POLOKWANE MUNICIPALITY WATER INFRASTRUCTURE PROJECT Transaction Advisory ...

141 Pages·2016·3.57 MB·English

by  Gerhard Bester

POLOKWANE MUNICIPALITY WATER
INFRASTRUCTURE PROJECT

Transaction Advisory Services

Feasibility Study Report

Date: 06 Feb 2016

Updated by:
Jendza Capital (Pty) Ltd
Polokwane City Water Infrastructure Project - Transaction Advisory Services:
Feasibility Study Report:

Feasibility Study on replacement of AC pipes page ii
TABLE OF CONTENTS
EXECUTIVE SUMMARY ............................................................................................................................. 3
APPROACH AND METHODOLOGY TO THE FEASIBILITY STUDY .............................................. 9
INTRODUCTION ......................................................................................................................................... 10
SECTION 1: NEEDS ANALYSIS .............................................................................................................. 19
1 PART 1: MUNICIPALITY’S STRATEGIC OBJECTIVES .............................................................. 20
1.1 Legislative Requirements ........................................................................................................... 20
1.2 Summary of Strategic Objectives ............................................................................................. 20
1.2.1 National Department of Sanitation Strategic Objectives ............................................... 20
1.2.2 Strategic Objectives of Limpopo Provincial Government .............................................. 21
1.3 Institutional Environment Functions and Public Service ....................................................... 21
1.3.1 Polokwane Department of Water and Sanitation ........................................................... 21
1.3.2 Polokwane Municipality ...................................................................................................... 22
1.4 Objectives of the Project ............................................................................................................ 23
1.4.1 Description of the Project ................................................................................................... 23
1.4.2 Scope of the Project ............................................................................................................ 23
1.4.3 Objectives ............................................................................................................................. 23
1.4.4 Project Contribution towards Implementation of Government and Municipality’s Policy
23
1.4.5 The Municipality’s ability and capacity to provide services ........................................... 24
1.4.6 Relative size of Project in Terms of Budget and Expenditure ...................................... 24
1.4.7 Potential cost savings ......................................................................................................... 25
1.4.8 Potential job creation .......................................................................................................... 25
1.4.9 Capacity of private sector to provide services ................................................................ 25
2 PART 2: BUDGET ANALYSIS .......................................................................................................... 27
2.1 Introduction ................................................................................................................................... 27
2.2 Operational Budget Allocation to Water ................................................................................... 27
2.2.1 Distribution Losses Analysis .............................................................................................. 28
2.3 Existing Municipality Budget for Water .................................................................................... 29
2.4 Historical Municipality Revenue ................................................................................................ 29
2.5 Historical Municipality Expenditure ........................................................................................... 32
2.6 Historical Operating Grants ....................................................................................................... 33
2.7 Conclusion .................................................................................................................................... 36
3 PART 3: COMMITMENT AND CAPACITY ..................................................................................... 37
3.1 Legislative Framework ................................................................................................................ 37
3.2 Project Participants ..................................................................................................................... 37
3.2.1 The Client Team .................................................................................................................. 37
3.2.2 Structure ............................................................................................................................... 38
3.2.3 The Transaction Advisor .................................................................................................... 39
3.2.4 Authority and Capacity ....................................................................................................... 40
3.3 Stakeholder Analysis .................................................................................................................. 40
3.3.1 Introduction ........................................................................................................................... 40
3.3.2 Key Stakeholders ................................................................................................................ 40
3.3.3 Consultation Plan ................................................................................................................ 41
4 PART 4: PROJECT SCOPE & OUTPUTS: TECHNICAL NEEDS ANALYSIS ......................... 43
4.1 Description of Services: .............................................................................................................. 43
4.1.1 Study Area and Scope of Investigation ............................................................................ 43
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Feasibility Study Report:

