The fundamental flaw in SA’s water financing model

South Africa's water crisis is exacerbated by municipal funding systems that allow water revenue and subsidies to be diverted to other services. To address this issue, legislative reforms are necessary to ensure that water funding is strictly used for maintaining and improving water services.

Dr. Sean Phillips, Director-General of the Department of Water and Sanitation, and Dr. Risimati Mathye, Deputy Director-General for Water Services, highlight the severity of the crisis, driven by a steady decline in service delivery and reliability. President Cyril Ramaphosa has declared a national water crisis and established a National Water Crisis Committee to tackle the issue.

The Department of Water and Sanitation's Green and Blue Drop assessment reports indicate that 74% of municipal water services authorities in South Africa are performing at a critical or poor level. A fundamental flaw in the financial model for the water sector in South Africa is that it does not ensure that the resources intended for water services are actually used for that purpose due to the absence of a statutory framework for ring-fencing water revenues.

Under the post-apartheid financial model, water services are funded through a combination of user charges and a fiscal subsidy. Municipalities are expected to fund operational costs from revenue generated through water user charges. While water tariffs are calculated based on the efficient cost of providing the service, the fiscal subsidy, established under the Free Basic Services policy in 2001, does not legally earmark funds for water services.

Several conditional infrastructure grants from the national government have been introduced to help municipalities eradicate historical infrastructure backlogs, but these grants do not fully replace the need for municipalities to use their own water revenue for new infrastructure and ongoing rehabilitation. The conditional nature of these grants means they are ring-fenced for municipal water and sanitation infrastructure.

The financial model assumes that user charge revenues will be used to fund water services, but the Municipal Finance Management Act of 2003 did not legally require municipalities to ring-fence water revenues. Municipal councils may divert water revenues to other functions, undermining the purpose of cost-reflective water tariffs.

While some argue that diverting water revenue could lead to underfunding of other municipal functions, the counter-argument suggests that municipalities should use a transparent surcharge if they wish to allocate water tariffs revenue to other functions.

Furthermore, the equitable share of revenue raised nationally to provide basic services is unconditional, without a legal requirement for municipalities to use it solely for water services. This lack of legal requirements further exacerbates the issue. To resolve this fundamental flaw, the government must establish a statutory framework for ring-fencing water revenues, ensuring that funds are exclusively used for water service maintenance and improvement.