The following objectives are of equal importance in formulating the new pricing strategy:

Each of these are elaborated upon below. These objectives are incorporated into the implementation of the new pricing strategy, which is discussed in part 5.

1 Technical and other terms are explained in the glossary at the end of this report.

4.1 Social Equity

Apartheid policies distorted the provision of water supply services, so that in 1994 an estimated 12 million people did not have adequate supplies of potable water. Apartheid also generated a biased approach to water resource management, and allocation was never merely an economic matter, but a socio-political one. Government water policy, and in particular the provision of subsidies (including those associated with the provision of irrigation water), resulted in considerable advantages to large, mainly white commercial farmers at the expense of emerging black farmers and smallholders. The pricing strategy for water use charges coupled to the granting of financial assistance, will achieve social equity by redressing the imbalances of the past, both with respect to equitable access to water supply services and with respect to direct access to first tier water.

4.2 Ecological Sustainability

South Africa is committed to following a path of development that is environmentally sustainable. In the case of water, this requires that the availability and quality of water resources inherited by future generations should be adequate to ensure human well-being and the maintenance of ecosystems. As part of overall water resource management, this means that we need to ensure that our levels of water consumption, use, and pollution, as well as the associated infrastructure to impound, supply, treat and dispose of the water, do not cause either unacceptable or irreversible impacts on the population or ecosystems.

The following principles underlie ecological sustainability in the water pricing strategy:

As indicated in 5.2 and 7.1, the "polluter pays principle" does not form part of this pricing strategy and will be introduced at a later stage together with waste discharge charges.

4.3 Financial Sustainability

The methods that have been used by DWAF to finance major bulk raw (i.e. first tier) water schemes in the past are not financially sustainable for a number of reasons. First, inflation was not taken into account, resulting in a decline in the value of tariffs over time in real terms. Second, no provision was made for refurbishment. And third, no provision was made for asset replacement.

A new financial framework is required to accommodate the water sector’s increased need to be financially autonomous, to attract greater contributions to its development from the private sector, and to be financially accountable and sustainable.

In the new approach to water pricing, it is proposed that the full financial cost of supplying water should be recovered from water users, including the cost of capital. The new approach would however, be phased in by taking account of the constraints within various user sectors to adapt quickly to price increases.

4.4 Economic Efficiency

Section 56(2)(c) of the National Water Act, 1998, provides for setting a water use charge for achieving the equitable and efficient allocation of water. Economics is concerned with the optimum allocation of scarce resources between competing uses. This applies equally to the capital resources used in the development of water infrastructure (i.e. dams, reservoirs, pipelines, etc.), and to natural resources such as water. In theory, meeting the goal of optimum resource allocation requires that goods be priced at their opportunity cost, which is simply the value of goods forgone (including environmental goods and services), when a scarce resource is used for one purpose instead of for its best alternative use.

If South Africa’s water resources were abundant, there would be no need to consider attaching a price to the water resource itself. However, the need for water conservation and management of demand in conditions of growing scarcity is an important and increasing focus for water policy.

Ensuring an efficient allocation of the country’s scarce water resources requires that the price of the resource be set to reflect its scarcity value. Failing to price water at its scarcity value can result in two kinds of misallocation of water:

In the context of water scarcity, an argument can be made for the introduction of economic incentives in water-stressed catchments to encourage the conservation of water and its shift from low to higher value use. This can be done administratively or by using market-related mechanisms.