TARIFF FILING PROPOSAL

Financial Year 2018-19

Final Draft

April 2018

The Water and Sewerage Company P.O Box 426 Maseru 100 Lesotho Tel: (+266) 22312449 Fax: (+266) 22310006 Website: www.wasco.co.ls

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Pursuant to the provisions of the operating licence signed on 30th April 2013

The Water and Sewerage Company (WASCO) has prepared and finalised this Tariff

Filing Document.

The Tariff filing document has been seen and approved by the WASCO Board on

10th April 2018

Signed: ............................................

WASCO Chief Executive

Signed: ............................................

WASCO Board Chairperson

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Table of Contents

Executive Summary iv 1 Basis for Application 1 1.1 Basis and Key Assumptions 1 1.2 Statement of WASCO’s Regulated Business 2 2 Analysis of Performance of Key Indicators Since 2010 4 2.1 Revenue/Expenditure outturn for 2010-11 to 2016-17 4 2.2 Operations & Maintenance Cost Coverage Trend Analysis 5 2.3 Review of Staff costs against Total Expenditure Trends 6 2.4 Non-Revenue Water (NRW) Performance 7 2.5 Water and Effluent Quality trends 8 2.6 Conclusion 10 3 Review of the 2016-17 Financial Year 11 3.1 Review of Outturn Regulatory Accounts and Budget Estimates 11 3.2 Production, Consumption and Sales Data 11 3.3 Review of Service Coverage against set targets 13 3.4 Review of Water and Effluent Quality Data 14 4 Review of Current Financial Year 16 4.1 Review and Reconciliation of Management Accounts and Budget Estimates (April to

December 2017)

16 4.2 Production, Consumption and Sales Data 17 4.3 Review of Service Coverage 18 4.4 Review of Water and Effluent Quality 19 5 Forecast for the next Financial Year (2018-19) 21 5.1 Introduction 21 5.2 Priority Initiatives for 2018-19 21 5.3 Statement of the Approved Budget 22 5.4 Forecast Operating Costs 22 5.5 Forecast Capital Costs 25 6 Proposed Tariff Requirements for 2018-19 29 6.1 Regulated Accounts 29 6.2 Weighted Average Cost of Capital 29 6.3 Proposed Tariffs and Charges 29 6.4 The Basis and Rationale for Tariff Adjustment 31 6.5 Affordability Analysis 33 Appendices 35

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EXECUTIVE SUMMARY

This is a tariff review application for a single year period covering the period April 2018 to March 2019. This tariff application is made against the backdrop of a cost of service study that will be the basis for future tariff applications. The following is the basis for the proposed water and sewerage revenue and the resultant tariff adjustment:

• Offsetting under-recovery for the last three financial years

• Addressing the financial burdens of the Metolong dam facility and related infrastructure

• Offsetting the effects of inflation

• Offsetting the effects of one notch increase in VAT for service inputs (Materials, Chemicals, etc)

• Addressing financing costs

• Addressing the effects of the recent drought conditions

• Dealing with financial losses from water used by villagers along the DCS

• Increased input costs due to proposed improvements in service (more personnel, equipment, etc)

Estimated total expenditure as at December 2017 was recorded at M112.70 million. It is anticipated that expenditure will reach an amount of M159.0 million at the end of the financial year. Revenue for the 2017-18 period ending December 2017 is recorded at M174.27 million. The projected revenue for the financial year is M198.47 million. The total planned expenditure for the financial year 2018-19 is estimated to be M296.72 million. The main drivers for this expenditure in the 2018-19 financial year include among others the following:

• Strengthened debt recovery and collection

• Continued capacity building interventions

• Ongoing interventions and rehabilitation of office and service infrastructure

• Actively dealing with Non-Revenue Water (NRW)

• Robust service coverage

• Implementation of Pre-paid metering system

• Energy management and reduction endeavours

• Enhanced public outreach and marketing activities

An analysis of set WASCO performance indicators presents a positive outlook of performance. However, there are challenges that continue to beset the Company as well as

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new emerging ones. The Company has set in motion endeavours aimed at improving service delivery and addressing challenges while mindful of improving on gains made in the past. It is against this backdrop that WASCO proposes a Revenue Requirement of M268.97 million from the regulated business comprising M234.36 million for water and M34.61 million for sewerage. This will yield a total revenue of about M300.193 when other unregulated revenue is added. At this rate the expected operating profit will be M4.322 million when the expected revenue is pegged with the envisaged total expenditure of M296.72 million. In order to meet the proposed Revenue Requirement, WASCO proposes an upward adjustment of the 2018-19 tariff in the following manner:

➢ A 12% adjustment for domestic volumetric and Standing charges

➢ A 15% adjustment for Non-Domestic Volumetric and Standing charges

The volumetric and standing charges for services supplied from public stand pipes have been kept at 2017-18 figures. The same goes for Standing charges for domestic customers in Band A, which have not been changed at zero.

1 BASIS OF THE APPLICATION

1.1 Basis and Key Assumptions

1.1.1 This application is premised on the LEWA Act as amended, the WASCO Composite Operating Licence as well as set out filing principles and guidelines. This application is for a single year tariff adjustment for the financial year 2018-19.

1.1.2 The application hinges on the need for the Company to meet its service delivery

commitments to reliably provide safe, quality and potable water while ensuring the used water disposes an environmentally tolerable effluent disposal services. This is against the backdrop of annual increases in prices of key materials for WASCO’s operations and inputs for treatment of waste water.

1.1.3 The other basis for this application is that the company continues to employ efforts to

improving service delivery and addressing known challenges as well as improving on performance against set targets. WASCO has endeavoured to address the need for essential services in selected peri-urban areas of HA-Foso, Motloheloa, Makhoathi and others and there is need for capital injection in order to fulfil this promise.

1.1.4 Lesotho Electricity Company (LEC) the sole industrial power supplier has recently been seeking electricity tariff hikes around 20% the matter likely to cause further pressures on WASCO’s financials as they utilise power in the water pumping stations on its expenditure. Mindful of the continued rise in power charges, the utility has put in place measures to reduce energy usage in its operations so as to reduce the burden to its customers.

1.1.5 The growth of the urban and peri-urban population as presented in the 2016 population

census, is exerting pressure on WASCO to serve the ever-growing demand and expectations for its services. The existing infrastructure, of which most of it is old and obsolete is struggling to reliably serve the customers. The take-over of the newly commissioned Metolong Dam and the Water Treatment Centre is beginning to show that the increased water pressures into the old and aging Asbestos Cement Pipes (ACP) reticulation systems are causing numerous pipe bursts resulting into great water losses.

1.1.6 WASCO took over the operations of the Metolong Dam and related water treatment

facility and the substantial magnitude of the operations of the facility continue to exert unprecedented financial pressures on the utility now that the assisted operations has ceased. Furthermore, the continued utilisation of water through public standpipes at key points on the Downstream Conveyance System (DCS) by the communities of the villages along the DCS is exacerbating the NRW problem. There has not been a financial solution to the free use of that water by the communities and it is planned that recovery for the immediate term will be through a tariff adjustment.

