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[2017] ZAKZPHC 72
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Sembcorp Siza Water (Proprietary) Ltd v Umgeni Water and Others (11908/2015) [2017] ZAKZPHC 72 (13 September 2017)
IN THE HIGH COURT OF SOUTH AFRICA
KWAZULU-NATAL DIVISION,
PIETERMARITZBURG
CASE
NO. 11908/2015
In
the matter between:
SEMBCORP
SIZA WATER
(PROPERIETARY)
LTD
APPLICANT
and
UMGENI
WATER
FIRST RESPONDENT
MINISTER
OF WATER & SANITATION
SECOND RESPONDENT
ILEMBE
DISTRICT
MUNICIPALITY
THIRD RESPONDENT
JUDGMENT
Delivered:
13 September 2017
MNGUNI
J
[1]
Water is critical for sustainable development, including
environmental integrity and
the alleviation of poverty and hunger,
and is indispensable for human health and wellbeing.
[1]
Section 155(7) of the Constitution of the Republic of South Africa,
1996 gives the national government, subject to s 44 of the
Constitution, the legislative and executive authority to ensure
effective performance by municipalities of their functions in respect
of matters listed in schedules 4 and 5 of the Constitution. Schedule
4 Part B of the Constitution lists water and sanitation services
limited to potable water supply systems and domestic waste-water and
sewage disposal systems as one of the municipal functions
that are
subject to national government’s legislative and executive
authority.
[2]
The second respondent (the Minister) is the authority entrusted in
terms of s 155(7)
of the Constitution, with the authority to ensure
that municipalities effectively perform the functions listed in
schedules 4 and
5, in particular, functions in respect of water
services. The Minister plays an active role as the custodian of the
country’s
water resources and as an overall policy maker and
regulator. To this end the Minister oversees the activities of all
water sector
institutions, is responsible for national resource
planning and allocation, licenses water uses and ultimately manages
water resources
infrastructure.
[3]
The Water Services Act 108 of 1997 (the Act) was promulgated to give
content to the
Minister’s executive authority contemplated in s
155(7) of the Constitution. The Act provides a detailed account of
the legislative
and executive authority of the Minister to regulate
the entire water value chain.
[4]
The main objects of the Act are to provide for inter alia, (a) rights
of access to
basic water supply and the right to basic sanitation
necessary to secure sufficient water and an environment not harmful
to human
health or wellbeing; (b) the setting of national standards
and norms and standards in respect of water services; (c) the
preparation
and adoption of water services development plans by water
services authorities; (d) a regulatory framework for water services
institutions
and water services intermediaries; (e) the establishment
and disestablishment of water boards and water services
committees
and their duties and powers; (f) the monitoring of water
services and intervention by the Minister or by the relevant
Province;
and (g) financial assistance to water services
institutions.
[5]
In terms of s 10(1) and (2) of the Act, the Minister with the
concurrence of the Minister
of Finance, may from time to time
prescribe norms and standards in respect of tariffs for water
services which may (a) differentiate
on an equitable basis between:-
(i) different users of water services, (ii) different types of water
services, and (iii) different
geographic areas, taking into account,
among other factors, the socio-economic and physical attributes of
each area.
[6]
The first respondent (Umgeni Water) is a public statutory water
utility established
in terms of the Act, and, is a regulatory
authority established with its primary activity being to provide
water services to other
water services institutions within its
services areas. Umgeni Water has authority to apply for the
increase of water tariffs
which is subject to approval by the
Minister. The third respondent (the Ilembe) is a water services
authority with an obligation
to all customers in its area of
jurisdiction to progressively ensure efficient, affordable,
economical and sustainable access to
water services.
[2]
[7]
In terms of s 19(1)
(a)
and
(b)
(i) and (ii) of the Act,
the Ilembe may perform the functions of a water services provider
itself, and may enter into a written
agreement with a water services
provider or form a joint venture with another water services
institution to provide water services.
[8]
On 29 January 1999, the applicant concluded a concession contract
with the then Dolphin
Coast Transitional Local Council (the DCTLC),
which at the time was the municipality having jurisdiction over the
concession area
defined in the concession contract to include an area
lying roughly between the urban areas of Zimbali, Ballito, Umhlali,
Shakaskraal,
Chaka’s Rock, Salt Rock, Shefield Beach, Tinley
Manor and several areas given over for housing of less affluent
communities
including some informal settlements. The concession
contract is for a period of 30 years and is capable of renewal for a
further
period.
[9]
The concession contract was entered into pursuant to the DCTLC
putting out for public
tender the right to provide water services to
the resident population in the concession area. At that time the
DCTLC was the water
services authority for the concession area. The
applicant was awarded the tender. The concession contract was the
means whereby
the applicant was appointed as the water services
provider for purposes of delivering water services to the resident
population.
[10]
The applicant has therefore been the water services provider for
purposes of the Act throughout
the concession area since the
inception of the concession contract and has continued to perform
those services under the concession
contract. The applicant’s
functions under the concession contract which would have been carried
out by the Ilembe but for
the concession contract include, inter
alia, supplying water to individual consumers, metering, billing and
recovering charges
from the individual users, maintaining the
existing water distribution system from the bulk supplier to the
individual users, and,
extending the existing supply infrastructure
so as to supply new water users.
