If one just looks at the water boards, then the extent of the crisis becomes apparent, because municipalities owe them a staggering R28-billion.
At the recent Presidential Water and Sanitation Indaba, the shocking reality of the systemic collapse of the water sector was laid bare for all to see.
Reliable information from the Blue, Green and No Drop Reports indicates that more than 100 municipalities are dysfunctional. The impact of this dysfunction is failing infrastructure, deteriorating water quality, escalating costs, growing unreliability and the glaringly obvious inability of delinquent local authorities to fix what is broken.
None of this is in dispute any longer.
At the heart of the problem is financial mismanagement. If one just looks at the water boards, then the extent of the crisis becomes apparent, because a staggering R28-billion is owed by municipalities to the water boards.
Let us unpack this in greater detail. The Water Services Act of 1997 distinguishes different legal entities in the water services value chain. Only a water services authority (WSA) is allowed to provide potable water to consumers.
Typically, the municipality is also the water services authority, but the act also provides for a separate category of legal service provider. This is known as a water services provider (WSP), which must be registered as a technically competent entity, and it can operate under contract to the water services authority, which in most cases is the municipality.
Accountability
The differences between these two entities are important. The first difference relates to accountability. The WSA is legally accountable for water services that are compliant with the human health safety standard known as SANS 241. If the municipality is also the WSA, they cannot absolve themselves from their accountability under law, even if they appoint a WSP to act on their behalf.
In effect, the WSP becomes the technically competent agent acting on behalf of the WSA, but only the WSA is legally accountable if the WSP fails to deliver.
This is where contractual obligations become important, because the WSA can delegate responsibility for service provision, but it cannot delegate accountability. This is an important aspect to understand, because the Financial Management Act does not recognise fiduciary trust.
Think of fiduciary trust as the legal obligation of an executive, known as the fiduciary, to act in the best interests of those on whose behalf financial decisions are being made, typically on a board. It prevents the executive from promoting their own self-interest above the interests of the people on whose behalf they are acting.
Under present circumstances, when municipal executives mismanage funds, they are not legally accountable to the same extent as company directors are in terms of the Companies Act of 2008.
Roles
The second difference is about the role of each structure. A WSA is responsible for planning, regulation and the assurance of supply to the public. Assurance of supply is the guarantee of a defined pressure, quality, quantity and price at a defined location. The WSP is contracted to provide the actual services needed to meet the WSA’s objectives. Again, the municipality cannot absolve itself from accountability.
The third difference is that the WSA has the right to contract a WSP, but the relationship between the two is such that the municipality will always be the master and the WSP will be the subservient actor.
So, we have two legally defined entities at play, with precise roles and responsibilities, with the WSA always being the single accountable authority if the WSP fails to deliver.
However, there is a third legally defined entity in the water services value chain. Water boards are defined as Schedule 3B State Owned Enterprises (SOEs) in terms of the Water Services Act. The water boards must be self-funding, because they can receive no bailouts or operational grants from government. This makes them fundamentally different from municipalities acting in their role as a Water Services Authority that receives various grants from government for infrastructure upgrades.
Planning
This ties in with the second role defined above – planning. Only the municipality is responsible for the planning for water infrastructure, which is a responsibility from which they cannot absolve themselves. That planning determines the infrastructure grant that is allocated to the WSA.
Poor planning equates to inadequate funding for infrastructure upgrades, which has nothing to do with any water board. That same planning by the WSA is fed into the water board, because they need to finance future upgrades in the bulk supply system by raising capital on the bond market.
A fundamental difference between a municipality and a water board is that the former relies on grant money provided by the state, whereas the latter can only raise capital by leveraging the strength of their own balance sheet when raising bonds. The Rand Water Bonds are particularly robust because they are the single largest sustainability-linked bonds in Africa.
Revenues
A second difference between a municipality and a water board is that the former collects revenues from all its customers, whereas the latter only collects revenue from one customer – the municipality acting as the water services authority.
This means that the level of complexity in the billing and revenue collection systems is skewed in favour of the municipality, which must manage thousands of monthly invoices and statements, whereas the water board manages only one invoice and statement per municipality that it supplies.
In the case of Rand Water, that means three large metros (Johannesburg, Tshwane and Ekurhuleni), plus many smaller municipalities. Stated differently, the municipalities must manage a significantly more complex revenue collection system than water boards.
Delinquency
It also means that water boards are more vulnerable to a delinquent customer than a municipality is. If one municipality is delinquent, then the water board runs the risk of insolvency, which in turn impacts its capacity to raise capital on the bond market because of a compromised balance sheet.
The importance of all this detail becomes relevant when we focus on the ability of the delinquent municipality to self-correct. They simply go to government and ask for a bailout, which the water board cannot do. Therefore, the insolvency of a water board is a significantly bigger risk to society than the insolvency of any single municipality.
Using Rand Water as an example, if they face a liquidity crisis because one large metro doesn’t pay its monthly invoice, then many other municipalities and metros will be impacted negatively.
What happens if the government is unable to bail out a municipality?
That’s where the rubber meets the road, because that is precisely where we are at present. The tax coffers are empty, so bankrupt municipalities are simply unable to fix what is broken.
The last line of defence is the Schedule 3B SOEs such as Rand Water, Umgeni Water, Berg Water and Magalies Water, whose balance sheets are still strong enough to raise the necessary finances on the bond market.
This is why the Association of Water and Sanitation Institutions of South Africa (Awsisa) has worked closely with these water boards to pioneer the concept of Public-Private-Partnership Special Purpose Vehicles. This brings the Companies Act into the picture, which holds officials legally liable in terms of the many fiduciary laws associated with corporate governance.
This is literally the last line of defence between the public and a failing state. It is also the reason why attempts are being made to sabotage the initiative, because the gravy train prospers when fiduciary responsibility is absent. DM