Economic analysis of water supply cost structure in the Middle Olifants sub-basin of South Africa

Abstract

Using data gathered from the National Treasury of South Africa, we examine the structure of water supply costs and tariffs of Water Service Authorities (WSAs) in the Middle Olifants sub-basin of South Africa. Using the translog cost function method, the marginal cost of water supply and economies of scale are estimated. Comparison of tariffs and marginal costs show that the estimated marginal cost is higher than the actual tariff paid by consumers. This implies that WSAs in the Middle Olifants are not charging enough to recover the costs of the water services. Thus, among other things, pricing of water at its marginal cost would partly assist in solving the cost recovery problem. Raised tariffs would in turn contribute to improved efficiency of water use. As evidenced by estimation results of returns to scale (greater than one), merger of WSAs would be economically advantageous. Hence, reversing the process of transferring water services’ authority to ‘local’ municipality level and thus up-scaling WSAs into the ‘district’ municipality level is an important policy option for improving water services efficiency in the Middle Olifants sub-basin of South Africa.