4.1.2 Condition and Structural Integrity of the Water Reticulation Network ......................... 45
4.1.3 Leakage at Consumer Connections .................................... Error! Bookmark not defined.
4.2 Description of Project Deliverables (Outputs): ........................................................................ 46
4.2.1 Primary Project Objective(s) .............................................................................................. 46
4.2.2 Motivation for Replacement of AC Pipes ......................................................................... 47
4.2.3 Motivation for Improved Metering ..................................................................................... 48
4.2.4 Strategy for the Reduction of Water Losses ................................................................... 49
4.3 Assessment of Whether Deliverables will meet Client’s Needs: .......................................... 49
4.4 Key Performance Indicators: WATER ...................................................................................... 50
5 PART 1: SOLUTION OPTIONS THE INSTITUTION HAS CONSIDERED ................................ 52
5.1 Brief description: .......................................................................................................................... 52
5.1.1 Moling: ................................................................................................................................... 53
5.1.2 Pipe bursting: ....................................................................................................................... 53
5.1.3 Slip-lining: ............................................................................................................................. 53
5.1.4 Pipe-jacking: ......................................................................................................................... 53
5.2 Evaluation of Solution Options: ................................................................................................. 53
5.3 Description of Study Areas ........................................................................................................ 54
5.3.1 Seshego B & C: ................................................................................................................... 54
5.3.2 Annandale ............................................................................................................................ 54
5.3.3 Polokwane CBD .................................................................................................................. 55
5.4 Financial impacts ......................................................................................................................... 56
5.5 Funding and affordability ............................................................................................................ 56
5.6 Risk ................................................................................................................................................ 57
5.7 Service delivery arrangements .................................................................................................. 58
5.8 Transitional management issues .............................................................................................. 58
5.9 Technical analysis ....................................................................................................................... 59
5.10 Site issues .................................................................................................................................... 59
5.11 Human Resources ...................................................................................................................... 59
5.12 Market capability and appetite................................................................................................... 59
6 PART 2: IDENTIFICATION OF OPTIONS FOR SERVICE DELIVERY ..................................... 60
6.1 Service delivery options ............................................................................................................. 60
6.1.1 Internal mechanisms include: ............................................................................................ 60
6.1.2 Public Private Partnerships ................................................................................................ 61
6.2 The identification and selection of options for service delivery ............................................ 62
7 Part 3: Delivery Mechanism Summary and Interim Recommendations ..................................... 66
7.1 Best solution option: .................................................................................................................... 66
8 Assessment of compliance framework and relevant legislation .................................................. 69
8.1 Legislation .................................................................................................................................... 70
8.1.1 The Constitution of the Republic of South Africa, Act 108 of 1996 ............................. 70
8.1.2 Municipal Systems Act ....................................................................................................... 71
8.1.3 Alignment of MSA Section 78(3) and MFMA Section 84 .............................................. 74
8.1.4 Issues raised by the acts .................................................................................................... 74
8.1.5 Do Section 78(3) and Section 84 overlap?...................................................................... 74
8.1.6 What sequence to follow? .................................................................................................. 75
8.1.7 Can compliance occur simultaneously? .......................................................................... 75
8.2 Proposed funding structure ........................................................................................................ 75
8.3 Current Structure ......................................................................................................................... 76
8.4 Proposed Structure ..................................................................................................................... 76
9 Technical Due Diligence .................................................................................................................... 80
9.1 Due diligence overview .............................................................................................................. 80
9.2 Staffing requirements .................................................................................................................. 80
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Polokwane City Water Infrastructure Project - Transaction Advisory Services:
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9.3 Environmental issues .................................................................................................................. 81
9.4 Land ownership ........................................................................................................................... 81
9.5 Geotechnical issues .................................................................................................................... 81
9.6 Project Identified on the Municipal IDP .................................................................................... 82
9.7 Technical issues .......................................................................................................................... 82
9.8 Integration with other projects and replacement of aging pipes in other areas ................. 83
9.9 Land Zoning ................................................................................................................................. 83
9.10 Land Availability ........................................................................................................................... 83
9.11 OHS Issues .................................................................................................................................. 84
9.12 Site Enablement issues .............................................................................................................. 84
10 VALUE ASSESSMENT ...................................................................................................................... 86
10.1 Introduction ................................................................................................................................... 86
10.2 Value for money assessment .................................................................................................... 86
10.3 Output specification .................................................................................................................... 86
10.4 Base Public Sector Comparator (PSC) Model ........................................................................ 87
10.4.1 Direct cost ..................................................................................................................... 88
10.4.2 Indirect cost .................................................................................................................. 89
10.4.3 Revenue ........................................................................................................................ 89
10.5 PSC Model Assumptions ........................................................................................................... 90
10.6 Results of the PSC Model .......................................................................................................... 91
10.7 Proposed Funding Structure for the PSC ................................................................................ 92
10.8 Risk assessment ......................................................................................................................... 93
10.9 Risk matrix assessment summary .......................................................................................... 109
10.10 Risk-adjusted PSC model ........................................................................................................ 110
10.11 Affordability analysis ................................................................................................................. 110
10.12 Revenue optimisation drive programme ................................................................................ 111
10.13 Benchmarking results with the financial institutions and mining corporations ................. 113
11 PROCUREMENT PLAN ........................................................................ Error! Bookmark not defined.

