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FINANCING OF THE BUSINESS OF WATER SUPPLY AND SANITATION

A presentation at the 2nd African Water WeekGallagher Convention Centre

9 November 2009

Presented by: Helgard Muller Fred van Zyl

Department Water Affairs Republic of South Africa

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Why talk of water supply and sanitation as a business? (even if it

is a subsidised business)• Water is both a Social and Economic

Good• Ongoing-non stop service- 24/7/365• A service for -people, mining,

commerce, tourism, industry• Some clients can pay; others not- their

supply subsidised or free • BUT – all water supply comes @ a cost

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Why water as a business? (even if it is a subsidised business)

• Business: product to be treated and transported and distributed-bulk systems- distribution- infrastructure-all needs to be managed

• All these elements come @ a cost• The books of the business must

balance or else not sustainable- same cash flow problems as in any other business

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Main elements of a water supply business

• Access to water and sanitation i.e. the infrastructure (a tap or a toilet)

• The ongoing service from such a facility. (operations)• The quality of such a service (depends on assets)• The quantity of such a service – e.g. l/p/day or

kl/hh/month (available resources)• The free part of such a service (management)• Funding of such a service/viability of service• Cost recovery/credit control of service• Communication between municipality and residents

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SA Water Supply and Sanitation Business

• 49 million people served by more than 800 supply schemes/systems

• Municipalities responsible• National oversight, leadership and

regulation (Department Water Affairs)• Service Providers (mostly public-water

boards and municipal entities)

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SA -% Households with Access to:Water, Sanitation & Cell Phones

19941994 20012001 20082008

% Households with Access to Water% Households with Access to Water

% Households with Access to Cell Phones% Households with Access to Cell Phones

% H

H C

over

age

as %

of H

H%

HH

Cov

erag

e as

% o

f HH

32.2%32.2%

72.9%72.9%

73%73%88%88%

59%59%73%73%

48%48%% Households Access to Sanitation

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Funding of water supply and sanitation

1. SOCIAL Infrastructure- dedicated and committed ring fenced

grants • Basic services (MDG’s) (MIG, Housing, schools)• Bulk infrastructure (Grant for regional bulk)

Sustainable management:• Equitable share: operating grant for the poor• Cross subsidisation from paying consumers

Dedicated leadership and governance Donor support for capacity building and support

programs

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Funding of water supply and sanitation

2. ECONOMIC-Self financingLoan funding PPP arrangements and servicesCost recovery; tariffsCross subsidisation; tariffs

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OPERATING

CAPITAL

Operating grants(Primarily equitable

share)

Capital grants (MIG)

Own sources (user charges;

rates; levies etc.)

Own sources (capital funds,

loans etc.)

Basic service social

Higher service level- economic

MUNICIPAL FINANCIAL FRAMEWORK

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REGIONAL BULK INFRASTRUCTURE GRANT

• 1994- date: Massive program to connect households.

• Initial spare bulk capacity exhausted- bulk insufficient.

• Not realised by project managers• Huge gap developed for funding of bulk

infrastructure (between water resources infrastructure and retail infrastructure)

• New grant developed for regional bulk

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REGIONAL BULK INFRASTRUCTURE GRANT

• Two components:Social for poor people that cannot pay full costsEconomic for consumers that can pay.

• Insufficient funding for social component.• Economic component needs loans but

expensive and difficult to put a deal together

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Lessons learned from SA system• Established a central grant for basic

services- extremely positive--allocated for Water and Sanitation

• The Equitable Share Grant as an unconditional grant is substantial but often not used for its intended purpose; i.e. operations of basic services

• “Municipalities have become too dependant on grant funding”- SALGA in Parliament

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Lessons learned from SA system• Good policy but implementation

challenge- lack of capacity at some municipalities

• Leakage of funds a threat• Sustainability challenge- short term vs.

life cycle costs• Interdepartmental co-operation

essential• Moving targets- rapid urbanization

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Higher service levels

• What happens after the MDG’s have been achieved?

• Is there a need for service level> basic?• What are the needs over and above

basic levels for economic development• Arguments for more water-over and

above basic-preliminary studies- economic development- benefits>costs

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8 Aug 2009DWA Workshop on "The Costs and Benefits of Increasing the Basic Water

Services Standard" 15

Increased benefits for Consumer:Increased benefits for Consumer:More healthcare direct and indirect Time lost due to sicknessImpact of mortalityHuman pipes and pumps factorCrime, property value, food productionFire damage

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8 Aug 2009DWA Workshop on "The Costs and Benefits of Increasing the Basic Water

Services Standard" 16

Increased WSS benefits:Increased WSS benefits:Households that have to carry their water home suffers more due to less hygiene, more illness, more exposure, shorter life span, time lost to carry water, more crime, lower property value, fire risk, unhealthy food and food preparation

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8 Aug 2009DWA Workshop on "The Costs and Benefits of Increasing the Basic Water

Services Standard" 17

Increased benefits for Employer:Increased benefits for Employer:Absenteeism, Productivity, Labor turnover, Lower returns, increased taxesWork place safety and accidents

Benefits for Government:Benefits for Government:Education – training days,Health – primary health careLabor – provisions for unemployedTreasury – investment and subsidies

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Lessons learned from Soweto (Mazibuko) Court case

• Free Basic Volume as well as use of pre-paid meters challenged in court

• High Court-Supreme Court of Appeal- Constitutional Court.

• A municipality must do the best from its own resources (water and money)

• The basic volume must be set by government and not by the courts

• Progressive realisation of Constitutional rights• Pre-paid meters are not unconstitutional and

can be used

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Cost of the Business

Planning Design Procure Construct Operate Maintain Refurb.

0,2% 2% 17% 44%

Typical % of Total Cost over the Life of Water Supply InfrastructureTypical % of Total Cost over the Life of Water Supply Infrastructure

37% Financing Cost

Based on actual local government case study (Paul le Roux)Based on actual local government case study (Paul le Roux)

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Conclusions• Asset management critically important-

value those assets!• Water supply and sanitation to be ring-

fenced as a single business• Never under-estimate own income• Tariffs realistic- too low tariffs resulting

in a business that cannot expand and cope with economic growth.

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Conclusions• Sustainable Water Supply and

Sanitation= financial viability• Social component must also be financial

viable- effective and efficient use of grants

• Minimise misuse and leakages of grants

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Conclusions

Financing planning over total life cycle of a system-

Remember design and build may only be 20% of the total life cycle cost

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Thanks!