1.1.7 The key assumptions that underpin this tariff adjustment are that the national economy will continue to grow and no shocks will beset it in the near future. This presents a case that a large proportion of WASCO domestic customers will be able to afford and are willing to pay for services dully rendered. The issue of water and sanitation being an essential public service renders a continuous influx of customers to connect to the

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WASCO network thereby growing the WASCO customer base. In its strategic reviews, WASCO has put into place measures that are intended to ensure that the new financial year will see more improvements in the cash collections. WASCO will continue to implement strategies that will increase the customer base especially in areas that has been reticulated with sewer lines. Furthermore, the utility will, during the 2018-19 financial year actively and robustly implement the smart prepaid metering programme that will guarantee commensurate revenue for services dully rendered. This will reduce the burden on collection costs as it is with the current system.

1.1.8 WASCO assures the Regulator that the proposed revenue requirement as informed by

its submitted 2018-19 expenditure budget has been carefully considered, rationalised

for financial prudence. The issues raised in the previous tariff determination (2017-18)

have been considered and addressed in this application.

1.1.9WASCO has engaged a consulting firm to carryout a thorough analysis of its costs of providing water and sewerage services in its service areas and this will inform future tariff applications once completed.

1.2 Statement of WASCO’s Regulated Businesses

1.2.1 The Water and Sewerage Company (PTY) Ltd came into being through a “Water and

Sewerage Act No. 13 of 2010”, thereby making it a fully-fledged public company earmarked to deliver water and sewerage services in designated urban centres of the country.

1.2.2 WASCO operates in 16 centres serving approximately 94, 0001 customers nation-wide, about 4, 000 of whom are connected to sewer lines. The total number of customers comprises 2, 688 non-domestic customers and 91, 220 domestic customers. There are also more than 4, 300 domestic prepaid connections, and more than 4, 400 communal pre-paid token holders.

1.2.3 WASCO operates within the water and sanitation sector functionally reporting to the

Ministry of Water. The Ministerial powers are strategically overseen by a Board of Directors. The Board is responsible for the overall strategic direction of the company and other key strategic areas of finances, Audit and Risk; and Performance Management. WASCO is headed by a Chief Executive who is supported by a team of five heads of Divisions hereto referred to as Directors heading five divisions of: -

- Operations and Maintenance; - Enterprise Project Management; - Finance and Shared Services; - Human Resources; and - the newly formed Corporate Services Divisions 1.2.4 The business cycle WASCO starts with the extraction and production of raw water from

rivers, bore holes and dams. These are supported by its distribution and ultimate supply to households and entities as well as the extraction of sewer for safe disposal back into

1 Figure as at December 2017

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the environment. On this basis, the following functions or business of WASCO are regulated (i.e. production, distribution and sewerage disposal).

1.2.5 The functions of the Sanitation Services Unit (SSU) have since been outsourced to

private contractors in 2011 and do not form part of this submission. WASCO’s sewerage tankering services, which still occur in the districts are also not included in the regulatory accounts for purposes of this submission. This is the same case for other WASCO functions pertaining to house connections, sewerage blockages, meter testing, house disconnections and reconnections do not form part of this application.

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2. ANALYSIS OF PERFORMANCE TRENDS OF KEY INDICATORS SINCE 2010 2.1 Revenue/Expenditure outrun for 2010-11 to 2016-17 2.1.1 The commendable profit realised during the 2016-17 financial year comes against a

backdrop of losses for the previous five years leading to it. a marginal M2.337 million was generated in the year preceding the year in question while in the 2014-15 financial year, a loss of M3,160 million was recorded and was higher than that of the previous year (at M1, 781 million). This has largely been attributed to a substantial increase in expenditure for the year from the previous year’s figure of M173, 233 million. The company experienced its highest loss (at M10, 595 million) during the 2011-12 financial year. This improvement has been largely as a result of a substantial and steady growth of Water and sewerage billing for the last five years since 2010-11 financial year coupled with more initiatives for cost management.

2.1.2 The table below highlights the outturn on the finances of WASCO for the review period

as well as preceding years from financial year 2010-11.

Table 2a: Revenue/Expenditure Outturn for 2010/11 to 2016/17 (In Maloti Million)

Item 2016-17 2015-16 2014-15 2013-14 2012-13 2011-12 2010-11

Total Revenue 256, 044 218, 609 198, 666 171, 233 157, 756 139, 705 119, 364

Water and Sewerage Billing

192, 334 190, 539 175, 628 151, 452 137,878 115,691 103,555

New Service connections

13, 916 15, 458 15, 826 14, 922 15,878 21,733 10,886

Other Income 49, 794 27, 037 7, 212 4, 646 4,000 2,285 4,818

Interest Income - - - 9,305 - 5,944

Expenditure 239, 931 216, 272 201, 826 173, 014 161, 746 150,300 120,596

Manpower 94, 988 88, 458 81, 926 80, 743 69,327 68,133 65,053

Power 16, 581 17, 172 18, 460 16, 262 13,622 10,980 10,295

Reticulation and Plant Maintenance

14, 833 13, 472 9, 579 12, 556 7,684 9,545 7,808

Chemical Usage 3, 524 5, 506 7, 683 7, 230 5,460 6,688 4,272

New Connections Materials

14, 113 15, 119 13, 682 9, 912 7,955 10,110 6,126

Depreciation 27, 076 18, 416 17, 955 15, 086 14,767 14,586 13,751

Operating Profit 16, 113 2, 337 (3, 160) (1, 781) (3, 990) (10,595) (1, 232)

2.1.3 Figure 2a below presents the growth of income and expenditure and the

commensurate profit/loss for the last sis years leading to the 2016-17 financial year. The financial year 2011-12 experienced the most losses and this situation improved in the subsequent years leading to the first realised profit in the 2015-16 financial year. Total revenue has grown by a magnitude of 61 percent during the seven-year period to 2016-17 while expenditure grew by nearly 100 percent. A tend analysis clearly shows that Water and Sewerage Billing have been the main contributor to revenue growth while expenditure on human resources and plant and reticulation maintenance had the largest influence in the growth of expenditure for the period.

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Figure 2a: Income/Expenditure performance for the years 2010 to 2017

2.1.4 The rate of increase in expenditure on power has been very high in recent period as

a result of an increase in tariffs by the LEC as well as increases in the demand for pumping due to increased coverage and population demand. The rate of growth of new service connection has been very erratic in recent years mainly due to slow implementation of reticulation extension initiatives and service coverage improvement projects.

2.2 Operations & Maintenance Cost Coverage Trend Analysis 2.2.1 For a utility to be viable, its billing has to be able to meet expected expenditure for the

set period. The figure below analyses the trend in the ratio of billing against operations and maintenance costs.

-10.00%

-8.00%

-6.00%

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2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

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t (%

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Mil

lio

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alo

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Income Expenditure Operating Profit

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Figure 2b: O&M Cost Coverage for 2011-12 to 2016-17

2.2.2 It can be inferred from figure 2b above that over time the utility’s billing had not been

able to meet expected expenditure in the past. This explains the losses that the company had been experiencing for the period but however, things improved somewhat in 2015-16 and 2016-17 financial years. There has been a promising trend in the O&M cost coverage by billing which reached an average of 0.94 at the end of the period. This indicated that the health of the company was gradually improving leading to a state of viability going forward.

2.3 Review of Staff costs against Total Expenditure Trends 2.3.1 Figure 2c below highlights the relationship between expenditure of human resources

as a fraction of total expenditure. Regional and international benchmarks call for a well operating utility to have this relationship to be at a percentage ranging from 30 to 40 percent. LEWA in this case gave WASCO a target of 41 percent.

