THE NATIONAL WATER ACT, 1998 - A PRICING STRATEGY FOR RAW WATER USE CHARGES

A STRATEGY DOCUMENT

FINAL DRAFT December 1998

Department of Water and Sanitation

We all advocate that measures be put in place that ensure long-term water security in South Africa. The challenge is to achieve this in as fair a way as is practicable. The legal foundation for water pricing has already been provided in the National Water Act, 1998. This document provides a strategy for its implementation.

Water is a limited resource in South Africa. In using it, we have obligations to meet basic human needs; the requirements for basic ecological functioning; the legitimate needs of our neighbouring countries; and the redressing of the extreme imbalances with which water is now allocated. Furthermore, when we talk of "water" in this way, we have to think in terms of water of an appropriate quality.

One of the most difficult aspects of managing these obligations is a water-pricing strategy. There can be no doubting the fact that the pricing of water can make a substantial contribution to the efficiency with which we use water, the equity with which we share water, and the sustainability of our water reserves.

This strategy document therefore is an attempt to find a better way to ensure that the pricing of water contributes to long-term water security. Interested parties are urged to study these draft proposals, and respond in a timely fashion, so as to ensure that we understand your perspectives on what is being proposed.

The measures that we are advocating here are designed to be in the enlightened self-interests of all South Africans. A finely-tuned management of water will have immense developmental benefits, and will be a major factor in establishing the quality-of-life prospects of all South Africans.

Ultimately, too, each of our own quality-of-life prospects is tied up in those of our fellow citizens.

Government’s role has to be fair and equitable in treating all sectoral interests. It is the responsibility of all of us to be efficient in our use of resources. If together we can find a practicable, manageable way in which to allocate tariffs to these ends, we shall all be richer.

Professor Kader Asmal, M.P.

Minister of Water and Sanitation

TABLE OF CONTENTS

2.1 Factors Influencing Supply

2.2 Factors Influencing Demand

3.1 Supply-side Versus Demand-side Management

4.1 Social Equity

4.2 Ecological Sustainability

4.3 Financial Sustainability

4.4 Economic Efficiency

5.1 Introduction

5.2 Definitions of Water Use

5.3 Pricing Strategy for Water Use

5.3.1 Funding water resource management

5.3.2 Funding water resource development and use of waterworks

5.3.3 Achieving the equitable and efficient allocation of water

5.4 Transparency and Accountability

6.1 Introduction

6.2 Phasing in the Various Charges

7.1 Discharge of Waste (Section 56(5) of the Act)

7.2 Municipal Sector

7.3 Industrial and Mining Sector

7.4 Irrigation Sector

7.5 Streamflow Reduction Activities

7.6 Non-consumptive Use of Water

7.7 Licensing and Registration Fees

1.    Introduction

The broad principles underlying the new approach to the pricing of water use are already reflected in the White Paper on a National Water Policy for South Africa, and in the National Water Act, 1998. This document expands on those broad principles, in a manner consistent with the provisions of the new Act, and provides a framework and detailed proposals for implementing the new pricing strategy for water use.

The new approach is concerned with pricing the use of water from South Africa’s water resources, and not with the pricing of water services. Water services, including the pricing thereof, have been dealt with separately in the Water Services Act, 1997. In other words, the new approach deals with first tier water, i.e. the use of water from the water resource. It does not deal directly with second and third tier water, i.e. water supplied in bulk (often by water boards) and distributed to households (usually via a municipality), except for water supplied by Government water schemes. The new approach deals with all first tier water: state and private schemes, as well as ground and surface water.

2.    Water Supply and Demand

In formulating such a new water pricing strategy, it will be necessary to meet the challenges presented by the existing and growing imbalances which exist between the supply of and demand for water in South Africa. The increasing gap between supply and demand has been confirmed by studies carried out by the Department of Water and Sanitation (DWAF), which indicate that the quantity of remaining surface water resources available to meet South Africa’s needs within the most important water catchments will be adequate only until the year 2030 if the present usage patterns and tariff structures are maintained.

2.1   Factors Influencing Supply

There are a number of factors that influence the supply of water in South Africa. These include the fact that:

much of the country is semi-arid with relatively low rainfall; rainfall patterns are erratic, i.e. not consistent in terms of the parts of the country or the time of year in which it falls; regions of high runoff are often situated away from areas of maximum water demand; the country’s groundwater - which is often the main source of supply of water in rural areas - is limited and often of poor quality.

2.2    Factors Influencing Demand

On the other hand, the demand for water in South Africa is growing. Factors that contribute to this growth are:

the high population growth rate; rapid urbanisation; economic development; demands for higher levels of service (such as in-house water rather than communal standpipes); the need to sustain ecological systems; and the drive to provide accessible, drinkable water for everyone in the country.

In the past, the growing demand for water has been accommodated by increases in supply. New dams and transfer schemes have been built to make these increases possible. However, the most easily accessible water sources will soon all have been fully utilised, and it will be necessary to go ever further afield to find new ones. In the future, unless demand patterns are dramatically altered, it will become necessary to import water from neighbouring countries if they are agreeable, or to resort to the desalinisation of sea water. These new supplies will be expensive, and their rising costs will have to be borne by all water users.

3.    Addressing The Problem

3.1 Supply-side Versus Demand-side Management

There are essentially two ways in which the increasing gap between the demand for and supply of water can be closed. The first involves supply-side management, which simply means continuing to expand supply to meet ever-increasing demand. We have suggested above, however, that this would result in significant increases in the cost of water as less favourable sources further afield have to be developed. These rising costs would ultimately have to fall on all water users.

Before these costs are incurred, it is important to make sure that the water that is already available is used efficiently and not wasted. This is best achieved by introducing demand-side measures to manage our water resources. By encouraging all water sectors to use water more efficiently, demand-side management provides a more sustainable long-term solution to the problem of water scarcity than do supply-side measures, because it takes into account the value of water in relation to its cost of provision, thereby treating it more like a commodity.

It is important to note that the focus on demand-side issues does not imply that important supply-side initiatives, such as catchment management (and dealing with unaccounted-for-water), will be neglected in the new approach to water resources management. The optimal solution to address the problem is to apply integrated water resource management, involving supply-side as well as demand-side measures.

4.    The Objectives That Shape The New Pricing Strategy

The following objectives are of equal importance in formulating the new pricing strategy:

• Social equity
• Ecological Sustainability
• Financial Sustainability
• Economic efficiency

Each of these are elaborated upon below. These objectives are incorporated into the implementation of the new pricing strategy, which is discussed in Section 5.

4.1 Social Equity

Apartheid policies distorted the provision of water supply services, so that today more than 12 million people do not have adequate supplies of potable water. Apartheid also generated a biased approach to water resource management, and allocation was never merely an economic matter, but a socio-political one. Government water policy, and in particular the provision of subsidies (including those associated with the provision of irrigation water), resulted in considerable advantages to large, mainly white commercial farmers at the expense of emerging black farmers and smallholders. The pricing strategy for water use charges will achieve social equity by redressing the imbalances of the past, both with respect to adequate access to water supply services and with respect to direct access to first tier water.

