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.”
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 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 cover 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”.
Brought to you by Moneyweb