Structure of the presentation

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2. 2 Structure of the presentation About SALGA Water Pricing Chain Regulations Challenges Suggested Way Forward

3. SALGA GovernanceStructures

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5. SALGA Functions SALGA has four main functions: Strategic profiling - building the profile and image of local government within South Africa as well as in the internationally; Support and advice - policy analysis, research and monitoring; knowledge sharing and municipal support. Representation - stakeholder engagement; lobbying and advocacy and being an effective employer representative for members. The fourth (the octagon) refers to the internal programmes aimed at strengthening SALGA�s corporate governance and programmes to deliver on the three functions listed above.

6. 6 The water pricing chain

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10. Local Government and Bulk Water Utilities WSA are the major customers of Water Utilities Water Utilities bring economies of scale WSA depended on bulk water utilities socio - economic development (Umgeni and Rand) Water Utilities are SOE � Supports Government's policy goals

11. Implications in LG Planning Non Compliance to the provision of section 42 MFMA Majority of the bulk providers to not comply with section 41 of the MFMA Debt owed to Water Utilities by Municipalities is of concern to Water Utilities Under-expenditure on Capex (same as DoRa provision on municipal Grants) Year to Year tariff negotiations stifles better Planning Integration of bulk and retail (Bulk is fairly an easy business compared to reticulation) Tendency to build reserves - rather than utilisation for Capex

12. 12 Pricing Principles At the end of the day, it is the consumer that �pays the price�. That is, all �upstream� prices impact on the consumer. For this reason, the pricing chain should be viewed in totality to understand the impact of pricing on consumers. For the sake of consistency, the same principles and pricing methodologies should be applied throughout the value chain. Any subsidies should benefit end users (consumers) and hence are most appropriate when allocated at the retail end of the pricing chain (and not upstream).

13. 13 A municipal budget Circular 48 from National Treasury issued on 2 March 2009 explicitly states that municipalities are encouraged to keep increases in rates, tariffs and other charges as low as practically possible. It further states that for this reason National Treasury continues to require that municipalities must justify in their budget documentation increases in excess of the 6% upper boundary of the South African Reserve Bank�s inflation target.

14. 14 Water Pricing and Tariff Regulations

16. Regulation Domain(social and economic)

17. CHALLENGES In addition to drawing key lessons from the first term of local government, this presentation also specifically reflects on the key lessons from Project Consolidate, since its launch in October 2004. The report argues that the last 5 years point to the need for some refinement in the policy regime of local government. It should also be noted that this presentation also gives effect to a Cabinet decision in 2005 that the January 2006 Cabinet Lekgotla receives a report on a comprehensive review of local government. This report focuses on selected areas of practical and policy intervention with the greatest potential for improving municipal performance and creating a better life for our people.In addition to drawing key lessons from the first term of local government, this presentation also specifically reflects on the key lessons from Project Consolidate, since its launch in October 2004. The report argues that the last 5 years point to the need for some refinement in the policy regime of local government. It should also be noted that this presentation also gives effect to a Cabinet decision in 2005 that the January 2006 Cabinet Lekgotla receives a report on a comprehensive review of local government. This report focuses on selected areas of practical and policy intervention with the greatest potential for improving municipal performance and creating a better life for our people.

18. Some challenges Water Losses Billing Maintenance of Infrastructure Costing of Water (cost per Kl) Water Pricing, Tariff Setting and investment models Separation of WSA and WSP Skills and Competencies to run the water business

19. LOCAL GOVERNMENT CHALLENGES

20. 20 Suggested Way Forward

21. The impact of governance on prices The way prices are set depend on the governance arrangements that apply along the chain. For example: DWAF sets its raw water price in terms of a policy Water Boards set bulk water prices in terms of the Water Services Act and prices are (in effect) approved by national government. Municipal tariffs which are approved by local councillors in terms of a local tariff policy which must comply with nationally defined norms.

22. 22 Suggested Way Forward The key issue facing the sector is not access to finance, but the fact that water is unsustainably priced � and this calls for a review of water pricing in the sector; An integrated vertical (full cycle tariff) pricing framework be developed (multi- year price determination) DWAF revise the pricing strategy parallel with the revision of the NWRS process;

23. 23 Suggested Way Forward National Treasury and DWAF penalise Water Utilities for under expenditure on planned CAPEX if such is not undertaken ; National Treasury enforces compliance with section 41 of the MFMA; The tariff structures and pricing of water at all levels be published every year; and An interim independent panel of experts to monitor water tariffs and pricing be established

24. THANK YOU