FINANCIAL ARRANGEMENTS THE KZNCMA

FINANCIAL ARRANGEMENTS TASK TEAMJune 13

• Establish well managed, financially sustainable CMAs

• In supporting this implementation it is critical to consider the financial viability of the CMAs, the policy assumptions upon which this is based, and the financial implications for both the fiscus and water users

Purpose of the Financial Analysis and Policy Considerations Document

Presumption that because CMAs can raise water use charges, they should be self-sufficient and that their viability should be assessed according to whether water use charges will cover the total CMA operational costs.

– This implies that CMA viability is entirely determined by affordability (or willingness-to-pay) issues for water users, primarily being farmers, municipalities and industries

Financing of Regulatory Public Entities

There are two fundamental flaws with this approach:

– If users are not willing to pay the full requirements for effective regulation of water resources, the public interest of water management is possibly jeopardised

– It introduces a possible perverse incentive for the regulator to prioritise the allocation of water to those that are likely to pay, with the adverse impacts on equity and redress

Both of these outcomes would counteract the political and social imperatives for decentralised equitable and sustainable water resources management.

Financing of Regulatory Public Entities

• Funding for CMAs will be from WRM charges and the fiscus• Charges should be related to the cost of management for the

direct benefit of users• Costs to ensure water resource management in the public

interest should be borne by the fiscus• The concept of self-sufficient CMAs runs against

international experience and public finance theory and will require fiscal support

• The pricing strategy prevents cross-subsidisation and shortfalls in affordability should be supported by the fiscus

Principles for CMA funding

• The recovery of relevant costs from water users is critical to promote local “ownership” of the CMA

• Charges should be collected from all water users that receive a benefit or require CMA management

• Affordability to all users must be considered • CMAs have a mandate to regulate water resources in the public

interest and to achieve government’s political, social and environmental objectives (in ways that may not directly benefit water users), so this mandate should be financially supported

• The costs associated with establishing or developing a new public entity should be supported by the fiscus, while DWA must transfer funding for the CMA before revenue collection is delegated

Principles for CMA funding

Sources of Finance• Section 84 of the National Water Act (NWA) gives the CMA full authority to

raise funds for the purpose of exercising its powers and duties as an original function from the time of establishment.

• The Act details the possible sources of funding for the CMA as:– Parliamentary appropriation– Water use charges– Money obtained from any other lawful source, including:

• recreational concessions,• license application fees,• donor support and sponsorship,• contractual payments,• return on Investment, and• in-kind contributions.

FINANCIAL VIABILITY

The establishment of the CMA can be thought of occurring over three stages:

• Initial functions• Consolidation and implementation functions• Responsibility functionsInitial functions• The initial (proto-CMA) functions in first 2 years should be mainly

funded through water use charges, except for some key institutional establishment processes and initial projects such as the catchment management strategy development.

FINANCIAL VIABILITY

Financial Arrangements

•Sources of Finance•Flow of capital•Financial systems arrangements•Financial analysis Public interest functions of a CMA accounts for about 35%

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The primary source of finance for the CMA: water use charges

Water uses as defined in the NWA:

– Abstraction related uses- Section 21 (a), (b) and (d) of the NWA (1998)

– Waste discharge related uses Section 21 (e), (f), (g) and (h) of the NWA (1998)

– Non-consumptive uses Section 21 (c), (e), (i), (j) and (k) of the NWA (1998)

CMA to levy charges for most of the water uses, after consultations with stakeholders. Charges in place: abstraction related uses; collected by DWA.

Water Use Charges and the Pricing Strategy

Water Use Charges and the Pricing StrategyStrategy has been developed for charging for recreational use, as a non-consumptive water use

The Waste Discharge Charge will be piloted in three catchments

Water uses that are not subject to charges under the Pricing Strategy. •water use under Schedule 1 of the NWA,•basic human needs (Reserve),•ecological sustainability (Reserve), andinternational obligations

Financial support

National strategic interest•large inter-basin transfer to the VaalWater allocation reform and redress within the WMA • affordability and equity Short to medium term until adequate cost recovery •capping of water use charges •ability-to-pay and willingness-to-payBilling and collecting of water use charges •institutional and systems issues require attentionCap on water use charges for agriculture (2c/kl plus CPI increase) and forestry (R10/ha plus CPI increase). Where water resource management costs are in excess of this cap, that portion of the charge in excess be provided as a subsidy transfer from DWA.

