Introduction

Operation Vulindlela was introduced by the Government to remove obstacles holding back economic growth.

Phase 2, announced in May, seeks to address the problem of municipal dysfunction and infrastructure collapse.

A key focus of Phase 2 of Operation Vulindlela is to achieve water infrastructure reform, which aims to:

a. address the root causes of service delivery failures;

b. protect the quality of drinking water;

c. implement institutional reforms to improve the management of water resources;

d. strengthen the regulation of water services provision; and

e. support the introduction of private sector participation in the water sector.

In November 2023, the Minister of Water & Sanitation published the Water Services Amendment Bill (the Water Services Bill) for public comment. Earlier this month, the Cabinet announced that the Water Services Bill had been approved and it was proceeding to have the Water Services Bill passed and adopted by Parliament.

Is the Water Services Bill going to make any difference to the problems of water service delivery and a lack of investment in water services infrastructure? Will Phase 2 of Operation Vulindlela achieve its objective?

The Water Services Act, 1997 (the Act) was one of the first pieces of legislation introduced post 1994 so as to reform our law relating to access to basic services.

It aimed to ensure that the fundamental rights of access to basic water supply and sanitation services were provided in a manner which was efficient, equitable and sustainable. Like the related National Water Act (NWA) introduced at the same time, it was rather ambitious legislation which, unfortunately, has not achieved the goals which were originally set out.

Municipalities were conferred the authority to administer water services, being water supply services and sanitation services. The Act refers to municipalities as being the water services authority.

Water services may only be provided by a water services provider, and a water services provider must, in terms of Section 22 of the Act, be approved by the water services authority.

We all know that municipalities have collapsed and are largely dysfunctional. How are water supply services to be resurrected and what is the government doing so as to achieve this goal?

Water supply services are the supply of potable water, and sanitation services are the collection, removal, disposal or purification of sewage and effluent.

The Private Sector and Municipalities

When the Act was introduced, municipalities were restricted to defined urban areas. Outside of these urban areas and in many places in KwaZulu-Natal, potable water and sanitation services were provided by the private sector. For example, sugar mills, paper mills and mining companies all tended to operate their own purification works and sewage treatment plants.

If a person was providing water services prior to the Act coming into force, they could continue to do so until the expiry of reasonable notice given by the water services authority. In some cases, notice has not yet been given.

Often, these privately run purification works and treatment works provided water services to the town established by the industry.

When the Act was introduced, it was necessary for the private sector to either transfer this function to the local municipality or to continue the service under a written agreement with the municipality. This is because Section 22 of the Act required a water services provider to obtain written approval from the water services authority to supply water services.

Water Boards and Municipalities

Water boards had been in place long before the Act came into force. In KwaZulu-Natal, the Umngeni Water Board and the Mhlathuze Water Board had established large infrastructural schemes such as dams, pipelines, purification and sewage works. In many cases, the infrastructure was established jointly with the private sector in terms of a long-term contract concluded between the board and industry. Most of the large industries in KZN receive water in terms of contracts concluded with the board. These include Mondi, Richards Bay Minerals, Hulamin, Mpact, Foskor, Tronox and South 32.

Water boards also supply bulk water services to municipalities.

Under the Act, a water board may only supply water services within the area of a municipality with the written approval of the municipality, as the water services authority. After the Act was brought into force, agreements were concluded between each municipality and the relevant board.

Water boards are state-owned and fall under the jurisdiction of the Department of Water Services.

Restructuring Water Boards

One of the key changes of the Water Services Bill is to amplify the authority of water boards.

Water boards may now be licensed and given the authority to provide water services within the jurisdiction of a municipality. Once licensed, they do not need the approval of a municipality to provide water services. They may provide advice to water services authorities and provide bulk water to water services authorities, water service providers and to bulk water consumers.

It would appear that it is contemplated that bulk water consumers receive the supply of water services from a water board as opposed to from a municipality.

As part of the strengthening of water boards, the Minister, in July 2023, amalgamated the Umngeni Water Board and the Mhlathuze Water Board into one to form Umngeni-Uthukhela Water (UUW).

Minister Senzo Mchunu, at the time, stated that this was justified so as to assist municipalities and communities in the provision of water services. Other unofficial reasons seemed to be so as to reduce corruption and wastage.

The Water Services Bill seems to indicate that the intention is now to enable water boards, controlled by the State through the Department of Water Services, to bypass municipalities and provide water services to, inter alia, bulk consumers.

Water Boards also have strong credit ratings, which municipalities do not. This enables a water board to raise finance so as to establish and maintain large infrastructural projects. Another critical factor is that the revenue received by the water board is ring-fenced to the water scheme, whereas, historically, municipalities have used revenue from water to fund other municipal functions.

In September 2023, Fitch Ratings (Fitch) assessed the merged UUW as having an AA plus rating with a stable outlook. This compares to Eskom, which has a B rating with a stable outlook.

