15 years time could push tariffs to over R10/kl in similar municipalities that have no financial reserves

Policy augmentation to address this component of the programme has been tabled with DWAF

Replacement costs

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There are concerns that the personnel subsidies could be insufficient

Example Chris Hani DM The current personnel subsidy will be inadequate once

the staff are transferred: The total personnel subsidy over the next six years

(2004/05 to 2009/10) is approximately R49,7 million The total salaries for the same period amounts to R61,6

million on the DWAF COS The current gap in subsidy is approximately 23,9%

Personnel Subsidy and Staff Costs

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Reviews of DWAF’s Functional Assessments, including the condition of assets, have found that the current allocations for refurbishment may not be adequate

Example: Mopani DM The grant for refurbishment presented by the Water

Services Operating Subsidy is approximately R18,9 million However the total estimated refurbishment cost for the

schemes is R68,6 million to be rolled evenly over the next 3 years (starting in 2004/05)

This shows a shortfall of R46,7 million in the DWAF allocation to adequately cover refurbishment

Refurbishment Value

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Proposal for Refurbishment

With regard to Refurbishment, SALGA has proposed augmentation to the Transfer Policy  

The Policy should make provision for the Transfer Grant, including refurbishment values to be jointly negotiated between the receiving WSA and DWAF and not necessarily be the value determined in the DWAF Functional Assessment

DWAF would agree that Transfer Grants and refurbishment values in the DORA should be regarding as provisional to guide local discussions

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Staff Transfers

The right personnel

SALGA’s position is that transfer of water services staff must be negotiated centrally

As far as possible staff transfers should occur on a uniform basis

Transfer of staff is an inextricably linked component of the transfer of a water service – it therefore cannot be separated from the overall transfer agreement

SALGA contends that whatever approach is taken in terms of the transfer of staff a narrow interpretation of S197 of the Labour Relations Act cannot apply

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Individual municipalities cannot negotiate a departure from collectively agreed positions on issues reserved for centralized bargaining in the SALGBC. This right is reserved for SALGA as the employer body.

Where there are issues that require departure from collectively agreed positions, it is proposed that either: negotiations should involve members of the SALGBC

or agreed positions should be forwarded by SALGA to

the SALGBC for ratification

Ensuring integrity of collectively agreed positions

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It is SALGA and its members’ policy position that staff should be transferred:a) according to the needs of the new service (which will

be consulted with DWAF)b) into an approved organisational structure appropriate

for the needs of the new service to be undertaken Questions such as the number of staff to be transferred,

precisely which staff, qualification levels and so on, must be determined before transfer of staff occurs

DWAF and SALGA have agreed to a central process to come to conclusion on this component of the programme

Staff transfers according to the needs of the service

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Deciding the delivery mechanism (or institutional arrangement) to provide the water services is one of the most important decisions in terms of sustainability

Staff cannot be transferred until it is clear which WSP they will be transferred to

The institutional reform and section 78 processes provide an opportunity for decision making around sustainable institutional arrangements

Institutional Reform and Section 78

The right water services provider

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Section 78 key part of Transfer

• The institutional arrangements for the operation, maintenance and management of the transferred schemes is an integral part of sustainable transfer

• Deciding the most appropriate delivery mechanism and ultimately the WSP through the section 78 process is thus a critical step in the transfer process

• It must be recognised that the institutional reform and section 78 decisions are long term decisions which often involve complex processes

• Institutional reform and decision making requires realistic time-frames

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Receiving municipalities and S78 assessments

• SALGA commends DWAF for commitment to supporting S78 assessments

• Receiving municipalities making steady progress include:- Buffalo City - Chris Hani DM- OR Tambo - Mopani DM- Mangaung - Capricorn DM- Central DM - Vhembe DM- Moretele LM - Western Highveld

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In his address to the National Conference of SALGA on 29 September this year, President Thabo Mbeki said that:“SALGA has to make an audit to assess whether the existing resources transferred to local government, such as equitable share transfers and infrastructure and capacity building grants, are sufficient for municipalities to provide free basic services, fulfil their constitutional mandate, and improve the quality of life of the citizen.”SALGA, as a key partner in the IDTC, remains committed to ensuring that municipalities are supported to achieve the objectives of the Transfer programme in a sustainable fashion

In Conclusion