[11]
In December 2000 a new dispensation for the local government was
introduced resulting in the
DCTLC being disestablished. All the
functions of the DCTLC were transferred and assigned, depending on
the nature of the function,
to either the KwaDukuza Local
Municipality or to the Ilembe as the district municipality. In terms
of ss 83 and 84 of the Local
Government: Municipal Structures Act 117
of 1998 (the MSA) the provision of water services was one of the
functions allocated to
the district municipalities. The Ilembe became
the successor to the DCTLC as the water services authority and
inherited the rights
and obligations of the DCTLC as set out in the
concession contract.
[12]
The Ilembe remains the water services provider for the remainder of
the areas falling outside
the concession area. These areas include
the Northern and Inland portions consisting mainly of KwaDukuza Town,
Groutville, Blythedale
Beach, Prince’s Grant, Zinkwazi Beach,
Darnall, Mandini and the inland municipality areas of Indwedwe and
KwaMaphumulo.
[13]
On 7 August 2000, Umgeni Water as the supplier, the applicant as the
customer and the Ilembe,
separately concluded a tripartite bulk water
service agreement (the tripartite agreement) in terms of which Umgeni
Water, with
the Ilembe acting as guarantor for the obligations of the
applicant to Umgeni Water, undertook to supply potable water to the
applicant.
The Minister was not a party to the concession
contract or the tripartite agreement. Clause 10.1 of the tripartite
agreement
includes provision for the payment of the purchase price
for the bulk supply of water made available to the applicant by
Umgeni
Water according to a tariff. This clause also contemplates the
adjustment of the tariff from time to time. What is clear from this
clause is that any adjustments of the tariff are subject to the
decision by the Umgeni Water board and does not envisage the
adjustment
of the tariff by the agreement except that the applicant
must be consulted.
[14]
It is common cause that over the past ten years, the increases for
the bulk water services to
the municipalities and the applicant were
below 10 per cent for each of those years, and were imposed uniformly
within an area
covering the Ilembe and municipalities serviced by the
same supply system of the Ilembe.
[15]
According to the applicant there is an interplay between the tariff
charged by Umgeni Water and
what the applicant charges its individual
water consumers in the concession area. The applicant asserts that it
is obliged to negotiate
with the Ilembe, for any increases in the
tariff in accordance with the concession contract which has detailed
provisions and schedules
dealing with the setting of the tariff
including the timing of negotiations. The applicant is contractually
guaranteed a minimum
rate of return to ensure that it remains viable
as a water services provider and has no authority or legislative
power to fix its
own tariff, whereas the Ilembe has the power to do
so in terms of the Act and ss 83 and 84 of the MSA.
[16]
According to the applicant, the Ilembe will generally approve a
tariff only if the tariff accords
with its budget and is considered
realistic, taking into account the impact the tariff will have on
consumers in the concession
area. In this regard the cost to the
indigent and middle class end user in the concession area as against
the cost to similar users
in the remainder of the Ilembe area is an
important factor to be considered.
[17]
On 12 November 2014 the applicant’s representatives and those
of Umgeni Water held a meeting
concerning the proposed tariff
increase for the financial year commencing 1 July 2015. In that
meeting Umgeni Water’s representatives
informed those of the
applicant that Umgeni Water was contemplating an increase of 40 per
cent in the tariff for the ensuing financial
year.
[3]
Two reasons were advanced in substantiation of such increase. The
first was the determination that Umgeni Water will no longer
allow a
cross-subsidy on price of bulk water supplied to the applicant. The
second was the determination that since the applicant
is not a
municipality, it must not be allowed to make a profit because its
profits will not be ploughed back into the service delivery
system.
[18]
The applicant’s representatives were taken aback and raised an
objection on what they considered
to be an unreasonable stance
adopted by Umgeni Water on the issue. The applicant’s
representatives requested Umgeni Water
to reconsider its stance. They
also pointed out the impact which such an increase will have on the
applicant and ultimately on
the applicant’s customers. However,
Umgeni Water remained unmoved. Subsequently, there was an exchange of
correspondence
between the applicant and Umgeni Water. Two of the
letters dated 5 January 2015 and 16 January 2015 bear mentioning. The
letter
of 5 January 2015 was addressed to the applicant by Umgeni
Water and recorded, inter alia, that:
(a)
Umgeni Water as a policy position strives to break even with all its
customers within its area
of supply. The applicant only draws water
from the Hazelmere system, whilst other customers who draw water from
the same system,
also draw water from other systems which on average
make their overall cost per customer lower when aggregated. With the
applicant
there are no other cheaper systems against which the losses
incurred whilst supplying it from the Hazelmere system can be netted
off against;
(b)
the municipal customers are related parties to Umgeni Water as part
of the intergovernmental
structure who operate to break even and not
to profit, whereby any margins made are ploughed back into the
service delivery system.