3 WMAs in KZN

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THUKELA WMA

USUTU TO MHLATHUZE WMA

MVOTI TO UMZIMKULU WMA

SWAZILAND

LESOTHO

INDIAN OCEAN

KWAZULU NATAL

MPUMALANGA

FREESTATE

EASTERN CAPE

Ixopo

Dundee

Ulundi

Eshowe

Howick

Weenen

Utrecht

Vryheid

Nongoma

Glencoe

Melmoth

Colenso

Mandini

Darnall

Tongaat

Kokstad

Hlobane

Pongola

MtunziniEstcourt

Greytown

Wartburg

Richmond

Ramsgate

Empendle

Newcastle

Louwsburg

Mtubatuba

Ladysmith

Bergville EmpangeniWinterton

Salt Rock

Himeville

Creighton

Amsterdam

Mooirivier

ScottburghCedarville

Piet Retief

Richards Bay

Umbogintwini

Zinkwazi Beach

Port Shepstone

Paulpietersburg

Blythedale Beach

Pietermaritzburg

St Lucia

Durban

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50 0 50 100 Kilometers

Financial flow Large users water users billed monthly and smaller users six-monthly

Kwa-Zulu Natal collection in the order of 75%.

Direct relationship between stakeholders , CMA will quickly improve upon these levels of collection.

CMA will require an establishment grant to cover all costs during the first 2 years,

Water use charge billing and collection is transferred from DWA to the CMA.

A 3 year budgetary cycle needs to be put in place for on-going operational support grants required by the CMA to make effective planning and execution possible.

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Organisational establishment costs include:• Appointing a governing board and initially building its capacity (additional to the

cost of the Board operations and administration covered in the CMA expenditure) as well as including change management processes;

• Setting up the CMA business and information management systems to enable its operation, including the first business plan and human resources strategies;

• Setting up the CMA in terms of appointing or transferring its initial staff complement and developing the first revised business plan; and

• Initial capital expenditure on communications, computers and obtaining/remodelling premises.

Initial WRM costs include:• Extending stakeholder participation, initial empowerment/capacity building of

disadvantaged communities, and awareness creation around WRM and the CMA establishment; and

• Developing the first catchment management strategy for the entire WMA (an initial function of the CMA

Organisational establishment costs include:• The outsourcing costs relate primarily to the implementation and consultancy

projects typically

– Water resources planning: including the CMS and other planning studies– Water use: including verification & validation and other licensing studies– Water management: including water conservation demand management

implementation– Institutional cooperation: including convening catchment forums and WUA

engagement– Information technology: developing water and corporate information systems– Corporate: developing corporate systems and financial management systems

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Financial analysis

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Calculated expenditure, differentiating salary, overheads, outsourcing and capital repayment costs, with recovery through a combination of water use charges and financial support

CMA ExpenditureAssumption: fully functional after 6 years with 6% inflation per annum. When the CMA is fully functional, expenditure will be approximately R 96 million per annum.

TOTAL Costs (‘000) 2 013 2 014 2 015 2 016 2 017 2 018 Governance Board R348 R795 R843 R893 R947 R1 004Office of the CEO Staff R2 713 R2 877 R2 878 R2 879 R2 880 R2 881

Institutional cooperation Staff & Outsourcing R0 R7 874 R9 039 R15 319 R15 939 R16 595WR Planning Staff & Outsourcing R0 R4 125 R11 432 R11 638 R11 856 R12 087Water Use Staff & Outsourcing R0 R8 480 R9 379 R14 000 R14 559 R24 342Water Management Staff & Outsourcing R0 R7 020 R9 388 R13 812 R17 456 R18 023

Corporate (admin & finance) Staff & Outsourcing & Overheads R3 537 R5 033 R6 522 R9 695 R12 091 R13 934Information Staff & Outsourcing R0 R1 285 R2 635 R4 927 R7 007 R7 229 TOTAL COSTS R2 554 R37 490 R52 116 R73 164 R82 734 R96 095Staff R4 044 R22 415 R27 279 R39 255 R45 023 R53 780Outsourcing R0 R11 640 R20 009 R26 291 R28 980 R32 100Overheads R2 554 R3 436 R4 828 R7 619 R8 731 R10 215

Financial Arrangements

Projected revenueThe CMA costs estimated above must be covered by user charges (under the pricing strategy) and/or by transfers from the fiscus (via DWA budgetary process), although other donor transfers for specific initiatives may be possible. The scenarios relate to:•No financial support: funding only through water use charges, with different assumptions about users and billing recovery rates•Charge-capping operating subsidy: DWA transfer for lost income related to the policy of capping water use charges to agriculture and forestry.•Public-interest operating subsidy: DWA transfer for functions performed by the CMA that are in the public interest, rather than for direct water user benefit.In all of the scenarios, the CMA costs were fixed (at 2012/13 prices) as was the estimate of registered water use

Financial system arrangement:

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DWA will collect revenue and allocate funds within DWA to the CMA (from the Trading Account).