0.78

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2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Rati

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Water and Sewerage Billing Expenditure (O&M)

O&M Cost Coverage Linear (O&M Cost Coverage)

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Figure 2c: Staff Costs against Total Expenditure for 20101-11 to 2016-17

2.3.2 It can be inferred from the figure 2c above that expenditure on employees continued

to grow at a much slower rate than total expenditure. This occurrence resulted in a steady drop in the Staff costs/O&M Expenditure rate to requisite levels during the period. After an initial rate above 60 percent this ratio reached a level of just above 40 percent in 2016-17. The average rate for the period was recorded at 49.0 percent.

2.4 Non-Revenue Water (NRW) Performance 2.4.1 The determination of NRW from production and consumption figures is an important

KPI for a utility entity. For the period under review production is realised to have grown markedly while consumption had remained largely constant. The resultant NRW performance is noticeable for its continued increase albeit after a period of maintaining a good performance of around 25 percent for the first four years. The substantial increase in NRW from 2015-16 financial year highlights the challenges posed by losses generated as a result of the Metolong pressures which caused numerous pipe bursts for the Maseru area. The reminder of the period highlights a time where more effort was made to properly calculate the NRW figure hence its increase indicating that the lower figures of the earlier years could be doubted.

2.4.2 Figure 2d below presents a pictorial image of performance of NRW as calculated

through balancing production and consumption volumes for the period leading to the 2016-17 financial year.

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250,000

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Manpower Expenditure (O&M) Staff Costs/O&M Expenditure

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Figure 2d: NRW Performance for 2011-12 to 2016-17

2.4.3 Based on the above result, WASCO has laid out efforts to correct the situation of non-

functioning bulk metres as well as customer meter. The inaccurate customer meter reading will also be attended to. The mainstay solution to this problems in the roll out of prepaid meters for the 2018-19 financial year. Another matter would be dealing with financial losses emanating from the DCS and illegal connections.

2.5 Water and Effluent Quality trends 2.5.1 The figure below presents the trends in water quality for the period under review.

The performance of key parameters for treating water, namely Residual Chlorine, Microbiology and Turbidity has not been at the required 100 percent level but have largely been excellent. There was a drop in turbidity pass rates in 2016-17 which confirms the effects of incessant pipe leaks and bursts due to the extreme pressures from the Metolong system. This has been corroborated by a spike in NRW figures for the same period. The pass rate for alkalinity/acidity of treated water continued to be a challenge in almost all treatment plants due to their archaic nature. The Langelier index registered a very low performance (below 50 percent) for he period.

0.0%

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2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Perc

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Production Consumption NRW

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Figure 2e: Water Quality Trend Analysis for 2011-12 to 2016-17

2.5.2 Figure 2e above shows a gradual increase in the pass rate for residual chlorine, Microbiology as well as for the Langelier Index. Turbidity pass rates have however been on a slight downward trend.

2.5.3 The figure below presents an analysis of Effluent quality for the period under review Figure 2f: Effluent Quality Trend Analysis for 2011-12 to 2016-17

2.5.4 As can been seen from Figure 2f above the pass rates for the two parameters for

effluent quality have been positive for the period under review. This has been largely so despite know infrastructural challenges. This also highlights the effects of the new

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2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

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Residual Chlorine (01-1.5 mg/l) Turbidity (<5.00 NTU)

Microbiology (<10/100ml) Langelier Index

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Chemical Oxygen Demand (<75mg/l) Suspended Solids (<25mg/l)

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waste water treatment infrastructure which came online in Maseru which influenced national pass rates.

2.6 Conclusion 2.6.1 This chapter presents a very positive position of WASCO in meeting set targets for

key performance indicators laid out by LEWA. Despite known and new challenges as well as the need to improve services in an environment of scarce resources, WASCO did manage to improve the performance of key indicators over time. With support from the government of Lesotho and the regulator, these would be further improved and those that are still posing problems turn around.

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3. REVIEW OF THE 2016-17 FINANCIAL YEAR

Here below is a presentation and review of the performance of WASCO for the period ending March 2017.

3.1 Review of Out-Turn Regulatory Accounts and Budget Estimates 3.1.1 According to the audited financial statements, WASCO reported an annual operating

profit of M16.113 million for the period. Total revenue generated for the period was M256.04 million. The main components of revenue have been Water and Sewerage billing at M192.334 million and new service connections at M13.916 million. All other revenue accounts for the remaining M49.794 million.

3.1.2 Expenditure for the period is recorded at M239.931 million. The main contributors to

expenditure have been labour costs at M94.988 million, Power demands were recorded at M16.581 million while reticulation and plant maintenance M14.833 million and chemical usage made a contribution of M3.524 million. A presentation of the audited financial statements as well as its regulatory format has been made in appendix A and B.

3.1.3 The contribution of Water and Sewerage billing has been below projected amounts

due to decreased consumption during the year under review. At M192.334 million the recorded revenue fell below the allowed revenue set for the financial year of M234.18 million. This is despite a tariff determination hat adjusted tariffs upwards by 8.7 percentage points.

3.2 Review of Production, Consumption and Sales Data for The Year 3.2.1 Total production for the period ending March 2017 amounted to 22.16 million kilolitres

while billed consumption was recorded at 13.28 million kilolitres. The resultant non-revenue water reached a figure of 40.09 percent for the period while average NRW for the period was recorded at 40.02 percent. Average NRW was higher than the set target of 28 percent for the period.

3.2.2 Here below is a presentation of production and consumption data for the 12-

month’s period ending in March 2017.

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Figure 3a: Analysis of production against billed consumption (April 2016-

March 2017)

3.2.3 Analysis shows that NRW has been behaving in a slight declining trend throughout the period which is a positive occurrence. There is also a realisation of a decline in the production and a commensurate decline in consumption which confirm production and reliability challenges faced by selected centres across the country. The high NRW figure highlights the challenges being faced by the utility in addressing infrastructure problems emanating from old and obsolete reticulation system as well as financial losses from inaccurate billing.

3.2.4 Envisaged production was slightly below projected figures for the year under review

and this has been largely due to the drought situation that occurred earlier in the financial year. The resultant supply challenges as well as reliability issues brought about by infrastructural challenges resulted in consumption falling below set projections. This corroborates the decrease in sales for the year.

3.2.5 It is seen from the above figure that the NRW figure has been averaging 40 percent

mark for the entire period to the end of March 2017. It is also clear from the picture that the set annual target for NRW of 26 percent was not attained. As stated in earlier sections the average NRW for the period was at 41.5 percent. Among the factors that have been attributed to the substantial water losses have been issues pertaining to data collection at production plants where in most case there were no bulk meters to determine the amount of water produced and hence most of the figures presented were estimates based on design capacities. Other factors included water losses due to some reticulation systems, particularly in Maseru not being able to withstand high pressures from the Metolong system hence experiencing high burst and leakage incidences.

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3.3 Review of Service Coverage against set targets 3.3.1 The total number of connections up to the end of the 2016-17 financial year were 5,

027. This figure slightly is below the set annual target for house connection of 6, 000. At this rate performance has been largely below par with the half-way mark only being achieved at the end of nine months. The table below shows the water and sewer connections in the three regions. It can be depicted that the month of December had the least water connections in the third quarter.