On that premise Umgeni Water therefore
strives to break even with the applicant supply by achieving a break
even tariff in the
area of supply of the applicant which is currently
on Hazelmere system through the North Coast Pipeline and
(c)
the applicant draws bulk water from the Avondale reservoir and the
Honolulu reservoir. The tariff
increases levied by Umgeni Water have
always been invested in capital expenditure incurred for the benefit
of its customers and
more specifically to the applicant is the
Hazelmere to Bifurcation pipeline commissioned in 2013 at a cost of
approximately R70m
and the construction of the dedicated Avondale
Pump Station to supply Avondale Reservoir at the Hazelmere Waterworks
is planned
to be commissioned early next year 2015. The cost to date
on this project is R35m. Furthermore, the Lower Thukela bulk water
supply
scheme, as well as this system when commissioned in 2016 and
the commissioning of the expansion of Hazelmere Water Works would
significantly contribute to reliable and constant water supply to the
applicant’s distribution points.
[19]
In the letter of 16 January 2015 addressed to Umgeni Water, the
applicant contended that the
determination of the tariff was
irrational in that Umgeni Water did not consider:
(a)
That the applicant was simply the mandatory of the Ilembe for the
purposes of providing water
services in the concession area and that
its tariff of charges to end consumers is controlled by the Ilembe,
which has to approve
any changes to the tariff on an annual basis,
both on a contractual basis and in its capacity as water services
authority.
(b)
There is nothing in the Act to suggest that a water board is
empowered or has any discretion to
discriminate between its customers
on the basis now postulated by Umgeni Water.
(c)
The tariff increase by Umgeni Water for the past years has been
slightly higher than the consumer price
index inflation. The increase
from 2013/2014 to 2014/2015 was approximately 8,7 per cent. For
Umgeni Water to now propose a punitive
tariff increase of 41,4 per
cent on the applicant for the 2015/2016 year induces a sense of shock
especially as all other bulk
water consumers on the North Coast
Pipelines are only being asked to pay an increase of approximately
8,3 per cent.
(d)
There is no basis in law or logic for the applicant, as the smallest
bulk water customer and
effectively standing in the shoes of the
Ilembe in the discharge of this public function, to be singled out
and made to pay substantially
more than all of Umgeni Water’s
other bulk water consumers on the North Coast Pipelines.
[20]
The engagement between the applicant and Umgeni Water did not yield
positive results especially
for the applicant. On 23 January 2015
Umgeni Water addressed a letter to the Minister in accordance with
the prescripts of s 42
of the Local Government: Municipal Finance
Management Act 56 of 2003 (the MFMA) read with s 31 (2) (b) of the
Act wherein Umgeni
Water gave the factual background of the matter,
the status of the engagement between the parties, the proposed
increases and the
reasons in support of such proposed increase for
the financial year commencing on 1 July 2015. It further requested
the Minister
to approve an increase of 8,2 per cent to all the
customers of Umgeni Water who are municipal entities and an increase
of 38,5
per cent to the applicant.
[21]
The Minister endorsed the methodology applied by Umgeni Water in the
determination of a tariff
increase, and by way of letter dated 20 May
2015, informed Umgeni Water of the approval of a tariff increase of
7,8 per cent for
the municipal entities and 37,9 per cent for the
applicant. Aggrieved by this decision, the applicant brought this
application
seeking an order to review and set aside the decision of
Umgeni Water made on 12 November 2014, proposing to impose a tariff
increase
of 38,5 per cent on the cost of supply of bulk water to the
applicant for the financial year commencing on 1 July 2015 and the
subsequent approval thereof by the Minister on 20 May 2015. The
applicant relies on the grounds set out in s 6(2)
(d)
,
6(2)
(e)
(i), 6(2)
(f)
(i) and (ii), 6(2)
(h)
and 6
(2) (i) of the Promotion of Administrative Justice Act 3 of 2000
(PAJA), alternatively, that both Umgeni Water and the Minister’s
decision offends the principle of legality on the ground that the
decision is unlawful and irrational.
[22]
The applicant joined the Ilembe by reason of the interest the Ilembe
has in these proceedings
but does not claim any relief against it.
Umgeni Water and the Minister are opposing the application. Umgeni
Water contends that
it has made its decision and that the decision
stands until it is set aside, especially given the ministerial seal
of approval.
The Ilembe has not participated in these proceedings.
Consequently, I shall refer to Umgeni Water and the Minister
collectively
as the respondents.
[23]
Notwithstanding the vigour of the respondents’ denial that in
taking the impugned decisions
the applicant was singled out and
treated differently from Umgeni Water’s other customers on this
increase, the record of
the proceedings lodged by Umgeni Water says
otherwise.
[24]
The question confronting this court is, whether it was rational and
lawful for the respondents
to increase the tariff for bulk water
supplied for provision to the Ilembe residents whose water is
channelled through the Ilembe,
compared to those whose water is
channelled through the applicant, due regard being had to the fact
that the applicant performs
an in line function in the delivery of
bulk water from Umgeni Water to the consumers in the concession area
on the basis postulated
by the respondents.