Consolidated invoice and centralised management of the system, are appropriate.

All risk is borne by DWA and this is supportive of a fledgling CMA.

Customer-oriented organization , credibility and legitimacy At this stage of development of the CMA, the billing and

collection cycle will be split between the CMA and DWA as follows:

The CMA will take over the customer relations responsibility, begin to set water use charges and undertake revenue collection.

Financial system arrangement:

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DWA will ensure that the CMA has access to key systems

such as WARMS that assist the CMA with issues regarding registration of water use

The centralised DWA SAP system will be used for billing, debt management and financial accounting, with WRM charges submitted to DWA by the CMA.

Transfers from the trading account and the DWA main account will be made to the CMA account according to the arrangements agreed to in the CMA business plan.

These transfers will include funds generated through WRM charges, establishment support funds from DWA and any requisite operational support.

Projected revenue

Water Use

Name TOTAL Urban Agriculture Forestry

Pongola-UMzimkhulu 1917 940 813 163

No financial support: Water use chargesThe registered water use for urban (domestic-industrial), agriculture (irrigation) and forestry (streamflow reduction activities) totals 1917 million m3/ annum and excludes a transfer out of the WMA of 297 million m3/ annum. Water use volumes per sector (million m3)

Projected revenue

Full cost recovery through charges

Year 1 2 3 4 5 6

Total CMA costs 4202 35399 60506 74352 78782 84547

WRM charges (c/kl) 0,22 1,85 3,16 3,88 4,11 4,41

While it is possible to have the CMA fully self-sufficient, it is an unlikely scenario due to a number of reasons. The first is that the CMA would not be able to collect 100% of the charges, especially from year 1 and therefore requires an establishment subsidy to cover the first 2 years of costs. Since current collection is between 40-80% of charges, The second is that there is currently an agricultural cap of 2c/kl, and the current charges when the system stabilises is more than double the cap amount. Full cost recovery and user charges

Projected revenue What are the Implications of maintaining the WRM charge cap on agriculture and forestry, which is set at 2c/kl for the 2012/13 financial year (increasing by CPI).

The analysis is based on including the establishment grant and water use charges for full cost recovery, except that there is a need for a charge-capping subsidy to be transferred to the CMA upon delegation of the charge collection function. This scenario partially addresses the affordability issue for agriculture and forestry, but would need to be implemented concurrently with subsidisation and/or management of under-recovery over the medium term.

It also implies that municipal users pay over 100% higher charges that agriculture, which may lead to conflict between users with some negative impact for the CMA in the long-term.

Establishment grant andAgricultural capping

Year 1 2 3 4 5 6WRM charges for all groups (except agriculture)(c/kl) 0 0 3,51 4,31 4,57 4,90WRM charge for agriculture (c/kl) 2 2 2 2

Establishment grant (R'000) 4202 35399 Agriculture grant (R '000) 0 0 14721 22557 25065 28328

Projected revenue

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Public Interest Operating SubsidyYear 1 2 3 4 5 6WRM charge (c/kl) 0 0 2,28 2,80 2,97 3,19

Establishment grant (R'000)420

2 35399

Public Benefit grant (R '000) 21177 26023 27574 29591

Public interest operating subsidy CMA functions from the fiscus The current situation where a part of the total DWA Regional Office proto-CMA costs are not allocated for recovery by WRM charges.

The operating subsidy level of R29, 5 million per annum required at full functionality is similar to the subsidy required for the agricultural capping.

The major difference is that the benefit is distributed among all water users, with a reduction in charges from 4,41c/kl to 3,19c/kl.

Financial support to the CMA. .Aim is to make the CMA financially self sufficient, the reality form of fiscal financial support

The establishment grant is required to ensure that the CMA is set up

The agriculture grant is a policy cap to ensure affordability in the agriculture and forestry sectors.

The public benefit grant is an optional grant as it provides for a more equitable reduction in charges and covers charges which are in the public interest.

Year 1 2 3 4 5 6

Establishment grant (R'000) 4202 35399 0 0 0 0Agriculture grant (R '000) 0 0 14721 22557 25065 28328Public Benefit grant (R '000) 0 0 21177 26023 27574 29591

Total subsidy per annum (R'000) 4202 35399 35898 48581 52639 57919 WRM charge (c/kl) 0 0 2,28 2,80 2,97 3,19WRM charge for agriculture (c/kl) 0 0 2 2 2 2