Table 3a: Water and Sewerage Connections (April 2016 – March 2017)

Water Connections

Region April May June July Aug Sept Oct Nov Dec Jan Feb Mar Total

Maseru 284 86 276 96 213 247 290 192 145 257 177 180 2, 443

North 111 115 190 103 183 170 129 183 107 86 104 170 1, 651

South 113 39 109 48 89 78 66 103 39 73 100 76 933

Total 508 240 575 247 485 495 485 478 291 416 381 426 5, 027

Sewerage Connections

Maseru 15 7 36 55 12 0 46 15 33 20 14 27 280

North 0 0 1 1 0 1 2 2 1 0 0 1 9

South 0 0 3 0 2 0 1 0 0 0 3 0 9

Total 15 7 40 56 14 1 49 17 34 20 17 28 298

3.3.2 The low connection rate leads to backlogs and as a result the target of connecting

customers within the stipulated 10 days was difficult to achieve. The main constraints in meeting this demand is the human resources dedicated to do the connections. Stock runouts for connections equipment also exacerbated the situation.

3.3.3 Despite these challenges, a number of interventions were carried out during the year

to improve access to water supply services. Infill projects in Mapoteng, Mafeteng and Maputsoe were carried out. The rehabilitation of abstraction points in Maputsoe and Mafeteng as well as a drought relief program in TY and Ha Foso were implemented.

3.3.4 In order to improve the reliability of supply (i.e. guaranteeing at least 18 hours of

supply), efforts to implement the recommendations of the energy study were carried out. This included replacement of motors in selected areas and installation of soft started pumps. Stand by pumping capacity was also procured and installed for selected areas. The strengthening of preventive maintenance was operationalized through the implementation of the Preventive Maintenance Plan. This entailed the servicing of generator sets for Mohale’s Hoek, Mafeteng and Qacha’s Nek, the rewiring of borehole panels and the scouring of the distribution lines in selected areas.

3.3.5 For sewer, 61 connections were carried out in Maseru while 4 connections were

carried out in the regions (1 in the North and 3 in the south) for the fourth quarter ending March 2017. The quarterly target of 100 has not been achieved. Increased efforts have been devised to increase coverage in all centres.

3.3.6 The number of connections for Maseru was still very low despite efforts to actively

promote connections uptake in this regard. One such effort related to an EU funded campaign supported by the Maseru City Council to boost applications in the Mabote and Khubetsoana area where new infrastructure has been installed.

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3.4 Review of Water and Effluent Quality Data

3.4.1 The 2016-17 target for quality of water produced is to achieve 98% passing rates for all parameters. On average WASCO treatment plants managed to maintain residual chlorination levels at 61% pass rates for the quarter, while turbidity levels were attained at 98% percent. Samples passing bacteriology count performed at 93%. These are slight changes from the figures recorded in the previous quarter for residual chlorination and turbidity while bacteriology counts were left unchanged. This is mainly attributed to initial under dosing at treatment plants (less than 1mg/l), long residence times, pipe bursts that introduce soil/microbes and therefore increase chlorine demand. All these affected chlorine levels at end (user) point. Dosage will be optimised (chlorine boosting should be done specially at Roma, TY and Morija) at the district and Maseru water treatment works reduce the failure rate.

3.4.2 Here below is a pictorial presentation of the performance of the quality of treated

water supplied to customers over the six-month period ending in December 2016. Figure 3b: Analysis of performance of treated water (April 2016 – March 2017)

3.4.3 Furthermore, is can be seen from the graph above that performance of residual chlorine has been dropping in recent times with a slight peak at the start of the last quarter. This is confirmation of higher than normal pipe bursts incidences that necessitate re-chlorination along the system in areas of the bursts hence detection of above normal chlorine levels at the furthest parts of the system, a matter which should not be occurring.

3.4.4 The bacteriology and turbidity pass rates have been slightly below set targets indicating proper procedures being utilized for treatment of water at plants. Standard operating procedures have been developed to regularize treatment operations and have been distributed to all centres for operators to be knowledgeable of and make good use.

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3.4.5 Though the target (30 percent) for treated effluent was met during the last quarter of the year for Chemical Oxygen Demand (COD), it was still very low for the quality of effluent being disposed to the environment. This was an improvement from the third quarter’s performance of 9 percent. Samples passing the Suspended Solids reached a pass rate of 41 percent. The high failure rate is mainly attributable to old and overloaded waste water treatment facilities in most of the areas. The only remedial measure in this regard is build new WWTP in all the areas. In order to improve the sewerage infrastructure, the masterplan for sewerage and sanitation has been completed and so far, the service areas have been assessed and the concept note has been submitted to the Ministry of Development Planning for approval.

Figure 3c: Analysis of effluent performance (April 2016 – March 2017)

3.4.6 It can be inferred from the above table that performance of effluent quality continues to be at very low levels highlighting infrastructural challenges of the system largely due to the old Ratjomose systems well as existing small systems in other areas (which were designed for entities like hospitals) which pulls down performance of the newly constructed MASOWE and Agric systems.

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Suspended solids COD

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4. REVIEW OF THE CURRENT FINANCIAL YEAR 4.1 Review and Reconciliation of Management Accounts and Budget Estimates

(April-Dec. 2017) 4.1.1 Total expenditure for the period ending December 2017 totalled M112.70 million. This

expenditure fell short of the budgeted expenditure for the period by 24.87 percent. The main drivers of expenditure for the period continue to be Manpower at M62.33 million, Power at M17.292 Million and slightly below the budgeted amount of M9.74 million while chemical usage was at M3.18 million against a budgeted amount of M3.96 million.

4.1.2 The table below presents how expenditure has been distributed among key items for

the period ending December 2017. Projected expenditure for the 2017-18 financial year is estimated at M159.00 million and is projected to be below the budgeted amount of M 239.93 million.

Table 4a: Distribution of Expenditure

Expenditure Item Amounts

Manpower 62,329,902

Chemicals 1, 599, 349

Power 17, 292, 796

New connections Materials 2, 488, 737

Reticulation and meter Maintenance 1, 685, 781

Other Expenditure 75, 551, 363

Total Expenditure 112, 704, 189

4.1.2 The target set for total revenue for the 2017-18 period is M255.17 million. Revenue

for the period ending December 2017 was recorded at M174.27 million. At M126.23 million the main driver of revenue, Water Billing was recorded against the set target of M198.25 million for the period. This represents a below expected consumption patterns by WASCO customers during the period.

4.1.3 Table 4b below highlights in a tabular presentation the contribution of the main

Revenue items for WASCO for the period ending December 2017.

17

Table 4b: Distribution of Income

Revenue Item Amounts

Water Billing 126, 234, 953

Sewerage Billing 20, 094, 311

New connections (water) 9, 932, 674

New connections (sewer) 691, 391

Other Revenue 16, 717, 119

Total Revenue 174, 267, 448

4.1.4 From the above figures it can be realised that an operating profit of M61.6 million had been generated for the nine-month’s period to the end of December 2017. This profit is higher than the budget profit of M15.24 million for the period.

4.1.5 The projected total income for the financial year can be extrapolated to reach an

amount of M198.47 million. Of this total revenue generated from water and sewerage sales is projected to reach M146.32 million. This amount falls substantially below the set Revenue Requirement of M232.86 million (by about 37.16 percent). This is a projected under recovery, once more, for the utility. This is corroborated by the projected shortfall in consumption for the period as presented in the next sections of this chapter. A presentation of the 2017-18 management accounts in regulatory format is made in Annex C.

4.2 Production, consumption and sales data 4.2.1 Below is a detailed presentation of production, consumption and sales data for the

period ending December 2017. Table 4c: Production, Consumption Energy and sales Data (April to Dec.