4.2 Ecological Sustainability

South Africa is committed to following a path of development that is environmentally sustainable. In the case of water, this requires that the availability and quality of water resources inherited by future generations should be adequate to ensure human well-being and the maintenance of ecosystems. As part of overall water resource management, this means that we need to ensure that our levels of water consumption, use, and pollution, as well as the associated infrastructure to impound, supply, treat and dispose of the water, do not cause either unacceptable or irreversible impacts on the population or ecosystems.

The following principles underlie ecological sustainability in the water pricing strategy:

• The water needs for the effective functioning of all ecosystems must be protected. The water required for this purpose refers to both the quantity and quality of water in the resource and is called the ecological reserve. It must be safeguarded and not used for other purposes.
• There is a cost associated with the ecological management of the catchment, and this should be paid for by all the users of the resource.
• To preserve water quality, point and diffuse sources of pollution should be discouraged through identification of control methods that are more effective than those presently in use. This requires the adoption of instruments such as a "polluter pays" approach to the generation of pollution. The underlying philosophy of the ‘polluter pays’ principle is to get the polluter to internalise the environmental cost of pollution.

4.3 Financial Sustainability

The methods that have been used by DWAF to finance major bulk raw (i.e. first tier) water schemes in the past are not financially sustainable for a number of reasons. First, inflation was not taken into account, resulting in a decline in the value of tariffs over time in real terms. Second, no provision was made for refurbishment. And third, no provision was made for asset replacement.

A new financial framework is required to accommodate the water sector’s increased need to be financially autonomous, to attract greater contributions to its development from the private sector, and to be financially accountable and sustainable.

In the new approach to water pricing, it is proposed that the full financial cost of supplying water should be recovered from water users, including the cost of capital. The new approach represents a step towards compliance with Generally Accepted Accounting Practice (GAAP). Full compliance is not possible under existing institutional arrangements in the water sector, but should be seen as a longer-term goal.

4.4 Economic Efficiency

Economics is concerned with the optimum allocation of scarce resources between competing uses. This applies equally to the capital resources used in the development of water infrastructure (i.e. dams, reservoirs, pipelines, etc.), and to natural resources such as water. In theory, meeting the goal of optimum resource allocation requires that goods be priced at their opportunity cost, which is simply the value of goods forgone (including environmental goods and services), when a scarce resource is used for one purpose instead of for its next best alternative use.

This has implications for both the pricing of water infrastructure assets (and hence for the cost of capital) and for the pricing of water resources. The former is discussed in more detail in section 5.3.2, which deals with the funding of water resource development and use of waterworks. The latter is discussed below.

If South Africa’s water resources were abundant, there would be no need to consider attaching a price to the water resource itself. However, the need for water conservation and management of demand in conditions of growing scarcity is an important and increasing focus for water policy.

Ensuring an efficient allocation of the country’s scarce water resources requires that the price of the resource be set to reflect its scarcity value. Failing to price water at its scarcity value can result in two kinds of misallocation of water:

• an inadequate incentive to conserve water. The resultant over-use necessitates the expansion of infrastructure prematurely, tying up the country’s limited capital resources when they could be better utilised for other purposes.
• some water being used for low-value purposes. This imposes an opportunity cost in that this same water cannot be used for alternative, high-value purposes. Without an economic charge, there is no basis for competition for water supplies between low- and high-value uses, and thus no mechanism to shift available supplies from the former to the latter.

In the context of water scarcity, an argument can be made for the introduction of economic incentives in water-stressed catchments to encourage the conservation of water and its shift from low to higher value use. This can be done administratively or by using market-related mechanisms.

5.    Implementation of the New Pricing Strategy

5.1 Introduction

The pricing strategy follows from the four objectives already discussed. It aims to achieve in a coherent manner the efficient and cost-effective allocation of water, equity and fairness in the allocation mechanism, and long term sustainability of the natural environment.

The starting point for the pricing strategy is the catchment. It begins with an estimate of the utilisable water available in a catchment. This will be derived from hydrological models of the rainfall/run-off/storage relationships for the catchment. From this amount three claims on water will be deducted.

The three claims are as follows:

• Basic human needs. This represents the first component of the Reserve, and provides for the essential needs of individuals served by the water resource concerned and includes water for drinking, for food preparation and for personal hygiene. Since water for basic human needs constitutes a small portion of water demand, and schemes are built mainly to provide water for economic use, it is appropriate that the DWAF makes the first tranche of 1^st tier water (equivalent to that portion required to meet basic human needs, defined as 25 liters per capita per day) available free of charge to 2^nd and 3^rd tier water suppliers. The objective of providing a portion of the 1st tier water free of charge would be to promote the application of lifeline tariffs at the 3^rd tier, which would ensure that all South Africans can achieve fair access to basic services (Section 56 (6) (c) of the Act).

Water for meeting basic human needs should thus be considered as a system cost, and will therefore be borne by all the economic users of the system. It is important to note that the subsidisation of the resource cost of 1st tier water (as it travels through to the 3^rd tier) should not be considered as a subsidisation of the operation and maintenance costs of the 3^rd tier provider of potable water supplies. Third tier costs must be borne in full by the 3^rd tier provider of potable water supplies.

Therefore, even if DWAF makes the first tranche of 1^st tier water available free of charge to the 3^rd tier water supplier, it does not imply that such water will be free to the consumer. It is however intended that the DWAF will, through the proposed regulations in terms of the Water Services Act, require local government to set the basic water supply at the lowest amount possible.

• Long-run ecological sustainability. This represents the second component of the Reserve, and refers to the water (quantity and quality) required to protect the aquatic ecosystems of the water resource. The DWAF will determine what these needs are, using appropriate models. In some catchments it may be necessary to reduce other uses of water below their present levels in order to provide the required ecological reserve. It is important to note that this claim does not include environmental purposes beyond the ecological reserve. For example, environmental "needs" which simply enhance the real estate value of a property (e.g. a private dam) will not be considered as necessary for long-run ecological sustainability and will not, therefore, be exempt from the pricing strategy.

• International obligations. The water requirements to meet South Africa’s commitments regarding international waters will receive similar priority, save where specific agreements have been reached concerning the pricing and supply of water to neighbouring countries.

The water that is available once these claims have been met can be allocated within and across catchments (i.e. inter-basin transfers) between competing water users. This water will be classified as economic use of water and is subject to pricing.