[25]
With this prelude I turn to deal with the explanation given by the
respondents for such increase.
Umgeni Water runs eight schemes in
total and each of these schemes has sub-systems through which Umgeni
Water supplies bulk water
to its customers.
[4]
All of Umgeni Water’s customers are municipal entities except
the applicant, which falls within the Hazelmere system situated
in
the area of the Ilembe. A significant majority of the schemes receive
bulk water supply through various sub-systems. The applicant
receives
supply of bulk water from Umgeni Water through the North Coast
Pipeline system whose only asset in that area is the Avondale
to
Honolulu Pipeline commissioned in December 2009.
[26]
According to Umgeni Water, historically, the Hazelmere system, which
the Ilembe and the applicant
are part of, has always experienced
lower revenues and high operating costs of water supply when compared
to other schemes. Umgeni
Water asserts that it maintains the records
of both the revenue and operating costs for each customer receiving
bulk water.
[5]
The record makes it plain that the cost of running these schemes is
more than the revenue they generate. Umgeni Water asserts that
in
order to keep schemes with higher costs and lower revenue afloat, it
has, over the years, relied on what in business parlance
has become
known as cross-subsidisation, in terms of which municipalities make
profits in their schemes which sustains Umgeni Water’s
profitability.
[27]
According to Umgeni Water, this situation has always caused
unhappiness amongst the profit-making
schemes who have contended that
increasing tariffs on a flat basis across the board and on the same
percentage with non-profitable
or loss making municipal customers
operates inequitably. The profitable municipal customers have also
called upon Umgeni Water
to require its customers to pay for
operational costs associated with each customer’s services and
have taken issue with
Umgeni Water’s practice of
‘cross-subsidising’ non-profiting water services
providers at the expense of profit-making
consumers who should be
receiving more services and infrastructure.
[28]
In order to ensure that tariffs are determined in a transparent
manner, Umgeni Water adopted
a pricing policy in line with s 34 of
the Act to strive for financial viability by ensuring that the costs
recovery measures are
put in place to fund its capital expenditure,
operational and maintenance costs as well as providing for future
capital expenditure
and expansion costs. Item 9 of the pricing policy
requires that Umgeni Water’s various bulk water schemes be
defined for
purposes of pricing. The schemes have been categorised
into two categories, namely: ‘economic schemes’ which are
required
to achieve full costs recovery through tariffs, and ‘social
schemes’ which are not expected to achieve full costs recovery
through tariffs, i.e the sales from the customers in the area are not
sufficient to cover the cost of implementation and ongoing
operation
and maintenance of the scheme. The social schemes are supported by
grants.
[29]
The pricing policy requires Umgeni Water to ensure that its costs are
fully recovered through
the tariffs by either setting a single tariff
for its entire area of supply or by separating the tariffs for each
bulk system,
thereby differentiating tariffs on the basis of the type
and level of service provided, geographical area and customer
profile.
Umgeni Water points out that in terms of clauses 5.1 and 5.2
of the Bulk Supply Agreement, Umgeni Water is required to establish
a
five year forecast for the applicant’s bulk water requirements
which was modelled on the twenty year cash flow model for
loan
repayment. The costs forecast for the applicant’s requirements
indicated a rise in costs of (a) 12,7 per cent in energy
requirements
mainly due to NERSA’s announcements that cost of energy from
Eskom will increase in the long term, (b) 9,2 per
cent to 10,5 per
cent in chemical costs due to the increase in the price of chemicals
in the projected period, (c) 17,8 per cent
in the maintenance costs
and (d) 11,1 per cent for raw water costs.
[30]
The water supplied to the applicant by Umgeni Water is sourced mainly
from the Hazelmere Dam,
from whence it is transferred to the
Hazelmere Waterworks for treatment. Once treated, the water is
transferred to the North Coast
Pipeline. At paras 60 and 61 of its
founding affidavit, Umgeni Water gives a detailed computation of the
costs recovery measures
to fund its capital expenditure, operational
and maintenance costs as well as providing for the future capital
expenditure and
expansion costs.
[31]
Umgeni Water further asserts that the applicant’s requirements
must be viewed against the
backdrop of Umgeni Water’s overall
commitment to the capital cash flow projections of (a) R6.9 billion
for the years 2015
to 2020 (five projections), and (b) R19.2 billion
for the thirty year capital expenditure total projections. Umgeni
Water maintains
that the applicant was informed during the price
review consultation phase that Umgeni Water’s constraints in
countenancing
loss making schemes was due to the effects of drought
in the province which required Umgeni Water to invest in
infrastructural
projects whose overall object is to assist in
reducing water disruptions to bulk water customers and users and to
mitigate the
drought factors in the short term. As a result of that
there has been an increase in the funding requirements of Umgeni
Water by
R261 million, necessitating Umgeni Water to raise a loan of
at least R1.45 billion. Consequently, Umgeni Water adopted a costing
model to enable it to accurately allocate costs to specific areas
within each system and to facilitate a more accurate costs allocation
for each customer drawing from these systems.