2017) Item April May June July August September October November December Projected

Actual (2017-18)

Actual Water Production (m³) 1,869,949

1,876,565 1,834,792

1,987,552

1,890,592

1,823,367 1,819,945

1,822,313

1,851,985

22,508,629

Projected Water Production (m³) - 19,769,468

Projected Consumption (m³) - 14,234,017 Actual Water Consumption (m³)

901,441

1,209,206

1,109,509

999,888

958,170

1,063,382

1,151,185

1,056,112

1,056,112

12,673,341

Non-Revenue Water (%)

51.8% 35.6% 39.5% 49.7% 49.3% 41.7% 36.7% 42.0% 43.0% 43.6%

Projected NRW (%) 28%

Energy Usage

Power (KwHrs)

1,436,140

1,483,944

1,471,668

1,573,843

1,555,377

1,511,394

1,831,100 1,710,022 1,794,577

Actual Water Sales (Maloti) 15,144,745 15,650,290 15,842,379

14,000,134

14,232,372 14,066,727

16,408,036

15,343,880

20,750,236

188,585,066

Actual Sewer Sales (Maloti)

1,970,541

2,747,691

2,628,416

2,123,315

2,021,815

2,481,322

2,633,278

2,344,494

2,575,073

28,701,262

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4.2.2 WASCO acknowledges the issue of the correct and accurate recording of

consumption at the customer level which largely influences the NRW figure. This is being dealt with for correction for proper determination in the next year. An effort would be also focused on the collection of accurate and credible data at production and consumption levels so as to be able to determine accurately the verifiable NRW target for the short and long term.

4.3 Service Coverage

4.3.1 The target for water and sewer connections for the year has been set at 6, 000 and

1,000 respectively. The performance of WASCO with regard to water and sewer connections for the period ending in December 2017 was registered at 3,464 water connections and 139 sewer connections.

4.3.2 The table below presents the distribution of water and sewerage connections for the

period April to December 2017 categorised according to those in Maseru, the north and south regions Table 4d: Water and sewer connections (April to December 2017)

Water Connections

Region April May June July August September October November December Total

Maseru 284 86 276 96 213 247 164 348 352 2298

North 111 115 190 103 183 170 50 75 45 686

South 113 39 109 48 89 78 61 53 35 480

Total 508 240 575 247 485 495 275 476 432 3,464

Sewer Connections

Region April May June July August September October November December Total

Maseru 15 7 36 55 12 0 5 29 11 128

North 0 0 1 1 0 1 0 0 0 3

South 0 0 3 0 2 0 1 2 0 8

Total 15 7 40 56 14 1 6 31 11 139

4.3.3 The total number of water connections for the period managed to breach the half-way

mark against the set target of 6, 000 connections for the year. The performance of sewerage connections could not even reach the quarter mark for envisaged connections. There is still a limited uptake of sewer connections in the districts due to limited infrastructure in the districts. It can be seen that in some instances there were no connections at all. For Maseru this is despite implementation of a European Union funded project to lay sewerage reticulation at Mabote and Khubetsoana. A marketing drive to induce sewerage house connections has not yielded fruits.

4.4 Water and Sewerage Quality 4.4.1 Performance in the quality of water produced and supplied to the public has been

very good during the review period as well as in recent months prior to the period. All treatment plants managed to maintain turbidity levels at an average level of 98.2 percent for the period and have largely maintained the 98 percent level for all the months of the period except for one. Samples passing bacteriology count have registered an average of 96 percent for the period and have largely kept a level above the 95 percent mark. Samples passing residual chlorine tests, at an average of 81.7

19

percent have dropped in performance during the period and have registered the lowest performance of 75 percent (the first time below the 80 percent mark) in the past few years.

4.4.2 The figure below presents the performance of treated water infrastructure for the nine

months to December 2017. Figure 4a: Quality of Water Produced (April to December 2017)

4.4.3 The performance of samples passing the Suspended Solids (SS) and Chemical

Oxygen Demand (COD) effluent parameters made a good start at the beginning of the period (though far below acceptable levels) and continued on a downward trend during the period to a common figure of 29 percent in December 2017. A clearer picture is laid out in the figure below. Figure 6: Quality of Treated Effluent (April to December 2017)

0

20

40

60

80

100

120

Pass R

ate

s (

%)

% samples passing (Turbidity) % samples passing (chlorine residual)

% samples passing (Microbiology) % samples passing (Langelier Index)

0

10

20

30

40

50

60

April May June July August September October November December

Pass R

ate

s (

%)

% samples passing (COD) % samples passing (Suspended solids)

20

5. FORECASTS FOR THE 2018-19 FINANCIAL YEAR 5.1 Introduction 5.1.1 The intentions set out in the 2018-19 budget estimates respond to the planned

objectives and commensurate initiatives and activities laid out in the 2018-19 Annual Business Plan as well as the implementation of routine operational activities aimed at delivering service to customers. The ABP and the responding budget focuses on the following main initiatives, namely, reducing debt by increasing cash collection, refurbishing the ailing reticulation system, reducing NRW, etc. These are further enhanced by the adoptions of indicators to define the performance scorecards. These initiatives will undoubtedly improve WASCO way of doing business and realizing its goals.

5.2 Priority initiatives for 2018-19 5.2.1 The following are priority initiatives to be implemented by WASCO in the financial

year 2018-19.

o Strengthened debt recovery and collection o Continued capacity building interventions

• Carrying out a Customer Identification Survey aimed at establishing exactly the number of customers the utility has.

o Ongoing interventions and rehabilitation office and service infrastructure o Actively dealing with Non-Revenue Water (NRW) o Robust service coverage o Implementation of Pre-paid metering system o Energy management and reduction endeavours o Enhanced public outreach and marketing activities

5.2.2 The following is a highlight of some of key WASCO performance targets that will be pursued in the 2018-19 financial year.

a) Thirty-Two (32) percent Non-Revenue Water - As set out in the Strategic plan the

target for NRW for the 2018-19 financial year is set at 32 percent. The efforts towards tackling NRW are being thwarted by continuous utilisation, through stand pipes, of water from the conveyance system from the Metolong Dam by communities in the villages through which it traverses without modalities for them to make payments. These standpipes are being metered and to date the rate of water losses (those communities do not pay for the water used) is up to 20, 000 kilolitres per month. Concerted efforts are being put in place to deal with structural problems facing the reticulation system which is best with leakages and numerous bursts.

b) A 10 percent Revenue growth - Efforts will be put in place for a robust campaign to improve the revenue of WASCO over the planning period.

c) Expanding the customer base and hence improving service coverage – a more

direct approach will be adopted towards improving the rate of household connection through direct marketing of the WASCO service product. Currently the

21

target for water and sewer connections are set at 6,000 and 1, 000 connections respectively. Extra resources will be placed at the disposal of the divisions responsible for house connections to improve performance in this area.

d) Sound management and reduction of customer debts – An aggressive campaign to reduce the magnitude and lag of customer debt will be implemented in the planning period through targeted disconnections. This is aimed at ensuring that customers do not permanently owe WASCO for lengthy periods of time and with substantial amounts.

e) 10 percent improvement in employee performance and satisfaction – a robust

capacity building endeavour will be implemented to improve employee performance and capacity with a view to improve service provision. This will be coupled with implementation of a performance reward system that will go in tandem with talent management and skills retention.