 

5.2    Descriptions of Water Use

Section 56 of the National Water Act instructs the Minister to establish a Pricing Strategy for charges for any water use described in Section 21:

(a) taking water from a water resource;

(b) storing water (i.e the water lost due to evaporation of such stored water);

(c) impeding or diverting the flow in a watercourse;

(d) engaging in a stream flow reduction activity (i.e. land-based activities which significantly reduce streamflow);

(e) engaging in a controlled activity (i.e. activities having a detrimental impact on water resources);

(f) discharging waste or water containing waste into a water resource;

(g) disposing of waste in a manner which may detrimentally impact on a water resource;

(h) disposing of water which contains waste from any industrial or power generation process;

(i) altering the bed, banks, course or characteristics of a watercourse;

(j) removing, discharging or disposing of water found underground;

(k) using water for recreational purposes;

It is important to note that the long term objective of the Department of Water and Sanitation is to systematically consider each of the 11 water uses defined above and to decide if and how each one should be priced and charged for. It is acknowledged, however, that it is not feasible to consider developing a pricing strategy for all water uses in a short period of time. For example, while the management of diffuse sources of water pollution and the development of a comprehensive waste disposal charge system are likely to be important components of a future pricing strategy, they cannot realistically be fully implemented in this "first round" of pricing strategy initiatives. The pricing strategy must therefore be seen as a process that evolves over time; it begins by prioritising those uses of water that are likely to generate the most significant and long-lasting impact on South Africa’s scarce water resources.

The intention is to include the establishment of charges only for those water uses which can be expressed in volumetric terms regarding annual quantities abstracted, stored or reducing streamflow in the initial pricing strategy. This relates to the uses specified in section 21 in the following way:

• Uses (a) and (b) as quantified in volumetric terms, including estimated evaporation losses from the water surfaces of dams.

• Use (c) only as far as the generation of hydro-electric power is concerned, by making use of water released during the normal operation of State-owned infrastructure and without altering the flow regime of water resources.

• Use (d) with reference to the quantified average annual use of forestry plantations for commercial purposes (Section 36 of the Act).

• Use (e) will not be covered under the general pricing strategy, but such controlled activities are, however, subject to authorisation, which may include conditions of payment for the use of water.

• Uses (f), (g) and (h) will not be covered under the initial pricing strategy. A pricing strategy is being developed for waste disposal and will form the subject of a separate future publication and consultation process in terms of section 56 of the National Water Act. The initial pricing strategy will only address the implementation of a charge to recover the administrative cost of water quality management.

• Use (i) will not be covered under a general water pricing strategy, but applicable water use charges will be imposed during the authorisation process.

• Use (j) will be covered in relation to the use of underground water and the dewatering of mines.

• Use (k) will be covered as far as the impoundment of water for recreational purposes is concerned.

5.3 Pricing Strategy for Water Use

In terms of the Act, the Minister may, with the concurrence of the Minister of Finance, from time to time by notice in the Gazette, establish a pricing strategy for charges for any water use (S 56 (1)). This pricing strategy may contain a strategy for setting water use charges-

• for funding water resource management (S 56 (2) (a));
• for funding water resource development and use of waterworks (S 56 (2) (b));
• and for achieving the equitable and efficient allocation of water (S 56 (2) (c)).

Each of these are discussed in more detail below. The pricing strategy can only be applied to catchments or schemes where annual water use has been registered or licensed. In the process of registration an assessment will be made of the average annual volumetric use of all water users in accordance with regulations to be promulgated. The database of registered annual volumetric use, as well as the estimated growing demands of water users supplied from Government waterworks, will form the basis on which unit sectoral charges will be calculated for each catchment or scheme. The end user sectors for which unit sectoral charges for 1^st tier water will be calculated and announced annually on a catchment basis are the following:

• municipal
• industrial and mining
• irrigation
• streamflow reduction activities

5.3.1 Funding water resource management

Resource management expenditure relates to those activities that are required to regulate, manage and maintain the water resource or catchment. These costs differ from overheads in that they are not related to water sold from individual schemes but are rather the costs related to the management of all water within a water management area as defined in terms of the national water resource strategy (Chapter 2, Part 1 of the Act). These can include the costs of the following functions to be performed by the Department and/or water management institutions exercising delegated or assigned powers under the National Water Act:

• Planning and implementation of catchment management strategies in terms of Chapter 2, part 2 of the Act.
• Monitoring and assessment of water resource availability, quality and use.
• Water quantity management, including flood and drought management, water allocation and control over water abstraction, storage and other water uses, and to promote the beneficial use of water.
• The evaluation and processing of water use licensing and registration applications.
• Water resource protection, water quality management and water pollution control.
• Water conservation and demand management.

Initially, water resource management will continue to be the task of the Department of Water and Sanitation. However, the National Water Act clearly states that the intention is to create Catchment Management Agencies (CMAs) in a staged and progressive manner and to delegate or assign significant water resource management functions to these bodies. The activities of the CMAs will be funded from the water resource management charges, which may be made by and are payable to the relevant CMA. In water management areas where not all catchment management functions have been delegated to CMAs, the relevant CMA will collect charges, and funds due to the DWAF will be passed on to the Department.

To deal with the determination of charges for water resource management, the DWAF’s budget has been restructured to contain an Integrated Catchment Management Trading Account providing for the allocation of Departmental costs and collection of revenue with regard to the following main activities, under which headings the functions mentioned above can be grouped:

• Functional support (from regional offices), involving indirect costs or overheads.
• Planning and implementation of catchment management strategies. This activity includes the cost of establishing CMAs and the development of a catchment management strategy for a particular catchment within a water management area.
• Dam safety control. These activities are defined in the National Water Act and are conducted to ensure the safeguarding of human beings and their material belongings against the failure of storage dams.
• Water quality management. This activity entails the water quality protection of aquatic ecosystems and the management of return flows and the receiving water quality of all users to enable the sustainable fitness of use thereof.
• Water utilisation. This activity entails water quantity management as defined above.
• Water conservation (including the Working for Water programme). The Working for Water programme entails the eradication of water consuming invasive vegetation and waterweeds in water catchments, with the view of enhancing the in-stream water availability for relevant water users, and thus the postponement of the creation of additional storage for meeting increasing water demands. This activity also includes demand management, which comprises measures to reduce the user demand for water, and the assessment and monitoring of sectoral demands.

The annual budgets for the listed activities can include the costs of the regional departmental personnel and administrative expenditure, consulting services and work performed by contractors.

The determination of water resource management charges will proceed in the following manner:

