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This is why the price of water needs to go up substantially

Proposed revisions to South Africa’s water pricing strategy are as broad as they are complex, but what is clear is that water will become significantly more expensive in the future.

The Department of Water and Sanitation (DWAS) has gazetted a draft of the revised water pricing strategy, which outlines a theoretical framework that would engender a fully functioning water eco-system. The 2013 document has led the discussion on how South Africa can reduce the financial burden on municipalities, which are required by law to provide water to those who cannot afford to pay for it, by transferring the full cost of delivering water services onto users. They will  incur a raft of charges that will see water pricing reflect the level of water scarcity in the country.

Domestic and commercial users will pay for charges related to planning, capital costs, operation and maintenance, depreciation, and future infrastructure build on government water schemes. A new polluter pays principle will also be imposed to ensure users discharging water containing waste into a water resource or onto land pay an additional amount.

According to the DWAS, South Africa ranks as one of the 30 driest countries in the world, with an average rainfall of about 40% less than the annual world average rainfall.

Even though the implications could potentially be disastrous for an already struggling economy, the consequences of not addressing the water security problem could be worse. The revised pricing strategy seeks to incentivise more efficient use of water, and ensure the much needed upgrade to the country’s water infrastructure is properly funded.

Municipalities struggling with poor billing systems, significant water leakage and high rates of non-revenue water (water provided for which no income is received) are a big part of the reason why significant capital is required to resolve the water crisis in South Africa.

Sanlam economist Arthur Kamp says it’s not possible to give a definitive, or even a ball-park figure on how much the cost of water is going to increase by, saying price structures are going to be complicated because it is going to be a hybrid model. There will be a wide range of charges that will be determined on a national level, other times at sectoral level.

Says Kamp: “What (the draft revised water pricing strategy) does is it gives one the flavour of what they’re trying to achieve. There is a lot of infrastructure coming and we can’t afford it so the user is going to pay. And I don’t think anybody is going to dispute that water is a scarce resource and that tariffs need to reflect that.”

Exemptions

The sticking point, he says, is going to come when giving exemptions and subsidies. Some sectors are critical to economic growth and will not survive the increase in cost. The country’s food security could be jeopardised if all farmers, for example, are forced to pay for their usage in full. Similarly, the inequality of South Africa’s population means there will be many households that will simply not be able to afford to pay for water. Resource-poor farmers are also going to be subsidised while subsistence farmers and non-profit organisations that care for the elderly may also have to be exempted. The minister of the DWAS will be able to use her discretion as to which groups are exempted and this aspect could prove contentious in the future.

Is there going to be any differentiation in terms of what industries are seen as more important for economic development in the long term, one wonders?

In the current water pricing strategy, the irrigation sector alone receives a subsidy of almost R1.5 billion because of a sector-wide cap on charges that has led to a significant under-recovery of costs, while the agricultural sector is still subsidised by around R300 million per annum. The new dispensation plans to remove these subsidies in phases, proposing a 20% annual reduction to remove the irrigation cap over a period of five years.

Charges

Charges to be levied
Operation and Maintenance Include direct costs, like administrative costs, water pumping and distribution. And indirect costs,  like regional office/untility costs, which cannot be directly attributed to a specific scheme
Depreciation/ Refurbishment Loss in functional performance or real term value of existing water resource infrastructure that occurs due to wear and tear, decay, inadequacy and obsolescence, and which is not restored by regular maintenance
Future Infrastructure Build Charge Will be charged to cover costs of investigation, planning, design, construction and pre-financing of
new infrastructure and the betterment of already existing infrastructure
Basic Human Needs Water Resources Charge Cover the depreciation and maintenance costs of  ensuring the provision of water for basic human needs for those identified as indigent households
Capital Unit Charge Will fund costs to water management institutions outside the DWAS, who raise loans to finance the development of new water resource infrastructure, and need to service these loans through cost recovery.
Assurance of Supply High assurance users would get 30% of the total available water but pay for 35.08% of the costs in order to get assured supply
Waste Discharge Charge System Consists of two distinct water use charges – the Waste Discharge Levy, which aims, among other things to promote the internalisation of environmental costs by waste dischargers; and a Waste Mitigation Charge, which covers the quantifiable costs of mitigating the impacts of waste discharge on surface water resources.

Source: Department of Water and Sanitation

Dhesigen Naidoo, CEO of the Water Research Commission (WRC), says South Africa has already experimented in different places with different components of the strategy, but that it had not been uniformly applied throughout the country and across all sectors.

“In the big metros, for example, many of the charges are already being applied. The waste discharge mitigation charges are the only new element of the strategy.”

According to the DWAS, the international average water usage per day is 173 litres per person, while South Africa was about 62% above the global average. This, Naidoo says, is a major part of the country’s water security problems.

“Ten years ago, Denmark’s total water consumption was close to 250 litres per person per day. By increasing their pricing of water, they’ve managed to get it down to 110 litres. In South Africa it is just as high (as Denmark’s was) and that needs to change. We don’t have to get down to 110, but it would be desirable to get it to 150 litres per day or thereabout.”

