Water tariff freeze

The recent announcement by the Minister of Human Settlements, Water and Sanitation, Lindiwe Sisulu, of a tariff freeze preventing the water boards from increasing their charges sounds like a good idea, but it is likely to have serious consequences.

The developmental state debate

The evidence unfolding in the Zondo Commission is illustrating the depth to which corruption has permeated our national political system. The self-evident truth is that state owned enterprises (SOEs) are regarded as crucial vehicles for radical economic transformation (RET). Less evident is the more subtle debate about the developmental state, which, at its core, is about the relationship between the public and private sectors. It is instructive to delve into this matter because it has grave consequences for society in general, and for developers and estate managers who need to ensure that residents have a reliable, reasonably priced water supply.

In the developmental state model, all economic activity is to be driven by the state, in a type of command economy. Water, which is a critical resource needed for all development, was nationalised in 1998 with the implementation of the National Water Act. This act did away with water rights, and replaced them with authorisations that were valid for a specific period, and had to be regularly renewed – with no guarantee that they would be.

In this developmental model, the role of the private sector is reduced to two broad functions – the employment of workers under precisely defined legal conditions that elevates workers’ rights above those of the employers, and the generation of tax to the state.

The effect of this has been a long, slow strangulation of the economy, as the combination of over-regulation and under-capacity by the state has decreased productivity and driven capital flight. With the private sector reduced to these two roles, execution of developmental aspirations has become the responsibility of the SOEs, but many SOEs are not in a good state.

The Zondo Commission is giving us a deep insight into the state of SOEs – not as instruments of development and RET, but rather as vehicles for the distribution of patronage in a system that has become increasingly corrupt. It is in this context that the recent actions by Minister Sisulu, in her ongoing battle with the water boards, should be interpreted.

The independent water regulator issue

South Africa has always had a fundamentally water constrained economy. So the careful development of the resource has been critical for the country’s past developmental aspirations. This has been carried out by the nine water boards that have been responsible for the development of the resource, the treatment of both potable water and waste, and the delivery of bulk water to municipalities.

The nine water boards provide a crucial service to the national economy, and were once considered to be among the best in the world. Rand Water Board, for example, originated during the South African War, predating the creation of the Union of South Africa in 1910. Rand Water is also one of the largest bulk water providers in the world. Sadly, however, all nine water boards have become mired in corruption as the role of SOEs in the dispensing of patronage has usurped their original role as service providers. It is clear that these water boards need to be properly regulated if they are to function effectively – and herein lies the fundamental problem.

Theoretically, the Department of Human Settlements, Water and Sanitation (DHSWS) should be that regulator, but it is also a provider of the water resource management needed by the boards. If one applies any internationally accepted model of sound corporate governance, then it is self-evident that the regulator cannot be both player and referee. The current financial distress is a cumulative result of two decades of inadequate regulation that cannot suddenly be overcome by one intervention, no matter how bold or heroic.

Inappropriate intervention

In a classic command economy posture, but too little too late, Minister Sisulu has dictated to the water boards that they may not increase their tariffs for 2021. This was done, presumably, to show that the Ramaphosa government is taking a hard line on corruption. Sadly, these actions are blind to three simple realities in which the boards are embedded:

• The input cost of bulk raw water will rise between 4% and 14%, depending on where the board is located.
• Electricity costs will rise by at least 8%, and there are serious concerns over the stability of the national grid as the Eskom crisis unfolds in a different arena.
• Labour costs will increase by 6.5%, backdated to July

2020, after an agreement between the nine water boards and the SA Municipal Workers’ Union. The implications of Minister Sisulu’s attempts are dire and will merely highlight the need to establish a credible independent water regulator. The current wage bill for each of the boards is such that it consumes most of the budget. This leaves little cash to fund the infrastructure upgrades that are desperately needed to create reliable service delivery. A salient example of how this impacts municipalities – and people – is Port Elizabeth’s Day Zero scenario, which is largely due to the failure of the Nelson Mandela Bay Municipality to repair a break in the Nooitgedacht Scheme that brings water to the city. This could happen again anywhere in South Africa. The fiscal cliff looms ever larger, driven by the growing cost of patronage and corruption that cannot be met by a declining tax base from a private sector that has been reduced to the role of employer and tax generator in an over-regulated market.

A rather frightening future

In the past, water boards have generally had strong balance sheets, and were able to raise capital on the bond market, but this is no longer viable given the downgrading of investment status by the various ratings agencies. So, the only certainty in this scenario is that water services will continue to deteriorate, and that the infrastructure backlog will grow. The actual cost of water will increasingly bear little resemblance to the tariffs being defined by the state, which will necessitate some intervention – either subsidies must increase, or alternative funding sources must be found. Unfortunately, neither of these is likely under the current scenario, which means that the consumer will be obliged to pay for the increases, either by providing alternative services, or through a deterioration in the quality of the service over time.

This scenario highlights the need to retro-engineer some form of water security in existing estates. For developers, this state of affairs makes it abundantly clear that innovative water harvesting, management and recycling strategies are no longer a nice-to-have. It may well be the management and retention of water that differentiates successful estates from sad, desiccated complexes in the future.