[32]
It is settled that a cause of action for the judicial review of
administrative action now ordinarily
arises from the grounds set out
in the provisions of s 6 of PAJA and not directly from the right to
just administrative action
in s 33 of the Constitution.
[6]
‘The section gives legislative expression to the fundamental
right to administrative action “that is lawful, reasonable
and
procedurally fair” under s 33 of the Constitution.’
[7]
[33]
In
Pharmaceutical Manufacturers Association of SA & another:
In Re Ex Parte President of the Republic of South Africa & others
Chaskalson P said:
‘
It
is a requirement of the rule of law that the exercise of public power
by the executive and other functionaries should not be
arbitrary.
Decisions must be rationally related to the purpose for which the
power was given, otherwise they are in effect arbitrary
and
inconsistent with this requirement. It follows that in order to pass
constitutional scrutiny the exercise of public power by
the executive
and other functionaries must at least comply with this requirement.
If it does not, it falls short of the standards
demanded by our
Constitutional for such action.
[8]
[34]
In
Albutt
v Centre for the Study of Violence and Reconciliation, &
others
[9]
the President had announced a special pardoning dispensation for
offenders convicted of politically motivated crimes, who
did not
participate in the Truth and Reconciliation process without affording
a hearing to the victims of the offences Ngcobo CJ
said:
‘
The
Executive has a wide discretion in selecting the means to achieve its
constitutionally permissible objectives. Courts may not
interfere
with the means selected simply because they do not like them, or
because there are other more appropriate means that
could have been
selected. But, where the decision is challenged on the grounds of
rationality, courts are obliged to examine the
means selected to
determine whether they are rationally related to the objective sought
to be achieved. What must be stressed is
that the purpose of the
enquiry is to determine not whether there are other means that could
have been used, but whether the means
selected are rationally related
to the objective sought to be achieved. And if, objectively speaking,
they are not, they fall short
of the standard demanded by the
Constitution. This is true of the exercise of the power to pardon
under s 84(2)
(j)
.’
[35]
In
Minster
of Home Affairs & others v Scalabrini Centre & others
2013 (6) 421 (SCA) Nugent JA at para 69 said that the process by
which a decision is taken, in contradistinction to the merits
of the
decision, might be ‘impeached for want of rationality’.
In
Democratic
Alliance v President of the Republic of South Africa & others
[10]
Yacoob ADCJ said:
‘
It
follows that both the process by which a decision is made and the
decision itself must be rational.
Albutt
is authority for the same proposition.’
(Footnote
omitted)
And at para 36 he said:
‘
The
means for achieving the purpose for which the power was conferred
must include everything that is done to achieve that purpose.
Not
only the decision employed to achieve the purpose, but also
everything done in the process of taking that decision, constitutes
means towards the attainment of the purpose for which the power was
conferred.’
[36]
I turn now to deal with the parties’ submissions relating to
the first reason. Applicant’s
counsel contends that the
respondents’ reliance on the Umgeni Water pricing policy and on
the norms and standards document
for the purported determination
relating to cross-subsidisation is misplaced as none of the documents
reflects a policy decision
prohibiting cross-subsidisation or
justifies the imposition of an irrational increase on a single
customer. The gravamen of his
reasoning is that the norms and
standards document does not deal with the question of
cross-subsidisation at all or any determination
that non-municipal
entities must not be permitted to make a profit. He argued that the
pricing policy does not aim to require every
water services provider
to break even with Umgeni Water as Umgeni Water seeks to assert, but
that its aim is to ensure that Umgeni
Water breaks even on an overall
basis. In support of this submission he expressed a view that the
categorisation of the entities
by Umgeni Water into economic and
social schemes in the pricing policy was meant to involve the
cross-subsidisation between the
schemes.
[37]
Dealing with item 21 of the pricing policy,
[11]
his submission was that this aspect is not a requirement but a goal
and does not validate the singling out of the applicant for
an
increase almost four times more than any other customer of Umgeni
Water. Counsel correctly observed that the deponent to the
affidavit
on behalf of the Minister has made it clear that cross-subsidisation
is an ongoing feature of water services provision
and that there is
no general policy to end cross-subsidisation across the various
schemes and municipalities who obtain water from
Umgeni Water.
[38]
Applicant’s counsel submitted that the irrationality of the
respondents’ approach
in approving the tariff is illustrated by
the fact that the determination of capital unit charges is based on
the entire system
tariffing and development of water resources that
allows for adequate capacity required to supply all customers within
Umgeni Water
operational area, and yet, the respondents require the
applicant to cross-subsidies other water services providers on these
charges,
on the basis that the capital projects to which the capital
unit charges relate benefit the system as a whole, notwithstanding
that there is no benefit to the applicant.
[39]
Counsel urged this court to reject the purported justification by the
respondents for the decision
to impose a 37,9 per cent tariff
increase on the basis of a policy against cross-subsidisation as
irrational and unlawful. The
action was materially influenced by an
error of law; the action was taken for a reason not authorised by the
empowering provision;
the action itself was not authorised by the
empowering provision; the action was irrational; and the decision is
otherwise unconstitutional
and unlawful and is a decision which no
reasonable decision maker could have taken.