(Taking a bath can use between 80 and 150 litres of water, while flushing a toilet uses 12 litres.)

Kamp says the best thing for businesses to do in preparation for water price increases is to start figuring out what their water footprint is and be able to measure it, so that firstly, they will be able to assess the potential impact of the increased water costs on their operations. Secondly, having a thorough grasp of their water usage and wastage, they can start finding ways of using it more efficiently.

Naidoo says there are various estimates of what the new cost of water could be, but that the WRC has proposed a methodology that rewards water efficiency based on best practice standards. If the world benchmark water usage for growing beans, for example, is 100 kilolitres per hectare, then there should be one price associated with the first 100 kilolitres, which should be a discounted rate.  And for every 50 kilolitres above that bean farmers pay a much higher and increasing rate so that they are penalised for being wasteful.

The biggest challenge regarding the revised water pricing strategy will be the timing and execution of it because of the impact it will have on the economy.  Naaidoo says there is still a lot of debate that needs to happen around the subject, but also that changes to water pricing are long overdue.

Says Naidoo: “With the exchange rate, fuel prices and electricity prices all rising, there is already such an inflationary atmosphere in the system. It is very difficult to move fast on the water pricing issue. My thinking is that the kind of scenario that would benefit us eventually is to agree on the principles, to agree of the phasing strategies of the new pricing system. Not pricing water correctly is already costing the economy a lot. Being too cavalier and gung-ho it can hurt us as well”.

Source: moneyweb


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South Africans among the world’s worst savers

Cape Town – At 15.4% of its GDP, South Africa has one of the worst savings rates in the world. And it’s getting worse, according to statistics released by the Reserve Bank.

And it’s not just that our salaries are low and our cost of living is high – the Chinese earn less than we do, and they manage to save over 50% of their GDP, according to the Financial Services Board (FSB). India manages to save about 30%, Brazil around 25%, and Australia about 22.5%.

The highest this figure has been in South Africa in the last 13 years is 17.2%, which was recorded in 2002. The lowest was 14.7%, which was recorded in 2009, shortly after the worldwide recession on 2008.

These savings include pension contributions, and all forms of investment. In short, says the FSB, to save means spending less than you earn, and it encourages people to adjust their lifestyle so that they can contribute a part of their income to a savings scheme.

But, according to SA government statistics, South Africans are now borrowing more money than they are saving. Household debt as a percentage of household income now stands at approximately 80% (this includes loans, overdrafts, credit card debt, home loans, accounts). In the United States, the household debt-income ratio stands at 138%.

Only a quarter of those between the ages of 18 and 30 are saving for retirement, according to the Old Mutual Savings and Investment Monitor. Only 31% are saving for possible emergencies, while 35% are saving for a car and 26% to pay off debt. But the rising cost of living is also affecting this sector of the population, as 68% of them have said they had to reduce their expenditure in 2014, up from 55% the previous year.

The South African Savings Institute gives a number of reasons for the low savings rate in SA:

* low disposable income growth;
* low employment growth;
* a rising tax burden;
* an inflationary environment; and
* lack of confidence in the future.

The Old Mutual Savings and Investment Monitor published in July 2014 provided some interesting statistics on South African households and their savings and spending habits:

* 65% of income is spent on consumables and living expenses;
* 38% of those interviewed said they were saving less than in 2013;
* 50% believe that death, funeral and disability cover are more important than retirement savings;
* 18% of households in the R40 000+ income category have unit trusts, mutual funds or exchange-related funds;
* 32% of parents are saving for their children’s education; and
* 45% of black households contribute to at least one stokvel per month.

The attitude to retirement savings mentioned above also explains why only 6% of SA retirees are financially independent at retirement. The rest are dependent on their families, friends, or the government, according to the FSB.

The savings rate is determined by looking at household savings, savings in the public sector and savings in the corporate sector. According to stats from the Reserve Bank, both the public and private sector were actually ‘dis-savers’ (borrowing more than they were saving) and the corporate sector was the only net contributor to gross savings. But that, at 4.2% was also not as high as it could be, according to the South African Savings Institute.

The reasons they give for this low rate in the corporate sector include the following:

* a lack of profitable investment opportunities;
* high cost of capital;
* labour market inflexibility;
* high corporate taxes; and
* short-term behaviour.

So if and when South Africans do save, what are their priorities? The following statistics from Old Mutual paints an interesting picture, especially as retirement savings and saving for funeral expenses come in at the same rate:

* 43% save for a rainy day;
* 37% save for retirement;
* 37% save for funeral expenses;
* 22% save for children’s education;
* 18% save to pay off debt;
* 16% save for home improvements; and
* 13% save for a vehicle.

In an effort to encourage South Africans to save more, National Treasury has introduced the Tax Free Savings Account from 1 March 2015.

Source: fin24


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