State-owned water utility Rand Water will have a funding shortfall of R5-billion over the period between 2010 and 2015, while higher energy and raw water costs would continue to weigh down its profitability, CEO Percy Sechemane said on Friday.

The utility boosted its revenues by 9,4% to R4,7-billion in the 2009 financial year, ended June 30, 2009, compared with R4,27-billion the year before.

However, Sechemane highlighted that Rand Water’s profit fell by 29% to R596-million, compared with R839-million the year before.

Higher energy costs, which increased to R128-million during the year, and higher raw water costs, which amounted to R120-million in the financial year, were largely responsible for the decline in profits, the CEO said.

One of the biggest challenges for the utility was the need to negotiate sustainable tariffs with its customers.

While it had, during the past financial year requested a 15% increase in tariffs, it was eventually awarded an 8,3% increase.

Sechemane noted that there was a need for more cost-reflective tariffs, saying it would again ask for a 15,1% tariff increase this year.

Another challenge was the utility’s ageing infrastructure with some of its pipelines having been in place for decades and requiring upgrades.

Rand Water would invest R8,6-billion between 2010 and 2015, 70% of which would be spent on augmenting infrastructure and 30% of which would be spent on infrastructure renovations and replacements, as well as for water demand management activities.

The required capex, along with redemption payments totalling R633-million up to July 2012, left the utility with a funding requirement of R5-billion.

Sechemane said that the utility would be going to the market to try to raise the funding, adding in the utility’s 2008/9 annual report that a funding plan and strategy was being developed.

He further highlighted that the default risk by major municipalities and the quality of raw water being abstracted from the Vaal River, were also matters it was concerned with.

Sechemane pointed out that the continuing poor management of water quality at the Vaal River, as a result of poor catchment management, resulted in higher chemical treatment costs for the water utility.

It was, however, not directly responsible for the water quality management of the river.

Despite the challenges, the utility was looking at “exciting” opportunities to lower its costs.

Given the expected electricity tariff increases to be implemented by Eskom and municipalities over the coming years, the utility planned to lower its energy costs through cogeneration.

It was looking at harnessing energy from the high pressure that was being used for its pipelines, while a regional bulk sanitation scheme would give it scale to potentially produce energy from methane, said Sechemane.

In addition, the utility was actively pursuing water demand management options, which, if done correctly, could delay the need for implementing the second phase of the Lesotho Highlands Water Project (LHWP), the CEO stated.

He explained that if the second phase of the LHWP was delayed, the additional raw water costs that would be passed onto Rand Water and subsequently end users, could also be delayed.

The South African government had, in 2008, approved the project at an estimated cost of about R3,7-billion. The project, to be implemented by the Trans Caledon Tunnel Authority, would include the construction of a new dam and other infrastructure to ensure water security in Gauteng and for the rest of the Vaal River water supply areas.