[40]
Not so, argued counsel for the respondents. Whilst conceding that the
norms and standards and
the pricing policy documents do not deal with
the question of cross-subsidisation and the determination that
non-municipal entities
must not be permitted to make a profit, they
contended that the decision to accurately allocate costs to specific
areas within
each system and to facilitate a more accurate cost
allocation for each customer was taken by Umgeni Water to ensure that
the applicant
breaks even. They submitted that Umgeni Water took a
policy decision to end the cross-subsidisation of the costs of its
supply
of bulk water to the applicant, not because of the norms and
standards document or pricing policy but the decision to end the
cross-subsidisation
was taken within the framework of the prescribed
norms and standards and the pricing policy.
[41]
They argued that item 2 of the norms and standards also allows a
water service institution, when determining
its revenue requirement
on which tariffs for water services are based, to take into account,
inter alia, the need to recover costs
of water purchases, recover
overheads, operational and maintenance costs and to recover the cost
of capital not financed through
any grant. Consequently counsel
argued that the tariff increase came as a result of policy decision
taken within the framework
of the norms and standards and the pricing
policy. They submitted that the relevance of the norms and standards
lies in the means
chosen by the respondents when setting tariffs to
differentiate between water users, as set out in item 4(1)(c) of the
norms and
standards and then to follow a methodology set out in item
2 of the norms and standards to determine Umgeni Water’s
revenue
requirements. They argued that this rationale for a higher
tariff on the applicant is connected with the objective of striking a
balance of achieving fairness and equity amongst Umgeni Water’s
customers, whilst at the same time ensuring recovery of operational
costs.
[42]
Counsel for the Minister submitted that nowhere in the applicant’s
founding affidavit or in the
applicant’s heads of argument is
it contended, for example, that the decision to cease the
cross-subsidisation of the cost
of supply of bulk water to the
applicant is not rationally connected to the purpose for which it was
taken or to the purpose of
empowering provisions. It is also not
contended that the decision to discontinue cross-subsidisation was
not rationally connected
to the information before the Umgeni Board
or the Minister.
[43]
As I see it, the hurdle besetting Umgeni Water and the Minister is
that the water services contract
between the applicant and the Ilembe
came about as a result of the decision of the Ilembe in considering
how best to serve its
residents in the concession area and this
arrangement is allowed by s 19 of the Act. It follows from this that
once it is accepted
(as I do) that the applicant performs an in line
function in the delivery of bulk water from Umgeni Water to the
Ilembe and to
the water consumers of the concession area, the fact
that the applicant is interposed in that chain of delivery is an
irrelevant
consideration in deciding on such increase and that cannot
serve to justify the imposition of a different tariff by Umgeni
Water.
[44]
In my view, the fundamental tenet which lies at the heart of this
application is that the Ilembe
is the guarantor of all debts owed by
the applicant to Umgeni Water, which is a committal of public funds
and is only valid because
the applicant has stepped into the shoes of
the Ilembe and acts as a public service provider instead of the
Ilembe to fulfil the
Ilembe’s constitutional and statutory role
as water services provider within the concession areas which form
part of its
jurisdiction. In the circumstances, it seems
opportunistic on the part of the respondents to consider the
applicant’s identity
as a commercial entity warranting an
imposition of a different tariff from the municipal entities.
[45]
I now turn to deal with the parties’ submissions relating to
the second reason. Counsel
for the applicant submitted that the
plough back versus private gain proposition was a general assumption
and was devoid of any
actual content in the particular context of
this matter. He submitted that the interposition of a private entity,
whether for gain
or not by the municipality in such flow chain,
whether before, parallel or after the municipal location therein,
simply cannot
serve to premise different tariffs imposed by Umgeni
Water.
[46]
The fundament of his reasoning is that these agreements clearly
contemplate that the tariff determined
in terms of the Act will apply
and will be similar, otherwise the Ilembe’s guarantee will be
unlawful and open ended. He
submitted that there is no provision in
the empowering legislative framework which authorises discrimination
between municipal
and non-municipal water services provider on this
basis and that any attempt to penalise the applicant for its
efficiency and its
ability to generate a profit would be irrational.
He pointed out that the applicant pays into the Ilembe the agreed fee
and that
what the applicant charges is controlled through the
Ilembe’s approval.
[47]
However, even accepting that the determination of the applicant as
not a municipality entity
and therefore must not be allowed to make a
profit for the reasons advanced by the respondents, I am not
persuaded that the respondents
considered that the applicant is
acting in the stead of the Ilembe in discharging the Ilembe’s
constitutional and statutory
obligation to provide water to residents
in the concession area. Importantly, the record does not seem to
indicate that the respondents
that they considered the reality of the
impact of the increase on the consumers in the concession area and
that any steps were
considered to mitigate such the impact thereof.