• Cognisance will be taken of water management areas to be established in terms of the national water resource strategy, within which the DWAF and/or CMAs will conduct integrated catchment management. The determination of water management areas will be the subject of a separate public consultation process.
• Catchments or sub-catchments will be selected within the said water management areas to which water resource management costs must be allocated to facilitate the imposition of equitable sectoral charges.
• Water resource management activities to be conducted in the catchments, in line with the restructured budget, will be determined.
• Costs will be allocated during the budgetary process to water resource management activities in each catchment.
• All user sectors to which activities apply, will be identified per catchment.
• The total estimated annual water use of each user sector, as well as the quantity of water to be supplied to another catchment via an inter-basin transfer scheme, will be determined per catchment. This will be done over a period of time, on the basis of individual registered and licensed water uses for an as yet underutilized catchment. This could mean an initial deficit which will be phased out over a period of time. An estimate will also be made of the basic human needs requirement for the municipal sector, which will not be subject to first tier pricing.
• The inter-basin transfer of water from one water management area to another will result in a reduction in the quantity of water available for use in the donor area. Consequently, the potential for generating funds from water use charges for water resource management activities will be reduced in the donor area. The management costs are unlikely to be proportionally reduced. Conversely, the receiving area will be able to raise additional water resource mangement charges on the use of the transferred water. Under these circumstances some of the charges raised in the receiving catchment will be transferred to the donor catchment for water resource management purposes. The amount to be transferred will need to be determined for each individual case by the catchment management agencies concerned.
• The costs of water resource management activities and any input cost related to the inter-basin transfer of water will be allocated to user sectors using an equitable allocation base, taking into account the relative detrimental impact of the relevant water use on the water resources in the catchment, as well as benefits accruing to the various user sectors by executing the activities. Cost allocation will differentiate between activities in that the cost of certain activities will only be borne by some, and not all, user sectors.
• The apportionment of activity costs will be done pro-rata to the average registered, licensed or estimated annual water use of sectors benefiting from the activity. The water resource management activity costs to be borne by individual user sectors will be determined as follows:
  • Municipal sector ? This sector will attract all activity costs in a catchment, but only in proportion to their "economic" use of water (i.e. excluding basic human needs) in relation to total estimated annual "economic" use.
  • Industrial and mining sector ? This sector will attract all water management activity costs per catchment pro rata to its share of total "economic" use in the catchment.
  • Irrigation sector ? This sector will attract all water resource management activity costs pro rata to "economic" use, except those related to water quality management.
  • Streamflow reduction activities ? Afforestation, being the only declared streamflow reduction activity at this point in time, will attract costs allocated to the activities of functional support, planning and implementation of catchment management strategies and water utilisation, pro rata to total "economic" use in the catchment.
• A differentiated subsidy policy will be applied to determine annual costs to be recovered from the various user sectors and water polluters. In this regard, standing agreements with regard to the subsidisation of existing tariffs will form part of the initial pricing strategy. The National Water Act also makes provision in clause 56(3)(e) for the waiving of charges in respect of certain water users. This is described in more detail in section 7 below. Sectoral charges will be determined by dividing recoverable sector costs, per activity, by the registered or estimated annual volume consumption for the sector. Water sales accounts of registered water users where water is not accurately measured will be determined by the billing system, by multiplying the relevant sectoral unit charge by the registered or estimated volume of water. For users supplied from State schemes, or in the case of institutions where water use is measured, accounts will be based on actual use.

 

5.3.2 Funding water resource development and use of waterworks

Water resource development and use of waterworks relate to those activities required to fund the development, operation, maintenance and betterment (improvement) of State water schemes. Water resource development costs and use of waterworks costs are discussed in turn.

Water resource development costs (i.e. capital costs)

In terms of section 56 (2)(b) of the National Water Act, 1998, water resource development costs can include the related costs of investigation, planning, design and construction of water schemes, which constitute the capital cost of projects. The most significant departure from the financing methods used by the DWAF in the past can be found in the treatment of capital costs, which are different from all other costs. This is because long term capital investments, such as water schemes, often have a life which extends beyond a financial year. Three common financial approaches can be used for determining the capital portion of the unit cost of water; they are the "funding" approach, the "depreciation" approach and the "rate of return" approach.

• Funding approach. The basic feature of the funding approach is that revenues should be sufficient to cover debt service obligations (interest charges) and the redemption of loans. The funding approach has been widely used by government-owned utilities and is generally more easily understood by government bodies because of the cash-oriented budgeting and accounting system traditionally used by this sector.
• In the depreciation approach, asset values (composed of water infrastructure assets and other fixed assets) are depreciated over their useful economic lives. Depreciation is normally calculated on a straight-line basis over the life of the asset. In an inflationary environment, it is prudent to depreciate assets on the basis of current replacement cost.
• The rate of return approach allows for the earning of a specific rate of return on either the total capital employed (fixed assets base or total assets) or the total financial investment used to finance the facilities used to supply the water. The rate of return is usually related to the governing real interest rate in the economy at the time (or some proxy thereof). Typically, this approach would be applied in conjunction with depreciation accounting.

In assessing these three approaches, it is important to note that current public sector accounting policy is in line with the "funding" approach, namely on a cash basis with strict cost controls against budget. Fund accounting is not consistent with Generally Accepted Accounting Practice (GAAP), and is not favoured by organisations dependent on external investors and lenders. Moreover, the funding approach is problematic in water-scarce countries in that unit costs will decrease when loans have been repaid.

The first tier pricing strategy set out in this document is based on the "rate of return" approach, which is applied together with depreciation. The reasons for this are as follows:

• First, depreciation is a real part of the cost of operating water infrastructure, in that it represents the loss in value of facilities, not restored by current maintenance, that occurs due to wear and tear, decay, inadequacy, and obsolescence.
• Second, the Department of Finance has suggested that where the State has provided funds for the development of a water supply scheme, the State could be deemed to own the scheme and is entitled to a return on its assets. Section 56 (2)(b)(v) of the National Water Act provides for implementing this charge. The return on assets is intended to pay the annual interest cost of debt capital and provide a fair rate of return for the total capital employed to finance water infrastructure. A rate of return (on assets) can be justified from the point of view of there being an opportunity cost associated with the utilisation of scarce capital resources for the development of water infrastructure, and that this cost should be reflected in water tariffs. Moreover, incorporating a return on assets into the cost component would eliminate the need for reverting to the "notional loan" concept, and all its associated problems, used by the DWAF in the past.

Thus, in order to recover fully water resource development costs, the capital component of the unit cost of water will be determined by a depreciation charge and a return on assets charge.

1) Depreciation Charge

Depreciation is defined as the systematic allocation of the depreciable amount of an asset over its useful life and will be applied as follows:

• Depreciation will be applied on a straight line basis, which means that the depreciable amount will be allocated in equal amounts over the useful life of the assets.
• The depreciable amount will be the depreciable portion of the depreciated replacement value, which will be determined in accordance with a revaluation policy whereby water resource assets will be periodically re-valued. Initially, calculations will be based on the figures produced during the investigation into the inventory of assets and financial information relating to Government water schemes which was initiated in 1998.
• Full technical revaluations will be carried out every 5 years. The remaining useful lives of assets and the depreciable portion will also be reassessed during the revaluations. In the intervening years, desk top re-valuations will be carried out annually and will apply the average October to September consumer price index (CPI) to the asset values and thus to the annual depreciation amount.
• The depreciable portion and useful lives over which the asset will be depreciated are determined by qualified engineers and for purposes of initial price-setting, are in accordance with the table below. The technical revaluations will also be determined by qualified engineers.

The depreciable portion and useful lives listed in the table relate to new water resource assets and could change with each re-estimate. The depreciation charge could therefore also adjust with each re-estimate and will be based on the re-estimated remaining useful life.

Component	Depreciable Portion (%)	Estimated Total Useful Life (years)
Dams & weirs Reservoirs Canals Tunnels Pump Stations Syphons & concrete pipelines Steel pipelines Water Treatment Works Buildings	10 100 40 10 40 30 75 30 100	45 45 45 45 30 45 30 45 40

2) Return on Assets Charge

An efficient allocation of scarce capital resources requires that they be priced at the "marginal opportunity cost of capital," or, in other words, the social cost of capital to the country. Since the marginal opportunity cost of capital is a theoretical concept, it will be necessary to approximate this value. A suitable proxy for this, and hence for the desired return on assets, could be:

Real Interest Rate = 5 year moving average treasury rate minus the five year moving average CPI.

