Business Case forthe Pongola-Umzimkulu Catchment Management ...

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Business Case for the Pongola-Umzimkulu Catchment Management Agency In addition to routine operating expenditure, the process of amending the boundaries of the CMA will incur various once-off costs, to be funded by DWA. These may distinguish between those that are necessary for the CMA organisational establishment and initial WRM costs associated with functions that may also be funded through water use charges (and therefore may not require DWA support after the first few years). Organisational establishment costs include: • Appointinga governing board and initially building its capacity (additional to the cost of the Board operations and administration covered in the CMA expenditure) as well as including change management processes; • Setting up the CMA business and information management systems to enable its operation, including the first business plan and human resources strategies; • Setting up the CMA in terms of appointing or transferring its initial staff complement and developing the first revised business plan; and • Initial capital expenditure on communications, computers and obtaining/remodelling premises. Initial WRM costs (depending upon availablefunding) may include: • Extending stakeholder participation, initial empowerment/capacity building of disadvantaged communities, and awareness creation around WRM and the CMA establishment; and • Developing the first catchment management strategy for the entire WMA (an initial function of the CMA The outsourcing costs relate primarily to the implementation and consultancy projects typically required to provide specialist input to six generic CMA programs: • Water resources planning: including the CMS and other planning studies • Water use: including verification & validation and other licensing studies • Water management: including water conservation demand management implementation • Institutional cooperation: including convening catchment forums and WUA engagement • Information technology: developing water and corporate information systems • Corporate: developing corporate systems and financial management systems 9.4.2 Projected revenue The CMA costs estimated above must be covered by user charges (under the pricing strategy) and/or by transfers from the fiscus (via DWA budgetary process), although other donor transfers for specific initiatives may be possible. The section describes four scenarios, representing different assumptions about user charges and financial support to CMAs. The aim of these is to showcase the impact of different financial support on the CMA viability in the short and long term. The scenarios relate to: 1. No financial support: funding only through water use charges, with different assumptions about users and billing recovery rates 2. Charge-capping operating subsidy: DWA transfer for lost income related to the policy of capping water use charges to agriculture and forestry. Department of Water Affairs 48
Business Case for the Pongola-Umzimkulu Catchment Management Agency 3. Public-interest operating subsidy: DWA transfer for functions performed by the CMA that are in the public interest, rather than for direct water user benefit. In all of the scenarios, the CMA costs were fixed (at 2012/13 prices) as was the estimate of registered water use. The former provides a current day indication of charges and subsidies that may simply be escalated by an assumed inflation rate. The latter assumption is conservative, but was partially opposed by the assumption that recovery rates would approach 100% within five years of CMA establishment. No financial support: Water use charges The registered water use for urban (domestic-industrial), agriculture (irrigation) and forestry (streamflow reduction activities) totals 1917 million m 3 / annum and excludes a transfer out of the WMA of 297 million m 3 / annum. The volumes per sector are shown inTable 5. Table 5: Water use volumes per sector (million m 3 ) Water Use Name TOTAL Urban Agriculture Forestry Pongola-UMzimkhulu 1917 940 813 163 The Table 6 below indicates the total costs and the user charges required for full cost recovery within the CMA. While it is possible to have the CMA fully self-sufficient, it is an unlikely scenario due to a number of reasons. The first is that the CMA would not be able to collect 100% of the charges, especially from year 1 and therefore requires an establishment subsidy to cover the first 2 years of costs. This timeframe also allows for the collection system to be updated and passed to the CMA to ensure more effective collection of charges. Since current collection is between 40-80% of charges, a reasonable assumption can be made that collection of charges shall never exceed 90%. The second is that there is currently an agricultural cap of 2c/kl, and the current charges when the system stabilises is more than double the cap amount. Table 6: Full cost recovery and user charges Full cost recovery through charges Year 1 2 3 4 5 6 Total CMA costs 13 826 31 792 46 813 59 492 70 561 84 349 (R’000) WRM charges (c/kl) 0.72 1.66 2.44 3.10 3.68 4.40 The Table 7 below represents the implications of maintaining the WRM charge cap on agriculture and forestry, which is set at 2c/kl for the 2012/13 financial year (increasing by CPI). The analysis is based on including the establishment grant and water use charges for full cost recovery, except that there is a need for a charge-capping subsidy to be transferred to the CMA upon delegation of the charge collection function. The basis of the cap is that this is an affordability issue that must be addressed through fiscal support (not crosssubsidisation from domestic and industrial users) and that domestic and industrial users do not generally have an affordability challenge. This scenario partially addresses the affordability issue for agriculture and forestry, but would need to be implemented Department of Water Affairs 49
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