What in my view tends to diminish the force of the profit making
proposition is
that it is not anchored on the record and there
appears to be no evidence in support of it. The other difficultly
which arises
is that there appears to be no evidence from the record
that the Minister considered the price increase authorised by the
Ilembe
before the Minister’s approval of the impugned increase.
In the circumstances the interplay of the tariff between the
applicant
and the Ilembe was never considered.
[48]
Some argument was advanced by applicant’s counsel that in
singling out the applicant for
a 37,9 per cent increase, the
respondents failed to live up to the requirements of s 7(2) of the
Constitution and the right to
administrative justice enshrined in s
33 of the Constitution, as given effect to by PAJA, because the
impugned decision discriminated
against the applicant in violation of
s 9 of the Constitution. The strength of this argument is that such
unequal treatment of
a single consumer cannot be justified on the
basis that the consumer purportedly earns a private profit.
[49]
Counsel for the respondents disagreed. They contend that because the
applicant draws its sales
volumes from the North Coast Pipeline only,
based on an increase of 8,3 per cent, the cross-subsidy would be
R1,534/KL. To reduce
the cross-subsidy to nil, the required tariff to
the applicant would be R6,552/KL and resulted in a proposed increase
of 41,4 per
cent which was subsequently reduced to 37,9 per cent.
Counsel for Umgeni Water submitted further that the drought had a
devastating
impact which necessitated additional investment by Umgeni
Water and thus, the adoption of the increase of 37,9 per cent. They
submitted
that Umgeni Water needed to invest in projects aimed at
reducing water disruptions to bulk water customers and to mitigate
the
drought factors. It was emphasised on behalf of the Minister that
the decision to approve the tariff increase of 37,9 per cent was
based on the submission by Umgeni Water that it strives to break even
in respect of the costs associated with its supply of bulk
water to
the applicant and that on the facts and given the empowering legal
instrument, the approval of the tariff cannot be said
to have been
illogical, ill-advised or injudicious.
[50]
Whilst correctly pointing out that s 9 of the Constitution does not
outlaw every discrimination
but proscribes an unjustifiable, unfair
one, they contend that the interrogation of the relationship between
rational connection
and legitimate government purpose, involves
firstly the identification of a legitimate purpose and secondly a
rational connection
between differentiation and the purpose. They
submitted that although s 9 requires that the purpose and scheme be
examined in its
proper context, it does not require an analysis of
the impact of the impugned action or of the policy choice made but
merely requires
the respondents to have a defensive purpose, together
with reasons for its actions that bear some relationship to the State
purpose.
[51]
Lastly, Umgeni Water asserts that imposing higher tariffs for the
applicant is reasonable and
justifiable because the quality of
services provided by Umgeni Water to the applicant is higher compared
to the service level of
municipal customers falling outside of the
concession area. Umgeni Water asserts that in terms of the Bulk Water
Supply Agreement
it concluded in 1999 with the applicant, it agreed
to provide the applicant with a minimum of 1.5 times the daily
average draw
of the peak period month. According to Umgeni Water,
with the growth of the concession area, the applicant approached it
with a
request to increase the service level. This resulted in it
concluding an agreement with the applicant on 29 June 2012 in terms
of which it agreed to provide the applicant with a minimum of five
mega litres of storage capacity at the Avondale Zone to reticulate
to
its customers and to enable the applicant to operate the Avondale
water pump station to accommodate operations when reservoirs
exceed
25 per cent capacity.
[52]
Umgeni Water and the applicant further agreed that Umgeni Water would
reserve a further three
mega litres of water in the reservoirs at
Honolulu for the exclusive supply of an area falling within the
concession area. Umgeni
Water asserts further that on 28 May 2013,
the applicant requested and Umgeni Water agreed to increase the
minimum supply of five
mega litres agreed to in 2012 to six mega
litres as storage capacity for the applicant to reticulate to
consumers in the Avondale
Zone.
[53]
Umgeni Water asserts that in order to comply with the increased
demands for water supply in the
concession area, the upgrade of the
pipelines became necessary. Consequently Umgeni Water invested
capital expenditure of approximately
R200 million for the benefit of
the applicant’s customers and it commissioned a Hazelmere
bifurcation pipeline and constructed
a dedicated Avondale Pump
Station to supply Avondale reservoirs at the Hazelmere Waterworks.
[54]
There is a dispute of fact between Umgeni Water and the applicant on
this issue. The applicant
asserts that it is not the only water
services provider which utilises the North Coast Pipeline. The
applicant asserts that the
pipeline services the Ilembe and eThekwini
King Shaka International Airport, Dube Trade Port and other strategic
developments on
the North Coast. The applicant asserts that the
upgrade to the pipeline was planned and built with the future
development in mind.
The applicant also asserts that although the
capital costs of the upgrades were high, the schemes will revert to
making a profit
when the future planned North Coast developments take
off and the customer base increases.
[55]
According to the applicant, it has five water connections off the
North Coast Pipeline out of
the approximately thirty connections
which it has from Umgeni Water. The applicant asserts that the
majority of its connections
are from the original infrastructure that
previously serviced the DCTLC and not on the North Coast Pipeline.