The nominal interest rate in any year is set equal to the five year moving average annual treasury rate. Treasury rates are based on the R153 long-term government bond rate (a 15 year bond).

The Department of Finance promotes the use of a five year moving average rather than a fifteen year moving average since this not only reflects the opportunity cost of capital more accurately, but also has a damping effect on interest rate fluctuations.

The return on assets charge will be determined by applying an interest rate (i.e. a percentage) to the current cost (i.e. depreciated replacement value) of water infrastructure assets. It is important to note that the real interest rate discussed above (i.e. the proxy for the marginal opportunity cost of capital) represents a benchmark figure, and the long-term goal for the determination of the return on assets charge. However, application of such a charge in the short- to medium-term is likely to result in tariff increases that are not affordable to the majority of 1^st tier water users.

Thus, for this first phase of the pricing strategy, the return on assets charge will be based on a percentage well below the benchmark real interest rate. In line with Department of Finance guidelines in this regard, a real interest rate of four percent will be applied to the depreciated replacement cost of water infrastructure assets to determine the return on assets charge.

3) Smoothing of water resource development charge

It is important to note that the strict application of a constant interest rate to the depreciated replacement value of water infrastructure would give rise to declining costs over time in real terms (i.e. the depreciated replacement value of an asset is lower in year 2 than year 1). This, coupled to growing annual water demands, could produce declining annual water resource development charges for depreciation and return on assets, which would be problematic from a number of perspectives. First, the notion of declining tariffs would run counter to the principle of efficient pricing of scarce resources. And second, declining tariffs would ultimately lead to significant hikes in tariffs when assets reached the end of their useful lives and had to be replaced.

In order to avoid declining tariffs, it will be necessary on a scheme-by-scheme basis to establish water resource development charges which increase gradually initially from current levels, but which are ultimately constant in real terms. Such an "average" tariff would under-recover during the first few year’s of a scheme’s useful life, building up to full cost recovery and the generation of surpluses (to compensate for the under-recovery years) over time. Given that DWAF schemes are at various stages of their useful lives, under-recovery on any particular scheme will be more than offset by recovery on other schemes. Thus, the DWAF will be in a position to finance deficits on specific schemes from its general revenue base.

Treatment of Reserves

When full cost recovery is achieved, the depreciation and return on asset charges will result in a reserve fund being built up over time. As long as government water schemes are owned by the DWAF, these reserve funds will revert to the treasury. DWAF will establish an accounting system to record the extent and use of these funds. If, however, an alternative institutional model is developed in the future and a national public water utility is established, such reserves would be used by the utility to fund its loan commitments and for new investments in water infrastructure.

Assurance of Supply (Section 56 (4)(b)(iii) of the Act)

In determining tariffs of multi-purpose waterworks, it will be necessary to consider the level of assurance at which water is supplied to the various users in order to allocate capital costs between different users. Users that require a higher assurance of supply, for example, would have to pay a premium for their water allocation relative to those users who require a lower assurance of supply. This will be effected in the following way:

• Water resource development costs of dams will be allocated in proportion to the estimated average annual use of maximum water allocations to the different users/sectors, thus bringing into contention the differential imposition of water restrictions during droughts.
• To accomplish this strategy, sophisticated hydrological risk analyses must be conducted for all State dams. For purposes of the initial pricing strategy, the long term average annual use of the various user sectors shall be considered to be the following percentages of maximum allocations on Government water schemes:
  • Irrigation sector ? 91% (100% for 70% of the time and 70% for 30% of the time);
  • Municipal sector ? 97% (100% for 70% of the time and 90% for 30% of the time);
  • Strategic industrial sector, e.g. Eskom, Sasol ? 100% (no water restrictions would normally be imposed)
• In the case of conveyance structures, the division of capital costs will be done in proportion to the required peak rates of supply to the various sectors.

Pre-financing (Section 56 (2)(b)(iii) of the Act)

It may be necessary to include pre-financing into the tariffs of existing schemes during the development phase of identified future augmentations, upgrades and expansions. This will ensure a smooth price setting process in the long term and the avoidance of sudden and significant hikes in water prices. It is important to note that pre-financing is not a cost per se, but rather the reallocation of costs over time. Pre-financing will also include the direct financing of the annual costs of planning feasibility studies for augmentation schemes, by means of user charges.

Use of waterworks costs

These are the costs, both direct and indirect, that are incurred in the operating of government water schemes. These are broken down between direct and indirect scheme costs.

1) Direct Scheme Costs

These are the fixed and variable costs which can be attributed directly to administering, operating and maintaining a scheme. Direct costs include administration costs, operations and maintenance costs, pumping costs, direct labour and overheads and distribution costs.

2) Indirect Scheme Costs

These are the costs which cannot be directly attributed to a specific scheme, but which contribute towards the management and operation of the water resources of the entire region, and comprise the DWAF regional office costs, a portion of which can be allocated to individual schemes using an equitable allocation base. Indirect scheme costs will be allocated in proportion to the budgeted direct annual costs of the various schemes and water management areas.

Implementing a charge to fund water resource development and use of waterworks

The DWAF has created three separate trading accounts for:

• Bulk supply schemes (could eventually be transferred to water management institutions)
• Integrated systems (national water infrastructure)
• Water services schemes (to be eventually handed over to local government). The pricing strategy contained in this report regarding funding water resource development and use of waterworks, is not applicable to these schemes.

Water resource development and use of waterworks charges will be implemented as follows:

• All Government water schemes or systems and their supply areas will be identified and taken up in the relevant trading account.
• Cost information relating to the water infrastructure assets will be determined. This includes the compilation of an inventory of assets relating to existing Government water schemes and the evaluation of current and depreciated replacement value for each component of the schemes, as well as the expected remaining useful life thereof. Capital costs of new State-funded schemes will include the cost of project planning, design and construction. Direct and indirect costs relating to use of waterworks will be determined as part of the annual budgeting process.
• The maximum water allocations to various user sectors, as well as differences in required assurance of supply, will be determined.
• The annual expected water sales volume per user sector per scheme will also be determined as part of the annual budgeting process for the next financial year. An estimate will also be made of the basic human needs requirement of the municipal sector, which will not be subject to first tier pricing.
• Based on the above information, annual costs will be determined and allocated to user sectors. This will allow the determination of unit costs and thus charges per sector per scheme. The bases for determining and allocating the different costs are as follows:
  • Division of capital costs between sectors ? costs of dams will be divided in proportion to the estimated average sectoral use (i.e. economic use) of maximum allocations, thus taking account of assurance of supply. The cost of conveyance structures will be divided in proportion to the peak rates of supply of maximum sectoral allocations.
  • Depreciation ? Divided capital cost allocations (as above) to different sectors will be depreciated as described above to determine the annual depreciation component per sector.
  • Return on assets ? An interest rate of 4% will be applied to divided capital cost allocations (as above) for different sectors to determine the annual return on assets component per sector.
  • Direct use of waterworks costs ? Sector-specific costs will be allocated directly to the relevant sectors. The cost of joint works will be shared pro rata to the estimated annual sectoral water uses.
  • Indirect use of waterworks costs ? Indirect costs which have been allocated to the schemes will be further allocated to the different sectors in proportion to the direct sectoral costs.