5.3 Statement of Approved Budget 5.3.1 The 2018-19 WASCO budget has been presented and laid out in terms of key

revenue and expenditure drivers. The key drivers of revenue for the company include water and sewer billing, connection fees for water and sewerage, reconnection fees and application fees. Water and sewerage billing income constitute just under 80 percent of proposed income for the 2018-19 financial year. A growth potential in the area of water and sewer connections revenue will be explored.

5.3.2 A more direct attempt has been made at rationalising the cost of providing service. A

cost cutting drive is in place to reduce some non-essential budgetary items on the expenditure side. The following are key drivers, namely salaries and related emoluments, fees (including limited consultancies), chemical usage for water and sewer treatment, power, and plant maintenance. Base salaries constitute about 43 percent of WASCO proposed expenditure while combined budget for electricity and chemical usage sums up to approximately 14 percent of total planned expenditure.

5.3.3 Expenditure on the Metolong Dam operations and related infrastructure has been

singled out as a standalone item for the 2018-19 budget. This is with a view to clearly present a picture of how much impact the operation of the new facility is making on the WASCO budget.

5.4 Forecast Operating Costs 5.4.1 Here below is a tabular presentation of envisaged operating costs for the 2018-19

financial year. The 2018-19 Budget in regulatory format is shown in Annex E.

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Table 5a: 2018-19 Operating Budget against the 2015-16 and 2016-17 budgets

ITEM 2016-17 BUDGET

ALLOCATION 2017-18 BUDGET ALLOCATION

2018-19 BUDGET ALLOCATION

Expenditure 245,948,368 253,838,700 295,870,625

Manpower 118,013,296 110,478,227 123,689,452

Power 21,361,322 25,389,287 38,046,213

Chemical Usage 8,666,792 8,493,564 8,314,132

Reticulation and plant maintenance

18,067,557 21,596,907 10,359,647

Water and Sewer connections 23,052,853 20,475,836 9,441,862

Depreciation 18,132, 892 18,010,000 20,809,505

Total Income 253,958,897 257,304,543 300,192,573

Water and Sewer Billing 201,400,000 226,337,044 254,915,416

Water and Sewer Connections 14,370,000 25,045,000 15,402,480

Other Income 2,183,858 5,922,499 31,600,539

Operating Profit/Loss 10,607,052 223,055 4,324,948

a) Manpower costs

This budget line includes payment of emoluments for WASCO employees is for

basic salaries for WASCO’s staff which Management proposes to be adjusted by

6% effective 1st April 2017. The Company has about 603 employees with 99%

engaged on permanent and pensionable. This proposed increase is subject to

approval of the proposed tariff adjustment on water billing. The existing

infrastructure is experiencing numerous leakages and bursts which have to be

attended at times beyond normal working hours. This budget line caters for such

emergencies and the holidays which attract overtime pay. The 2017-18 year’s

budget declined by 40% from the previous year because Management intended

to control this expenditure item. The other contributing factor is that Meter Readers

(based in Maseru) will be utilising motor bikes instead of walking long distances

like it was the case in the previous years. The automated meter reading gadgets

will also minimise overtime pay because data is now downloaded remotely

thereby minimising idling time.

b) Consultancies

This budget line is meant for external consultancy which the Company intends to

engage for compliance purposes. There is a need for revaluation of all property in

order to comply with the provisions of International Financial Reporting Standards

and engagement of external consultants for geodetic deformation survey for

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Metolong Dam. There are other environmental and laboratory related consultancy

costs which will be incurred in this financial year for compliance and improvement

of the image of the Company.

c) Training

This budget line covers costs related to training initiatives in order to improve efficiency. The current year’s budget decreased by 6% when compared to the previous year. Some training initiatives are sponsored by the World Bank hence a decline in the budget.

d) Advertising

Advertising is one of the useful tools for promoting the company’s image and reputation. This budget line is used to acquire promotional materials and branding for public outreach and marketing campaigns and has increased by a factor of 23 perccent for the next financial year. This budget line will also cover radio programmes and other information dissemination endeavours.

e) Building Maintenance

This budget line is for renovation and routine maintenance of identified WASCO property. Activities include separation of electricity meters, plumbing and minor carpentry work. Office cleaning materials are also covered in this budget line and the decrease of 21% is triggered by the proposed partnership with private sector in order to develop prime land in the Maseru district.

f) Insurance

This budget line provides for annual insurance premium for all insured assets of the Company. The Company acquired twenty-four (24) motor vehicles and fourteen (14) motorbikes in the previous year which will increase the premium.

g) Telephone and Fax

This budget line is for telephone bills for staff. The Company introduced closed group calls system to improve communication with officers who work at the field and project sites. This new system will improve on efficiency and dissemination of information. The 10% increase is as a result of additional users who were accommodated in this financial year.

h) Power

This budget line is for electricity and coal. The 30% increase is led by the fact that Lesotho Electricity Company has applied for tariff adjustment (a pass-through cost) which is likely to affect the cost of electricity. Metolong Dam has so far contributed to high electricity bill as WASCO will, from the 2018-19 financial year be responsible for the payment of electricity after the end of assisted operations.

24

i) Plant

This budget line is for maintenance of the Company’s plant. Costs included in this budget line are motor rewinding, plant hire and acquisition of material that is used for repairs and replacement of parts. The budget has increased by 7% from the previous year’s budget due to inflation as most of the spare parts and material are imported from South Africa.

j) New Connections

This budget line is for payment of External Contractors and acquisition of material for new water and sewerage connections. The Company phased out engagement of Contractors for new water connection in order to minimise costs. This new arrangement where the Company uses internal resources resulted in 27% reduction when comparing the budget with the previous year.

k) Reticulation Maintenance and Materials

Reticulation maintenance material covers acquisition of repairs and maintenance material needed for reticulation network. The budgeted items include valves, adapters, manhole covers and clamps. The budget reduced by 3% from the previous year due to reduced quantities of material for this financial year.

l) Meters and Maintenance material

This budget line is for maintenance material for both prepaid and post-paid meters. The budget has increased by18% because of additional prepaid bulk meters that will be purchased in this financial year.

m) License fee

This line is for payment of annual license to Lesotho Electricity and Water Authority (LEWA) which is a pass-through cost. The 13% increase is the based on previous years trend.

n) Finance Charges

This budget line is meant for interest charge from the current loans that the Company has with Nedbank Lesotho and other International Development Agencies. The 7% reduction is caused overbudgeting in the previous year.

5.5 Forecast Capital Costs

5.5.1 WASCO is implementing a number of projects aimed at improving service coverage

and sound treatment of waste water. These projects are largely funded through funds from the Government of Lesotho and its development partners. Small projects are funded internally and are mainly focused towards reticulation extensions and small works.

25

5.5.2 For internally funded projects and investments the Company’s capital budget is estimated at M50 million and this is normally financed by collection from outstanding debts as well as use of depreciation funds. The Company engaged four External Debt Collectors in order to improve collection and the plan for this year is to run a pilot project for prepaid meters for non-domestic customers to improve cash collection. Below is analysis of the proposed capital expenditure for 2018-19.

