Moody’s report confirms right decisions were made for Cape Town
27 March 2019
It is unfortunate that statements from the Moody’s report pertaining to the City’s financial management are being misrepresented in the public domain. To clarify, the City did not make any profit from the water crisis. The R4,4 billion in water sales revenue derived for the 2017/18 financial year was the total income for the service, which does not equate to profit. All of this income has been spent in the supply of water to our residents.
This is clearly set out in the City’s own financial reports, which were scrutinised by the Auditor-General when drawing up the City’s Audit Report. It should be noted that the Auditor-General made no adverse findings with regards to the City’s management of its cash flow and gave the City its 15th consecutive unqualified audit opinion.
It is important to understand the context within which the decision was made to raise water and sanitation tariffs:
- At the beginning of 2018, we did not know what the rainfall for 2018 would be, but we did know that if it was the same as in 2017, we would be facing a big crisis which would have required considerable additional expenditure.
- We had also seen a significant under-recovery on water revenue in the second half of 2017 due to the much lower sales than had been anticipated at the time of drafting the budget.
- The City’s water tariffs, especially the first two steps, have historically been below the cost of delivering the service, but proposals to increase the tariffs adequately were repeatedly denied by the former Mayor.
- Even in November 2017, when the dire water supply situation was known, and at the beginning of 2018, when the former Mayor announced that Day Zero would occur in April if consumption continued at the current rate, she continued to balk at the idea of increasing tariffs as a measure to reduce consumption. Had the City been able to introduce tariff increases at an earlier stage, it is likely that it would not have had to introduce the much steeper increases further down the line.
- With the prospect of Day Zero looming, we needed to ensure that we would be able to fund emergency capital projects to produce additional water if required. We began to substantially cut back on expenditure across the city in anticipation of this, and introduced higher water tariffs to encourage residents to use less water, on the one hand, but also to ensure that the City did not run out of money as well, due to the dramatically reduced usage.
The over-recovery during the months that Level 6 restrictions applied is due to the fact that residents continued to use water above the required consumption target of 450 million litres per day, which was used to calculate the expected income. This is now being offset by the under-recovery since December 2018, when we dropped restrictions and tariffs down to Level 3. Under this level, the consumption target is 650 million litres per day, but our collective consumption has consistently come in lower than the target, averaging around 610 million litres per day.
Assistance for the vulnerable continued
It should be noted that the City continued to offer a free basic allocation of 10,5 kl/month to indigent residents and qualifying residents were able to apply for rebates to shield them from the higher tariff costs. The City provided additional assistance by writing off all arrears of indigent residents on a once-off basis and installing free water management devices to enable them to detect leaks and monitor their available allocation.
The City also accelerated roll-out of its Water Leaks Project to indigent properties to minimise water losses and assist those who were unable to fix leaks on their properties. Measures were also put into place within water tariffs to assist homes with large families.
Rain brought tariff relief
When the much-needed rains finally came, we took steps to alleviate the burden on our residents by reducing the water tariffs in stages.
All tariff revenue goes directly back into the City’s water operations to ensure continued service delivery.
During this financial year, provision was initially made for support of R1,5 billion to the Water Department from the rates account, in case we were not able to generate sufficient income to keep providing the service. We were able to return that subsidy once sufficient income was derived and R1 billion has been invested in the City’s Capital Replacement Reserve to fund future Capital Expenditure.
We were also able to significantly reduce the R4 billion borrowing requirement that was budgeted for this year, which benefits both the City and our residents.
All evidence points to sound management
Moody’s reporting of the City’s cash generation of R7 billion for 2017/18 is also being misinterpreted to refer to the water service only, when it represents the cash generation across the entire City operation. This cash generation is a reflection of the enormous effort of the administration to drive expenditure savings to ensure that the City would be in a capable financial position if the drought were to continue beyond 2018.
This is testament to the City’s sound management of cash flows, which ensured that we did not get into trouble. This, along with our good management of the water crisis, was among the reasons why Moody’s changed the City’s rating from negative to stable.
The change in the Moody’s rating is good news for the City, its residents, businesses and investors. It will help to restore confidence in Cape Town and its future prospects, encouraging investment and providing a level of comfort to potential investors that the municipality is in a strong and stable position.
Issued by Ian Neilson, Executive Deputy Mayor, City of Cape Town, 27 March 2019