• Once all costs are determined and allocated to sectors and expected consumption values per sector have been determined, charges per sector can be determined. Each sectoral charge will consist of two components, i.e. the water resource development charge and the use of waterworks (O&M) charge.
• In determining the water use charges per sector, a differentiated subsidy policy will be applied. This simply means that the full financial cost will not be recovered initially from all sectors. Standing agreements with representative bodies will be adhered to and the new charges will be phased in progressively within affordability constraints. Proposals in this regard are described in more detail in section 7 below.
• The development charge (depreciation and return on assets) will represent a gradually increasing but ultimately constant real tariff which initially under-recovers on each scheme, but full cost recovery would be reached by the end of the useful life of the scheme, which would ensure that the reserves are adequate to fund the replacement costs.
• Billing to water users on schemes will be based on the sectoral charge and the measured quantity of water actually used or by agreement in the case of integrated systems.

5.3.3 Achieving the equitable and efficient allocation of water

It is important to note that the proposals regarding the funding of water resource management and water resource development and use of waterworks that have been described above will make a significant contribution towards achieving the equitable and efficient allocation of water.

However, in the context of increasing water resources scarcity, it may be necessary to introduce additional economic incentives in order to optimise the allocation of scarce water resources between competing uses. Such economic incentives could be introduced in water-stressed areas; the objective being to shift water use from low to high values.

If it is deemed necessary to introduce economic incentives in water-stressed catchments, this can be achieved administratively (via an explicit charge) or via market-orientated mechanisms.

• Administrative mechanisms. An administratively determined economic charge could be introduced in water-stressed areas; such a charge would be over and above the financial charges (for water resource management, water resource development and use of water works) referred to above. The economic charge would attempt to reflect the scarcity value of water.

The medium-term objective would be to set the economic charge at the "market-clearing" level in each catchment. In areas where there is competing demand but predominantly low-value uses, a "market-clearing" charge could be imposed in order to promote a shift from low- to higher-value use of water. Charges should initially be set at low levels and increased over time. Given that the transition will result in distortions as long as the charge remains below the market-clearing level, it is important to raise the charge to this level as quickly as possible consistent with social and political objectives. The DWAF must assist current consumers to adjust by providing information on the estimated "market-clearing" level of the economic charge and the intended path to that level. The economic charge may well be represented by the marginal cost of the next scheme.

In reality, a catchment wide economic charge may be difficult to implement because its estimation requires information on the value that the marginal (or last) user places on the resource in a catchment. This value is neither transparent nor stable over time and place. Consideration must therefore be given as to how this can practically be applied in South Africa. Moreover, the move towards full financial cost recovery (given the current degree of subsidy, particularly in the irrigation sector) will probably generate a considerable shift to high value use of water, thereby obviating the need for introducing an economic charge immediately.

The development of a pricing strategy for the discharging of waste in terms of section 56 (5) of the National Water Act, 1998, will form part of the process of establishing economic charges in order to promote the efficient allocation of water (see section 7 below).

• Public Auction. This method could be followed in areas which are under water stress (Chapter 4, part 8) and for which compulsory licences have been issued. The issuing of new permits for any remaining water could be effected through a bidding or tendering process for certain catchment or sub-catchment areas. The highest bids or tenders would be awarded the available permits at a price equal to the lowest bid above the cut-off, or, in other words, at the price that clears the market by allowing users to take up the entire available supply. The price established in this manner should be an efficient and economic price for water in that particular area and for the specified water use. The scarcity value of water, which is so difficult to capture by means of an administratively economic charge, would now be implicitly reflected in the bids that are made by competing water users.

Prospective permit holders would thus compete with each other for entitlements, facilitating a move away from the administrative setting of first tier prices towards a market-oriented approach to price determination. The public auction concept stops short of making provision for a fully-fledged water market in that the permits representing water use entitlements would not be traded freely among competing water users.

• Water Markets (Sections 25(2) and 26(l) of the Act). Tradeable water use entitlements involve an extension of the move away from administratively set prices. The advantage of making a water use entitlement tradable, is that it allows for a more efficient user to buy the entitlement from an existing, but less efficient, holder of the entitlement.

The National Water Act, 1998 provides for trading in water use entitlements. The Act recognises, however, that while the trading of entitlements between uses and between catchments may optimise the economic use of water, they may in turn impose considerable external costs on the rest of the local economy. Thus, trading in water use entitlements would have to be subject to some form of control to protect the public interest as opposed to the interests of the contracting parties. The necessary regulations in terms of section 26 (l) of the Act must first be made.

 

5.4    Transparency and Accountability

It is important to note that in establishing the pricing strategy, every attempt will be made to control costs by the application of sound financial management principles such as strict budgetary control. The new pricing strategy embraces the principle of transparency, which of itself should promote cost control. In terms of this principle, the forthcoming year’s sectoral charges that are developed during the budgetary process for each catchment and scheme will be forwarded to regional offices for dissemination and discussion with interested parties. Final sectoral charges will then be formalised and made available to the regional offices for re-distribution to the area offices, prior to the commencement of the financial year.

In addition, a summarised version of the budgeted trading accounts for the forthcoming year, detailing estimated deficits and surpluses of accounts, will be made available at the regional offices for discussion with the representative bodies of stake-holders, prior to the commencement of the financial year. Similarly, after financial year end, summarised trading accounts reflecting actual expenditure and revenue compared to budget expenditure and revenue for the year, will be made available at the regional offices.

6.    Phasing In The New Approach

6.1    Introduction

The starting point for the phasing in of the new pricing strategy is the recognition that there are fundamental differences between water use charges for a) funding water resource management, b) funding water resource development and use of waterworks, and c) achieving the equitable and efficient allocation of water.

It is important to note that while both water resource management and water resource development and use of waterworks charges reflect financial costs, there is a logical difference between the two which requires that they be separated. Water resource development and use of waterworks charges are only levied on the users of specific government water schemes or systems, and are based on the costs associated with that scheme. Water resource management charges, on the other hand, relate to all water utilised within the water management area and should, therefore, be charged to all water users, irrespective of whether water is provided from a government water scheme or not.

Finally, when introduced, a charge for achieving the equitable and efficient allocation of water would reflect not a financial cost, but rather an economic one, the objective of which would be to provide incentives for water to be allocated to those who value it highly. Like the water resource management charge, such a charge would be catchment-specific and would apply in water-stressed areas.

It is clear from the above that a fundamental principle underlying the proposed pricing strategy is that eventually it should apply to all water, not just that which is supplied from government water schemes.