CAPITAL EXPENDITURE 2018-2019

Description Note 2018-2019 2017-2019 Increase/(Decrease)

Investment Projects 3.1

46,247,626

37,492,690

23%

Motor Vehicles 3.2

1,263,742

6,925,957

(82%)

Furniture and Equipment 2.3

262,627

681,292

(61%)

Property 3.4

671,426

6,795,003

(90%)

ICT 3.5

1,554,578

2,170,958

(28%)

Total Total 50,000,000 54,065,900

5.2.3 From the above table, investment projects are the projects which focus on

rehabilitation, infill and replacement of asbestos pipes. Investment projects are also

meat to reduce non-revenue water in order to improve efficiency. M5.1 million was

invested for construction of about 1.7km of a 250mm diameter class 16 uPVC

pipeline, 0.3km of a 250mm diameter Galvanized Iron Pipeline, and two Air Release

Structures for Qoaling project in the previous financial year. The Company further

invested M1.4million for replacement of asbestos pipes at Maseru East to ensure

reliability of water supply.

5.2.4 The Company acquired 24 motor vehicles and 14 motor bikes in the previous financial year which were all acquired. Four of these motor vehicles were acquired by cash while the remaining was through the bank loan amounting to M4million (Principal). The new budget if for replacement of 17 motor vehicles which were disposed towards the end of 2017/18 financial year. Major acquisition of motor vehicles and motor bikes in the previous year led to decrease of 82% when comparing the previous year with the current year’s budget.

5.2.5 The Company has property in most Centres where it operates and most of the buildings are decapitated. needs major revamp. The budgeted figure is for all is meant to upgrade buildings across the country. There is a proposal to develop all prime land at Maseru in partnership with private sector. This development is expected to create more space and increase revenue streams for the company whilst empowering private sector. The proposed partnership will lead to a decline of 90% when comparing the two years.

5.2.6 The Company has provided for procurement of ICT equipment which is meant for improved service delivery. The Company invested M1.5 million to acquire automated meter reading gadgets in the previous year and the plan for this financial year is to invest in advanced technology where customers can access their accounts over the

26

internet. The budgeted items include call centre system fees, acquisition of computers and Uninterrupted Power Supply systems.

5.2.7 The following ongoing projects are funded through the Government of Lesotho and will continue to be implemented during the 2018-19 financial year.

• Five Towns Water Supply Project,

• Maseru Waste Water Project

• Greater Maseru Water Supply Project

a) The Five Towns Water Project

For the coming financial year, it is planned that preliminary and detailed designs of the project will be finalised, procurement of contractor and commencement of construction works. For this project it is envisaged that M42.7 million will be spent in the 2018-19 financial year.

b) The Maseru Waste Water Project

The implementation of phase two of the Maseru Waste water Project will be in two contracts namely MWWP-W4 and MWWP-W1.

The contract MWWP-W4 will comprise two lots for the coming year. Lot 1 entails the construction of a pump station and pump house as well as the construction of a rising main from the one to be constructed to an existing one. Lot 2 deals with the implementation of a 3000-meter sewer line at Thetsane East and additional works on the sewer network at Thetsane West. This also includes construction of 5000 meters of sewer network for Masowe.

The MWWP-W1 contract will entail the continuation of construction of on-site sanitation facilities (water closets and pit latrines) the identified areas.

The project will utilise about M43.7 million in the 2018-19 financial year.

c) Greater Maseru Water Supply Project

The project entails design and construction of water distribution network and associated infrastructure in the three packaged areas namely South (Masana, Mazenod, Motloheloa, Ha Luka, Bosofo, Lenono and Makhoathi), South West (Tsiame, Ha Tikoe, Ratjomose/Lesia, Tsautse and Qoaling) and North East (Maqalika, Mabote, Tsenola, Sehlabeng, Foso, Marabeng and Berea).

The project comprises design and construction of new water transmission mains, trunk mains, and collection sub mains, and pumping stations with supply of water mainly from Metolong water treatment works and other existing works. Due to

27

extension requirements, a sizable reticulation network of pipes, various pumping options and additional reservoirs will be constructed.

The project will be implemented over a three-year period and is estimated to cost approximately M309 million and will cost M14.0 million in the 2018-19 financial year.

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6. PROPOSED REVENUE REQUIREMENT AND TARIFF FOR 2018-19

This chapter outlines the basis for the proposed tariff for the 2018-19 financial year. 6.1 Regulated Accounts 6.1.1 The value of the company’s assets as well as its depreciation has not been

adequately factored in the determination of the tariff for 2018-19 financial year. A framework to fully establish and delineate all WASCO assets was carried out through a consultancy during the current financial year and the results will form the basis for the valuation of the assets. Once more this has not been carried out so as to inform this tariff application.

6.1.2 The Company will be conducting a cost of service study in the next financial year to

accurately determine the cost related to service provision in the various areas of service. The result will form the basis for future tariff applications.

6.2 Weighted Average Cost of Capital 6.2.1 The real Weighted Average cost of Capital (WACC) has been calculated to be 6.4%

while the WACC (Pre-tax) has been valued at 11.4%2. An excel spreadsheet showing the calculation is depicted in Annex D.

6.3 Proposed Tariffs and Charges 6.3.1 Volumetric Tariff and Standing Charge Adjustment As set out in the foregoing pages which highlighted performance of WASCO on its

operation and finances as well as the desire to improve service delivery, WASCO envisages total operating costs to reach M253, 838,700 in the 2018-19 financial year. A total revenue of M257, 304, 543 is needed to realise an operating profit of M3, 789, 817.

Based on the above assessment of carefully presented cost to the company for the 2018-19 financial year, Revenue Requirement of M280.95 million from the regulated business comprising M246.32 million for water and M31.64 million for sewerage. This will yield a total revenue of about M312.55 when other unregulated revenue is added. At this rate the expected operating profit will be M15.83 million when the expected revenue is pegged with the envisaged total expenditure of M296.72 million. In order to meet the proposed Revenue Requirement, WASCO proposed an upward adjustment of the 2018-19 tariff in the following manner:

➢ A 12% adjustment for domestic volumetric and Standing charges

➢ A 15% adjustment for Non-Domestic Volumetric and Standing charges

The paper further goes to propose that the volumetric and standing charges

2 These figures are only estimates based on a trial calculation whose variables have been extrapolated from industry

estimates.

29

The volumetric and standing charges for services supplied from public stand pipes have been kept at 2017-18 figures. The same goes for Standing charges for domestic customers in Band A, which have not been changed at zero.

Table 6a: Comparative analysis of the proposed tariff

Band Current Tariffs (per kl)

Increase (Per kl)

New Tariffs (Per kl)

Domestic Customers

A: (0 – 5kl) 4.89 0.489 5.3945

B: (>5 – 10kl) 8.45 0.845 9.1384

C: (> 10 – 15kl) 15.03 1.503 16.0519

D: ( > 15kl) 20.81 2.081 22.1282

Domestic Standing charge 40.9 3.48 44.38

(Band A) 0.00 0.00 0.00

Non-Domestic Customers

- Industrial, business, Government 13.66 1.366 15.29

- Schools, churches 13.54 1.354 15.29

- Stand Pipes 6.71 0.00 6.71

Non-domestic Standing charge

- Industrial and Business 272.35 27.235 299.585

- Government and Schools 393.39 39.339 432.729

- Religious Institutions 272.35 27.235 299.585

- Schools 196.70 19.670 216.37

- Standpipes 0.00 0.00 0.00

Waterborne sewerage customers

Sewerage to be charged on 85% of water consumed 9.7 0.00 9.7

Low-Flush Waterborne sewerage customers

Water closet customers to be charged on 60% of water consumed. 9.7 0.00 9.7

5.3.3 Based on the above proposed tariffs, the following are forecasted sales based on

forecasted consumption patterns of various customer categories.