TABLES
Table 1: Polokwane GDP .................................................................................................................................. 11
Table 2: Population size .................................................................................................................................... 12
Table 3: Population group ................................................................................................................................. 13
Table 4: Annual Household Figure 3: Household income ...................................................................... 13
Table 6: Free basic service ............................................................................................................................... 15
Table 7: Water service level backlogs in Polokwane Municipality .............................................................. 16
Table 8: Blue drop ratings (2011) for water supply schemes in Polokwane Municipality ....................... 16
Table 9: Water level of services in Polokwane Municipality ........................................................................ 17
Table 10: Water supply to schools .................................................................................................................. 17
Table 11: Estimated Capital Costs (Determined by the TA Technical Consultant) ................................. 24
Table 12: Water Scheme Sources ................................................................................................................... 27
Table 13: Water Scheme Sources ................................................................................................................... 28
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Polokwane City Water Infrastructure Project - Transaction Advisory Services:
Feasibility Study Report:

Table 15: Historical Revenue ........................................................................................................................... 30
Table 16: Service Charges ............................................................................................................................... 31
Table 18: Historical Grants ............................................................................................................................... 33
Table 19: Grants Allocated for Water .............................................................................................................. 34
Table 20: JIC Members and Roles .................................................................................................................. 38
Table 21: Transaction Advisory Team ............................................................................................................ 39
Table 22: Consultation Plan ............................................................................................................................. 42
Table 23: Key Water Network Features of Project Area .............................................................................. 43
Table 25: Summary of 2014/15 water supply and sales volumes for the Polokwane - Seshego Cluster
.............................................................................................................................................................................. 47
Table 27: Estimated cost for replacing AC pipes in Annadale .................................................................... 55
Table 28: Estimated cost for replacing AC pipes in Polokwane CBD ........................................................ 56
Table 29: Risk and Mitigations ......................................................................................................................... 57
Table 30: Estimates of lengths of pipe replacement using trenchless and open trench methods......... 82
Table 31: Capital cost ........................................................................................................................................ 88
Table 33: Revenue assumptions ..................................................................................................................... 90
Table 34: Risk matrix assessment ................................................................................................................... 94
Table 35: Summary of risk, cost of risk, transferable risk .......................................................................... 109

FIGURES
Figure1: Polokwane GDP per sector ............................................................................................................... 11
Figure2: Population by group ........................................................................................................................... 12
Table 4: Annual Household Figure 3: Household income ...................................................................... 13
Figure 4: Water level of services in Polokwane Municipality ....................................................................... 17
Figure 2.1: Historical Revenue Schedule ....................................................................................................... 30
Figure 2.2: Service Charge: Water .................................................................................................................. 31
Figure 2.3: Revenue Expenditure Analysis .................................................................................................... 33
Figure 2.4: Total Grants Allocated ................................................................................................................... 34
Figure 2.5: Grants Allocated for Water ........................................................................................................... 35
Figure 4.1: Average Deterioration Relationship (Figure 1: NEW ZEALAND ASBESTOS CEMENT
WATERMAIN MANUAL, August 2001, ISBN 1-877134-32-5) ....................... Error! Bookmark not defined.

ANNEXURES

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ABBREVIATIONS AND ACRONYMS

AC: Asbestos Cement
BEE: Black Economic Empowerment
CAPEX: Capital Expenditure
CBD: Central Business District
CDW: Community Development Workers
CEC: Committee for Environmental Co-ordination
DOH: Department of Health
DWS: Department of Water and Sanitation
ECA: Environmental Conservation Act
EIP: Environmental Implementation Plan
EMP: Environmental Management Plan
EPWP: Expanded Public Works Programme
HDPE: High-Density Polyethylene pipes
IDP: Integrated Development Plan
LDO: Land Development Objective
LED: Local Economic Development
MM: Municipal Manager
MFMA: Municipal Finance Management Act, 2003
MIG: Municipal Infrastructure Grant
MLL: Minimum Level Living
MPVC: Modified Polyvinyl Chloride Pipe
MSA: Local Government: Municipal Systems Act, 2000.
MTEF: Medium Term Expenditure Framework.
NEMA: National Environmental Management Act
NPC: Net Present Costs
NPV: Net Present Value
NT: National Treasury
NWS: National Water Management Strategy
Polokwane City Water Infrastructure Project - Transaction Advisory Services:
Feasibility Study Report:

OPEX: Operational Expenditure
PPP: Public Private Partnership
PSC: Public Sector Comparator
MUNICIPALITY: Polokwane Municipality
RDP: Reconstruction and Development Programme
RFQ: Request for Qualification
RFP: Request for Proposal
TA: Transaction Advisor
TRV: Treasury Views and Recommendations
UAW: Unaccounted for Water
UPVC: Unplasticized Polyvinyl Chloride Pipe
WSA: Water Services Authority
WSP: Water Service Provider
Feasibility Study on replacement of AC pipes page ii
Polokwane City Water Infrastructure Project - Transaction Advisory Services:
Feasibility Study Report
EXECUTIVE SUMMARY