6.2 Phasing in the Various Charges

The phasing in of the proposed water pricing strategy will have to be structured so as to follow the phased implementation of the National Water Act, 1998. The process for phasing in can be summarised as follows:

Water Resource Management Charges

The introduction of water resource management charges will have to proceed more slowly than the introduction of water resource development and use of waterworks charges (see below), as the registration of all water use in water management areas is a pre-requisite for its full implementation. The current situation is that charges relating to the water resource management functions of water conservation (invasive plant and water weeds removal) and water utilisation (abstraction, storage and afforestation permit control) have already been introduced for water users at Government water schemes. Registration will be prioritised in the catchments of those schemes so that all water users can be charged in an equitable way.

Water Resource Development and Use of Waterworks Charges

The phasing in of full cost recovery for water sold from government schemes can be introduced more rapidly, as the users thereof are easily identifiable. This will have to be done bearing in mind standing agreements with specific user groups and affordability constraints (See section 7 below).

Charges for Achieving the Equitable and Efficient Allocation of Water

As already mentioned above, proposals regarding the funding of water resource management and water resource development and use of waterworks will make a significant contribution towards achieving the equitable and efficient allocation of water. Thus, the introduction of additional economic incentives will not feature in this first phase of the pricing strategy. The reason for this is that it is acknowledged that it would be premature to introduce economic pricing at this early stage. Pricing on the basis of economic principles can only reasonably be considered once the effect of full financial costing of water on resource utilisation has been evaluated.

Were economic incentives to be introduced in the future, they would initially involve fairly substantial reliance on administrative price setting subject to political supervision. The reasons for this are that:

• Existing access to water is highly inequitable, and any move towards water markets would have to address this difficult issue;
• The system of water provision is too complex to be altered radically over a short time period. Cautious and gradual changes are needed;
• Institutional structures and processes will have to evolve to support the new pricing approach. This will take time and require learning and adaptation;
• Legitimate and well-defined water entitlements will be needed before the new pricing approach can be implemented fully. The process of establishing these entitlements is only now starting and will take a number of years to complete; and
• There is concern that water markets could give rise to speculation, monopolies, lack of investment in socially desirable but unprofitable infrastructure, or negative environmental impacts if water were to be transferred between catchments. Extensive prior analysis will be required before water markets can be considered as the logical culmination of the new pricing approach.

 

7.  Application Of Pricing Strategy To Different Categories Of Water Use / User Sectors

Section 56 of the National Water Act, 1998 also provides for the pricing strategy to differentiate on an equitable basis between-

• different types of geographic areas (S 56 (3) (a) (i))
• different categories of water use (S 56 (3) (a) (ii)); and
• different water users (S 56 (3) (a) (iii)).

This differentiation is discussed with regard to the main categories of water use / water users in detail below.

7.1 Discharge of Waste (Section 56(5) of the Act)

Discharging of waste or water containing waste into a water resource is also defined as a water use for which charges can be imposed. It is the Department’s intention to develop and implement a waste discharge pricing system which will be based on the "polluter pays principle" (PPP) to provide economic incentives to reduce water pollution to the level with the least cost to society as a whole.

The waste discharge pricing strategy will form part of the introduction of economic charges in terms of section 56 (2)(c) of the Act and will be separate from the water resource management charge in respect of water quality management.

A separate project will be initiated in 1999 to develop the pricing strategy for waste discharges. It will include the determination of future charges for point and diffuse sources of pollution, based on the "polluter pays principle". This will include measures to internalise the cost of water pollution, as well as economic incentives and disincentives to promote the reduction of waste discharge. The pricing strategy in this regard will be developed and published for public comment in due course.

7.2 Municipal Sector

1.  Water resource management charge: The current method of determining catchment management charges for water supplied from Government water schemes -- relating to the estimated proportional activity costs of water conservation (invasive plants and water weeds removal) and water utilisation (abstraction, storage and afforestation permit control) -- is consistent with the new strategy and will be continued. However, adaptations will be made after the registration of all water users in the particular catchments has been accomplished and more accurate data on sectoral water use becomes available.

Charges for the full recovery of the other allocated water resource management costs will only be introduced once all the water users in the particular catchment in which the scheme is located have been registered. Water resource management charges for the municipal sector will also reflect the fact that only the "economic" uses of water from the catchment, scheme or system will contribute towards cost recovery (i.e. excluding basic human needs).

2. Water resource development and use of waterworks charge: This charge will be based on full financial cost recovery. The determination of unit costs for water supplied from Government water schemes, based on the notional loan approach, will be replaced by determining the unit costs through the proposed new approach as set out in this strategy. The principle of excluding the water requirements for basic human needs for purposes of setting 1^st tier prices will be introduced.

3. Phasing in of charges: A maximum increase of 20% over current tariffs for the first number of years of the new pricing strategy will be implemented. The objective is to achieve full cost recovery within ten years. Thereafter, tariffs are expected to increase annually with the inflation rate.

7.3  Industrial and Mining Sector

The application of the first tier pricing strategy to this sector will be identical to that of the municipal sector, except for the aspect of dealing with basic human needs. It will be based on full financial cost recovery by charging for "economic" uses of water in the catchment and the phasing in of new charges. A maximum increase of 20% over current tariffs for the first number of years of the new pricing strategy will be implemented. The objective is to achieve full cost recovery within ten years. Thereafter, annual increases will be limited to the inflation rate.

7.4  Irrigation Sector

Established schemes and commercial farmers

1. Water resource management charge: Full recovery of water resource management costs must be achieved in a phased approach. The agreement reached with the South African Agricultural Union (SAAU) makes provision for the allocated costs for the Working for Water Programme (water conservation) to be subsidised by 90% due to the fact that this activity will only increase the assurance of supply to this sector and will not make additional supplies available. The water resource management activity costs relating to water conservation (invasive plant and water weed control) and water utilisation (storage, abstraction and afforestation permit control) which have already been introduced, plus a 10% surcharge (to account for under-recovery of costs during drought years), will be phased in together with operation and maintenance costs, to be recovered in full by the year 2001. Thereafter the other water resource management costs will also be introduced for water pricing purposes, but only after all the water uses in a particular water management area have been registered and a new agreement has been negotiated.

2.   Water resource development and use of waterworks charge: In line with an agreement between the DWAF and the SAAU, all management, operating, maintenance and current refurbishment costs, together with certain water resource management costs plus a 10% surcharge, will be recovered in respect of existing Government schemes by the year 2001, by gradually phasing out the subsidy over a five year period. The agreement also makes provision for the full recovery of future refurbishment and betterment costs. This agreement will be reviewed in 2001, during which time a contribution to the allocated capital costs of existing schemes, in line with the pricing strategy, may be considered. The new pricing strategy also makes provision for full financial cost recovery for any new schemes to be developed by the Department.

3. Phasing in of charges: Total existing tariffs will be increased gradually to reach full recovery of the SAAU negotiated costs in the year 2001. The maximum annual increase of existing tariffs will be limited to 50% of the previous tariff during this period. Tariffs would also not be decreased in any year. Beyond the year 2001, the other water resource management activity unit costs for water resource management and a possible contribution towards water resource development costs will be added to the charge. Terms of a new agreement will be negotiated.