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Table 6b: Forecasted consumption and water sales (2018-19)

Customer

Water Unit Costs (M/kl)

Standing Charge (M/month)

Annual Sales kl/Year

Number of Connections

Total Revenue (M)

Domestic Customers

Band A (0 - 5 kl) 5.38 0.00 3,657,595 59,370 19,660,521.68

Band B (>5 - 10 kl) 9.30 44.38 1,892,029 29,711 33,418,050.84

Band C (>10 - 15 kl) 16.53 44.38 581,629 10,290 15,093,223.20

Band 0 (>15 kl) 22.89 44.38 1,104,465 9,146 30,155,719.44

Total 5,378,526 94,363 98,327,515.16

Non-Domestic Customers

Government 15.29 299.59 1,688,763 584 27,926,700.49

(Business, Industry) 15.29 432.73 6,594,950 2,094 111,736,017.19

Schools 15.16 299.59 382,559 288 6,838,113.21

Religious Institutions 15.16 216.37 53,417 197 1,322,125.54

Standpipes 6.71 0.00 18,122 119 121,552.37

3, 282 147,944,508.80

Total 16, 288, 125 111,800 234,356,474.82

6.3.4 The forecasted effluent to be disposed into the environment and related revenue

gained from provision of disposal services is presented as follows in table 9:

Table 6c: Forecasted sewerage disposal volumes and revenue from disposal services (2018-19)

Customer Categories Water Unit

Cost (M/kl) Sales (kl/year) Number of

Customers Total Revenue (M)

Water borne sewerage customers 9.70 405,668 2,575 3,934,979.60

Standard Non-Domestic 9.70 2,473,934 1,584 23,997,159.80

Lesotho Brewing Company 9.70 485,403 2 4,708,409.10

Likotsi and Qoaling Clinics 48.86 34,236 3 1,672,770.96

C &Y Sewer 1.01 290,560 2 293,465.60

Total 3,689,801 4,166 34,606,785.06

6.4 The Basis and Rationale for Tariff Adjustment 6.4.1 The proposed tariff and standing charge adjustments primarily hinge on the need to

augment revenue to meet the costs of efficiently and effectively running the Company for the provision of service.

31

6.4.2 The Implementation of the Annual Business Plan The priorities laid out in the Annual Business Plan have been clearly articulated in the

preceding chapter under section 4.2. WASCO has committed itself to address issues raised in several LEWA inspection reports and has endeavoured to include the proposed remedial measures in the 2018-19 annual business Plan.

6.4.3 Further rationale for this proposed adjustment of tariffs is the following:

a) Offsetting under-recovery for the 2015-16 and 2016-17 financial years WASCO has not been able to fully realise the potential revenue from water and sewerage services as projected by LEWA based on the two tariff adjustments due to below par demand patterns. This has to be factored into the tariff determination for the next financial year.

b) Takeover of Metolong Dam facility and related infrastructure The takeover of the Metolong Dam has exerted expenditure pressures on the WASCO budget. The magnitude of the facility is one factor highlighted as well as the fact that the company has to deal with maintenance of the dam wall infrastructure and related issues, a matter which is new to WASCO. Expenditure on running the Metolong Dam facility and related infrastructure has been presented as a stand-alone item to clearly highlight the substantial cost increases.

c) Offsetting the effects of inflation

The cost of obtaining operational materials from key WASCO suppliers is expected to increase by an inflationary rate of 5.2 percent in the forecast year and these costs will be borne by WASCO in the quest to provide requisite service.

d) Addressing financing costs

WASCO, in its quest to provide services to its customers has had to augment its financial resources through the services of financial institutions by way of loans. WASCO has been supported by the Government of Lesotho to obtain loans from development partners and international financing institutions and in recent times has had to approach local commercial financiers to supplement its financial resources. These loan obligations have to be serviced and are burdening the company. The projected financing costs to WASCO are estimated at approximately M7.06 million.

6.4.5 The Effects of the recent drought conditions The effects of the drought that started in the last financial year has caused reduced

production in most of WASCO treatment plants and a resultant decrease in consumption which in turn led to an under recovery of the required revenue for the 2016-17 financial year. There is need to recoup the below par performance in revenue for the year.

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6.4.6 The Takeover of Metolong operations During the 2015-16 financial year the Metolong Dam operations started being run by

WASCO. However, there was a reprieve at the initial stages of the operations WASCO was assisted for a period of up to a year through a consultancy under the project. In the 2017-18 financial year however, WASCO started bearing the full brunt of costs emanating from the operation of the Metolong Dam facilities. The magnitude of the operation surpasses what WASCO used to run and will have huge cost implications in its budget as has been presented in the forecasted budget. The unit costs for power and inherent structural maintenance of the dam wall, a new phenomenon for WASCO are envisaged to have a huge toll on WASCO’s budget and therefore consideration has to be made in to cover them in the new tariff.

6.4.7 Water losses from the DCS

At the outset and upon transfer of water from the Metolong Dam treatment facility to Maseru and other towns such as Morija, Roma and TY there was a need to run system integrity test on the conveyance reticulation which resulted in water losses. This was compounded by system faults in and around Maseru where valves failed resulting in substantial water losses. The system is now stable but the pressure exerted by the system to the old and obsolete system in some areas of Maseru caused several pipe bursts which also resulted in substantial water losses. Furthermore, as per instruction of the government of Lesotho WASCO was requested to supply communities in villages where the reticulation system traversed their villages during the drought situation. Recently the amount of water losses through the installed standpipes is being recorded and will need to be provide for in the new tariff.

6.4.8 Offsetting the effects of increased VAT

The Government of the Republic of South Africa announced at its recent budget estimates presentation the increase of one (1) percent in the Value Added Tax (VAT) on selected items for the 2018-19 financial year. This has had an inevitable effect on a similar increase by the Lesotho Government of the same magnitude of its VAT for the ensuing year. WASCO sources materials and services and other inputs from the RSA and Lesotho that attract VAT and this has a direct effect on costs of its service to its customers. The proposed tariff adjustment will go a long way to reduce the effects of this increase in VAT.

6.5 Affordability Analysis 6.5.1 This time around, the proposed adjustment of tariffs has affected all bands for

domestic customers with regard to volumetric charges. As an affordability assessment, the proposed M5.38 tariff for Band A produces a total charge on M26.90 for the maximum consumed under this band. From the last Household Budget survey (2008) it has been established that approximately 93 percent of the population earn below the M3, 000.00 and that the average monthly income for this group is M404.00. It can be inferred that of this population a large part works and resided in urban centres of which WASCO provides services and as such earn higher than the average

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figure. Having said that, the M26.90 still falls below the affordability threshold (5%) for this group under Band A.

6.5.2 Taking into consideration that improvements have been made to the minimum wage

and that the general economic growth of the country, keeping the volumetric charge for Band A keeps it within the affordable 5 percent threshold for the immediate year. This state of affairs is the same for urban communities drawing water from Stand pipes whose volumetric tariff has been kept at current rates of M6.64 per unit. The ultimate consumption of these communities and the resultant expenditure on water would still fall below the affordable threshold.

6.5.3 The argument of affordability is confirmed by the Per capita GDP of M6, 5053 determined by the Bureau of Statistics. Furthermore, adjusting volumetric and standing charges for bands C to D, is still within the affordable threshold for higher income earners based on a similar basis.

3 Issue No 22 of 2016 National Accounts: Bureau of Statistics