Fitch, however, assessed that the merged UUW had a major risk in that it had a record of significant water losses of about 52% which losses mainly occurred in municipalities' water distribution networks due to poor maintenance and illegal connections.

UUW’s margins would be hit by increased bad debt provisions as municipalities faced challenges in paying their full bill on time. The most significant challenge for municipalities was the mismatch between water volumes supplied and billed. Water losses and delays in infrastructure spend were the most significant challenges facing the larger amalgamated water board. These were problems created by municipalities and not by the board itself.

Having municipalities as their main customer would impair the ability of water boards to raise finance to establish large infrastructural schemes. To ensure the long-term viability of this sector, water boards would have to change their customer base to large industry bulk water consumers.

Can municipalities impose a surcharge on water services provided by the Board?

It would appear that, following the collapse of municipalities, the State is seeking to bypass municipalities and provide water services through a water board.

Whilst this is effective, and bulk consumers can utilise the strong balance sheet of a water board so as to finance large-scale water infrastructure, the legislation is still allowing municipalities to impact the viability of water schemes.

One of the problems of the current structure is that municipalities are charging a surcharge on water services provided by a board within their area of jurisdiction, notwithstanding that the municipality does not provide services at all. The Water Services Bill needs to address this.

Many bulk water consumers receive the supply of industrial water from a board as opposed to from a municipality. The water supplied is costed on the basis that the board receives a reasonable return on the capital invested. It is usually a very long-term investment costed at favourable interest rates. The imposition of a surcharge destroys the economic viability of the project.

Section 229(1)(a) of the Constitution provides that a municipality may impose rates on property and surcharges on fees for services provided by or on behalf of the municipality. Section 229(2) regulates this power by providing that the power of the municipality in this regard may not be exercised in a way that materially and unreasonably prejudices national economic policies, economic activities across municipal boundaries or the national mobility of goods, services, capital or labour, and it may be regulated by national legislation.

The Municipal Fiscal Powers and Functions Act, 12 of 2007 (MFPFA) is such national legislation and is intended to regulate the exercise by municipalities of their power to impose surcharges or fees for services provided under Section 229(1)(a) of the Constitution. Municipal service is defined to include any function assigned to a municipality in accordance with Section 9 or 10 of the Local Government Municipal Systems Act, 2000.

The question arises whether the Act assigns the function of the supply of water to municipalities. Although the Act does not expressly assign that function to municipalities, and it cannot have assigned this function to the municipality “in accordance with Section 9 and 10 of the Local Government Municipal Systems Act”, because that act was introduced after the Act, the question is whether it intends to do so upon a proper interpretation of the Act.

The Act provides that municipalities are water services authorities and gives them certain powers and duties in respect of industrial water, in addition to the powers and duties they have in respect of potable water and sanitation.

Section 19 of the Act provides that a municipality may perform the functions of a water services provider itself, but that it may also enter into a written contract with a water services provider, such as a board.

Where a municipality decides not to supply water for industrial use itself, and nominates a water services provider to do so (or gives approval to another water services provider or to a water board), such service is provided on behalf of the municipality. This was accepted to be the case by Jafta J, in the minority judgement of the Constitutional Court in Merafong City Local Municipality vs AngloGold Ashanti Limited. The minority judgement concluded that the municipality was entitled

to levy a surcharge for the service provided by a water board, regardless of whether or not there is value added by the municipality or not. Thus, if a user pays the water board for water services, the municipality is entitled to impose a surcharge on the fees paid to the water board since the service is being provided by a nominated service provider of the municipality.

Thus, the provisions of the Act, read with the Constitution and the MFPFA, allow a municipality to impose a surcharge for services provided by a board, even if the municipality does not itself provide a service. The bulk water consumer is therefore obliged to pay twice, first to the board and second to the municipality. This is clearly wasteful.

The Water Services Bill needs to declare this practice unlawful.

License to Operate as a Water Services Provider

Currently, under Section 22 of the Act, the private sector may not provide water services other than in terms of an approval from the water services authority.

The Water Services Bill amends Section 22 to provide that a person may not operate as a water services provider without an operating licence granted under the Act.

An application for a licence must be submitted to the Department of Water Services, in terms of regulations which will still be prescribed. The effect of this change is that municipalities will no longer provide approval for the provision of water services. Rather, the Department of Water Services will become the relevant authority.

Whether the Department will be more effective than the municipality is debatable.

The grant of water use licences in the past has been a major impediment to development, particularly as the grant of licences was subjectively determined.

Conclusion

Phase 2 of Operation Vulindlela is endeavouring to address the problems of dysfunctional municipalities.

The reform, however, is insufficient.

It still allows municipalities to impose a surcharge on water services provided by a board. Where the private sector wants to, itself, provide water services, it has to obtain a licence and there is no guarantee that it will obtain a licence given the past track record of the Department of Water Services.