INTRODUCTION
The Polokwane Municipality had embarked on the process of funding of project on an off balance sheet
basis and as a result the Request for Proposal (“RFP”) was advertised in February 2014 in national
newspaper to invite potential service providers to propose various solutions to the municipality as part of
the meeting smart city vision. The tenders were evaluated in normal supply chain management process,
however before the finalisation of the tender, the municipality was advised by Department of Cooperative
Governance and the Department of Traditional Affairs (“COGTA”) to follow national treasury guideline
since most of these transactions appear to be Public Private Partnership (“PPP”) projects by form and
nature. The accounting officer registered the projects with National Treasury (“NT”) with the intention of full
compliance with the statute that govern PPP which is Municipal PPP regulation of 2005, after the projects
were fully registered by National Treasury, the Transactional Advisors were appointed through normal and
competitive bidding process to conduct the feasibility study on water and energy projects which include
solar plant, substations, replacement of asbestos cement pipes and building of regional wastewater
treatment plant with the focus on the bankability and affordability of the projects.

The implication of the Request for Proposal meant that the Municipality was to procure services of potential
service providers on projects which have financial implications beyond three years without conducting
feasibility study hence it was important to conduct feasibility study on all the proposed off- balance sheet
projects which had financial implications over a period of three years.

All these projects were included in the Integrated Development Plans as the anchor projects to enable the
Municipality to meet its smart city vision. The proposed projects will enable the Municipality to deliver better
services to its residents in a sustainable manner. It is against this background that the Municipality has
embarked on the feasibility study for these projects.

The project has been registered with National Treasury and the project registration number is M0107.

SCOPE
The study area includes Seshego, Annandale and the Polokwane CBD. The scope of the assignment is to
conduct a feasibility study to determine the most appropriate approach for the replacement of AC water
reticulation pipelines within the study area in order to reduce water losses to acceptable levels and to
upgrade the water distribution networks to increase their capacity to meet current and future projected
water requirements for the study area. The Municipality has imposed a moratorium on new property
development in Polokwane City due to the insufficient capacity of the existing infrastructure to meet water
services requirements.

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Polokwane City Water Infrastructure Project - Transaction Advisory Services:
Feasibility Study Report
STUDY REVIEW
Polokwane Municipality has an objective to turn the City into a Metropolis. This means identifying critical
service delivery needs so as to meet the standard expected of such status as a City. Therefore, the city
has sought to improve the Water Infrastructure of the entire city, by implementing state of the art
infrastructure within the water network. The report, therefore, sets out a feasibility study for the
identification of critical needs, providing appropriate solution, and implementation of the project within the
framework as espoused by the applicable legislation. The report also addresses issues such as the
financial options available, the best solution as well as the appropriate procurement at the Municipality’s
disposal.

NEEDS ANALYSIS
Existing water distribution pipelines in the study area were installed more than 50 years ago, and have now
reached the end of their design life. A very high frequency of water pipe bursts is being experienced in
Seshego, Annadale and the Polokwane CBD, resulting in substantial water losses, service delivery
interruptions and inundation of properties. The sizes of the existing water distribution pipelines in the three
areas are no longer adequate to convey sufficient water to meet current and future projected water
requirements, as they were designed to service much smaller populations. The Municipality has been
forced to impose a moratorium on new property development in Polokwane City due to the insufficient
capacity of the existing infrastructure to meet water services requirements.

An assessment conducted determined that the more than 90% of the existing AC pipelines of the water
distribution networks in the study area are in a poor condition and need to be replaced. Increased repair
and maintenance costs due to the very high frequency of pipe bursts which occur in these three areas. The
overtime bill is increasing rapidly due to the frequent pipe bursts that are being experienced. Due to the
assessed scale of deterioration of the pipes, it will be more economical in the long run to replace the pipes
than to continue maintaining and repairing them.

Based on a comparison of the total volume of water supplied to the study area with the total volume of
water sales in the study area for the 2014/15 financial year, unaccounted for Water (UAW) is estimated to
be as high as 50% of total input volumes. Preliminary assessment indicate that water losses in the study
area constitute a significant proportion of the unaccounted for water. These excessive distribution losses
increase the expenditure budget for purchasing, treating and pumping the water to the communities. The
high water losses also contribute to less revenue being realised by the Municipality due to reduced water
sales. Further

In order to address the challenges listed above, the replacement of the old AC water pipes in the study
area is unavoidable.

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