Water User Associations (Irrigation Board Schemes)

In the case of waterworks built by Water User Associations, each Association will be responsible to redeem the loan commitments within the agreed redemption period. For this purpose charges may be levied on a proportional or differential basis, depending on the provisions of an association’s constitution.

Ex-homeland schemes and emerging irrigation farmers

In redressing the imbalances with respect to irrigation farming in the past, it should be noted that the State is committed to supporting disadvantaged individuals and communities through land restitution, land reform, or other programmes of corrective action. These could include concessionary periods during which the full cost of water, based on the approach proposed in this document, is not levied. The concessionary period in which the full cost of water is not levied would be considered on an ad hoc basis as a form of establishment support in the case of newly established farming or similar enterprises. A minimum phasing-in period of 5 years for water resource management plus the use of waterwork charges on State canal irrigation schemes is proposed, in order to bring the strategy in line with current practice on established schemes.

Stepped water tariffs

To promote water conservation and the beneficial use of water in terms of the National Water Act, the introduction of stepped water tariffs for irrigation will form part of the pricing strategy. The present agreement with the SAAU regarding the phasing-in of the recovery of current expenditure at schemes may lead to under-recovery of costs if stepped tariffs are introduced immediately, and such an immediate introduction may therefore be counterproductive. The introduction of stepped tariff structures also needs further applied research and refinement and can furthermore only be effectively applied where water supply is accurately measured and monitored.

To initiate the process of introducing demand management in irrigation, it is proposed that a two-part pricing system be introduced on established State schemes. For the first round of the pricing strategy, the price should consist of a basic payment regardless of actual use, equivalent to 90% of the required rate per hectare determined in terms of the SAAU agreement, plus an equivalent rate per cubic meter for actual volumes consumed above 90% of the quota. The full implementation of the stepped tariff structures for irrigation will then be introduced with the revision of the SAAU agreement in the year 2001.

Government institutions

Water supplied for irrigation purposes from State schemes to other government departments or institutions financially supported by government departments, will be charged a tariff based on full financial cost recovery, without subsidisation.

Purchase of "extra water"

The current policy of allowing scheduled irrigators on Government water schemes to purchase "extra water" under certain conditions at heavily subsidised prices will be discontinued. Only under exceptional circumstances, such as an unexpected heat wave, will irrigators be allowed to purchase additional water over and above the quotas. The tariff for such extra water will be the raw water tariff for domestic and industrial supply.

7.5  Streamflow Reduction Activities

Water resource management charge: Full recovery of allocated water resource management costs, based on the total registered average annual volumetric water use, must be achieved. The National Water Act makes provision for the DWAF to make regulations for making a volumetric determination of water to be ascribed to a stream flow reduction activity for purposes of water use allocation and the imposition of charges. The necessary regulations (which involves a public participation process) and registration of existing lawful water use will precede the imposition of charges in any water management area.

In terms of the National Water Act, 1998, forestry is declared as a streamflow reduction activity. Existing and new forestry plantations will attract charges for water resource management, while prospective permit holders could be allowed to tender for allocations during a public auction process. Charges will be converted to a rate per hectare and will differ from catchment to catchment.

7.6  Non-consumptive Use of Water

Generation of hydro-electric power

Charges for making use of State water works for generating electricity will be based on the current unit cost of burning coal for Eskom coal-fired power stations, expressed in cents per kilowatt-hour, plus a 10% surcharge. Where Eskom is a party to a joint hydro-electric venture with the DWAF, an agreement on water use charges must be negotiated.

Rebate for water returned to a resource

Although section 56 (3)(d) of the National Water Act states that the pricing strategy may provide for a rebate on water returned to a water resource, the initial pricing strategy does not cover this aspect. This must be considered with due cognisance of the development of the pricing strategy for waste discharge charges.

Dewatering of mines

Underground water removed for mining purposes and discharged into a water resource as directed by the DWAF will not be subject to pricing for the quantity of water removed, but waste discharge charges may be applicable in terms of the new pricing strategy to be developed for waste discharges.

Water for recreational purposes

Charges for water stored for recreational purposes will be directed towards the volumetric use for the initial filling of the impoundment and the estimated annual evaporation from the dam surface.

7.7 Licensing and Registration Fees

The determination of fees payable in terms of the National Water Act with regard to applications for new licenses (Section 40 (3)) will be based on the estimated unit cost of processing a license application. Fees will be determined annually by the responsible authority for a particular water management area. For purposes of the initial pricing strategy, a uniform national application fee will be announced for each financial year. These fees will be waived in case of individual license applications of members of previously disadvantaged groups in rural areas.

The payment of fees for the registration of existing lawful water uses as requested by the DWAF will be waived in respect of all water users for purposes of the initial pricing strategy.

8.     Conclusion

This document has presented a resource pricing approach for South African water, based on financial and economic principles, and taking into account the country’s social and ecological objectives. It has argued that supply-side approaches to address the problem of water scarcity are all but exhausted, and that an integrated approach, containing also demand-side measures represent the only viable long-run solution to the management of South Africa’s water resources.

The new approach to water pricing recognises this, and proposes that the full financial cost of 1st tier water eventually be recovered from water users. Where necessary, this financial charge may ultimately be supplemented by an economic charge in water-scarce catchments, in order to reflect the relative scarcity of water as a commodity at a given time and place and thus to promote the efficient allocation and beneficial use of water.

Finally, it would be premature to assign definite time-frames to the staged phasing-in of full economic pricing in the absence of actual data. However, it is important to remember that the country’s scarce water resources are at great risk if the move towards economic pricing is delayed any longer than is absolutely necessary.

Social equity: In the context of water resources, social equity implies that all user groups have fair and reasonable access to the nation’s scarce water resources, and that the allocation of water resources facilitates universal and affordable access to a basic water supply.

Ecological sustainability: This concept captures the view that there is a need to treat ecological protection and continuing economic growth as mutually compatible rather than as necessarily conflicting objectives.

Economic efficiency: A condition that is achieved when resources are used over a given period of time in such a way as to make it impossible to increase the welfare of any person without harming another.

Economic value: The cost that represents the scarcity value of a good which would prevail in competitive markets.

Economics: Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.

Externalities: are essentially activities whose full cost or benefit is not incorporated into an economic decision; hence they lead to sub-optimal social allocation.

Market approach: This is an accepted means through which buyers and sellers can communicate and trade at mutually agreed terms.

Market clearance: A condition that is attained when the price of the good traded adjusts so that the quantity buyers wish to buy is equal to the quantity which sellers wish to supply.

Opportunity costs: The costs of alternatives forgone by using scarce resources in a particular manner.

Polluter pays principle: A principle that ensures that a charge per unit of pollution emitted into the ecosystem is charged to those responsible for such pollution in order to internalise the cost thereof.

Scarcity: The situation which arises when demand for any given good outstrips the supply of that good.

Water market: A market where water is traded in the same fashion as other goods.