The DCTLC paid for
the refurbishment of the Honolulu and Avondale
reservoirs off the North Coast Pipeline and therefore these costs
should not play
any part in capital recoveries by Umgeni Water. The
applicant denies that the quality of service provided by Umgeni Water
to the
applicant is higher compared to the service level of municipal
customers falling outside the concession area. The applicant makes
the point that Umgeni Water’s sole function that is relevant to
the calculation of tariffs is to deliver bulk treated water
to
specified reservoirs and the quantity of water to be provided has
nothing to do with the quality of services rendered, only
quantity.
In light of the conclusion I have come to, I find it is not necessary
for me to make a decision one way or the other
on this dispute.
[56]
There remains one point in limine which was raised by the
respondents. They contend that an administrative
review is not
available to the applicant in the context of this matter as the
relationship between the applicant, Umgeni Water
and the Ilembe is
regulated by the tripartite agreement, which requires under clause
12.1, that the disputes between the parties
be arbitrated upon. Their
contention is that the decision to set conditions for bulk water
supply to the applicant and all of Umgeni
Water’s municipal
customers for the financial year commencing 2015 includes the setting
of increased tariffs in accordance
with the provision of clause 10 of
the Bulk Water Supply Agreement read with s 31(2) of the Act. I do
not agree with this submission.
The hurdle besetting this submission
is that the Minister who took the final decision to approve the
impugned tariff and whose
decision is sought to be reviewed is not a
party to the Bulk Water Supply Agreement. In the circumstances the
dispute and the relief
which the applicant is seeking falls outside
the ambit of the arbitration clause. In my view, this point in limine
is nothing but
a diversion without merit.
In
the circumstances the following order shall issue:
Order
(a)
The decision of Umgeni Water proposing to impose a tariff increase of
38,5 per cent on the
cost of supply of bulk water to the applicant on
12 November 2014 for the financial year commencing 1 July 2015 and
the subsequent
approval of a tariff increase of 37,9 per cent by the
Minister is hereby reviewed and set aside.
(b)
The Umgeni Water and the Minister are directed to pay the costs of
this application jointly
and severally, the one paying the other to
be absolved, such costs to include the costs occasioned by employment
of two counsel.
Mnguni
J
Appearances
Heard:
03 March 2017
Delivered:
13 September 2017
FOR
THE APPLICANT:
Adv. K J Kemp SC
ASSISTED
BY:
INSTRUCTED
BY:
Garlicke and Bousfield Inc.
c/o Venns Attorneys
REF.:
RSH/Gwen/26154292
TEL.:
031- 794
81 11
FOR
THE FIRST RESPONDENT:
Adv. T G Madonsela SC
ASSISTED
BY:
Adv. S Mahabeer and Adv. C Sibiya
INSTRUCTED
BY:
Straus Daly
REF:
UMG8.12A/Khoza/DD/tt
TEL:
031 – 570 56 00
FOR
THE SECOND RESPONDENT: Adv. K Moroka SC
ASSISTED
BY:
Adv. H A Mpshe and Adv. M
P Moropa
INSTRUCTED
BY:
The State Attorney, KZN
REF:
8824/2015/Z17/hm
TEL:
…
[1]
United Nation Resolution adopted by the General Assembly on the
report of the Second Committee (A/58/485) 58/217. International
Decade for Action, “Water for Life”, 2005-2015.
[2]
Section 11(1) of the Act.
[3]
At this meeting Umgeni Water’s representatives presented a
PowerPoint display of facts and figures on which the contemplated
increase was said to be based.
[4]
(a) Midmar, (b) D V Harris, (c) Ixopo, (d) Durban Heights, (e)
Hazelmere, (f) Wiggins (g) Amanzimtoti and (h) Umzinto.
[5]
The
extent to which each customer, including the applicant, falls short
is reflected in a summary in the Annual Review. The actual
costs of
supplying bulk water to Umgeni Water’s customers, including
the applicant, calculated on a per kilolitre basis
per customer as
well as the revenue made by each customer appears from the monthly
records covering the period between 2015/2016
which have been
produced.
[6]
See
Bato
Star Fishing (Pty) Ltd v Minister of Environmental Affairs &
Tourism & others
[2004] ZACC 15
;
2004 (4) SA 490
(CC) paras 25-26;
Mazibuko
& others v City of Johannesburg & others
2010 (4) SA (1) (CC) para 73.
[7]
See
Allpay
Consolidated Investment Holdings (Pty) Ltd & others v Chief
Executive Officer, South African Social Security Agency,
&
others
2014
(1) SA 604
(CC) para 42.
[8]
[2000] ZACC 1
;
2000
(2) SA 674
(CC) para 85
[9]
2010
(3) SA 293
(CC)
at
para 51
[10]
2013
(1) SA 248
(CC) para 34
[11]
Item
21 provides: Umgeni Water will strive to be financially viable which
means that it will seek as far as is practical to recover
its costs
from tariffs and fees in accordance with s 34 of the Act.