CONSTITUTIONAL COURT OF SOUTH AFRICA
Minister of Water and Sanitation v Sembcorp Siza Water (Pty) Limited and Another
CCT 300/19 Date of hearing: 10 November 2020 ________________________________________________________________________
MEDIA SUMMARY
________________________________________________________________________
The following explanatory note is provided to assist the media in reporting this case and is not binding on the Constitutional Court or any member of the Court.
On Tuesday, 10 November 2020 at 10h00, the Constitutional Court will hear an application for leave to appeal against the whole judgment and order of the Supreme Court of Appeal, which set aside the decision of the Minister of Water and Sanitation (Minister) who approved a decision of Umgeni Water to impose a tariff increase of 37.9% on the cost of its bulk water supply to Sembcorp Siza Water (Pty) Limited (Siza).
The primary issue for determination is the rationality of the Minister’s decision, to approve Umgeni Water’s tariff increase of 37.9% on Siza, a private entity, in contrast to an increase of only 7.8% on its other customers, all of which are municipalities. An ancillary issue is whether the Minister’s decision to approve the tariff increases constitutes administrative action in terms of the Promotion of Administrative Justice Act 3 of 200 (PAJA) or executive action which is reviewable under the principle of legality.
Since Siza and Umgeni Water have recently concluded an agreement releasing the funds held in a trust pending the finalisation of these issues, the question of mootness is also raised.
On 29 January 1999, the Dolphin Coast Transitional Local Municipality (DCLM) concluded a Water and Sanitation concession agreement (concession agreement) with Siza, as a private water services provider with the obligation to supply potable water and sanitation services to a portion of the region (concession area) for a period of 30 years.
DCLM further assigned to Siza its rights under an existing bulk water supply agreement it had concluded with Umgeni Water. After the restructuring of municipalities and local
governments, the DCLM became what is now known as Ilembe District Municipality (Ilembe).
On 7 August 2000, Umgeni Water as the supplier, Siza as the customer and Ilembe concluded a separate tripartite bulk water supply agreement in terms of which Umgeni Water undertook to supply potable water to Siza. Ilembe would act as a guarantor for the fulfilment of Siza’s obligations. Until 2014, Siza had enjoyed annual tariff increases equivalent to Umgeni Water’s other customers. However, in 2014, Umgeni Water reviewed its financial viability, and recommended tariff increases of 39.7% for Siza and 7.9% for the municipalities (including Ilembe), respectively.
The Minister and Umgeni Water contend that the tariff increases were as a result of the need to mitigate the effects of the drought which impacted KwaZulu-Natal and to reduce water disruptions.
Siza opposed the proposed tariff increase. On 23 January 2015, Umgeni Water applied to the Minister for approval of the proposed tariff increase for the 2015 financial year.
Having considered Umgeni Water’s request for tariff increases as well as the objection raised by Siza, the Minister approved the tariff increases in terms of section 42 of the Local Government: Municipal Finance Management Act 56 of 2003.
Following the approval of the tariff increases by the Minister, Siza applied to the High Court of South Africa, KwaZulu-Natal Division, Pietermaritzburg (High Court) for an order declaring both decisions irrational and unlawful. The Minister and Umgeni Water advanced two arguments in support of the decision. First, they argued that a cross- subsidy to Siza should be discontinued (cross-subsidisation argument). Second, they contended that, because Siza was a private entity, it should not be allowed to make profits because municipalities “ploughed back” any profits into enhancing service delivery (plough-back argument). The High Court found in favour of Siza and set aside the Minister’s decision. The High Court reasoned that, in terms of the concession agreement, Siza had stepped into the shoes of Ilembe and assumed Ilembe’s constitutional obligation to provide water to residents in the concession area. The High Court held it was
“opportunistic” for Umgeni and the Minister to single out Siza as a private entity. It found that there was no evidence to support the proposition that Siza was making undue profits. As such, it ruled that the two reasons advanced by the Minister and Umgeni Water failed to justify the differential tariff increase between Siza and Umgeni Water’s other customers. Following this, the Minister and Umgeni Water were granted leave to appeal to the Supreme Court of Appeal.
In a unanimous judgment, the Supreme Court of Appeal dismissed the appeal with costs.
It agreed with the High Court’s reasoning that held Siza performed “identical functions”
to those performed by Ilembe in the concession area and that Siza was essentially discharging the same statutory and constitutional obligations as Ilembe. It found that the Minister’s decision to impose a tariff increase constituted administrative action reviewable under PAJA. The Supreme Court of Appeal dismissed all the arguments advanced by the Minister and Umgeni Water to justify the differential tariff increase.
First, it found that the differential tariff increase could not be justified and that, in any
event, it had not been demonstrated that Umgeni Water did in fact intend to eliminate cross-subsidisation. Second, it considered the purported justification that Siza was a private entity to be irrational, because Siza was discharging the same functions as Ilembe yet paying a higher tariff to do so within the concession area. Finally, it dismissed the argument related to a “management scheme” which was presented after the fact to the Supreme Court of Appeal as a rationalisation for its bad decision.
Aggrieved by the decision of the Supreme Court of Appeal, the Minister and Umgeni Water applied for leave to appeal to the Constitutional Court against the judgment and order of the Supreme Court of Appeal. The Minister contends that the decision to approve the tariff increase is not administrative action reviewable under PAJA, but rather executive action, which is reviewable under the principle of legality.
The Minister maintains that the decision to differentiate between Siza, a private entity, and Umgeni Water’s other customers (as municipalities) was rational. To this end, the Minister argues that the Supreme Court of Appeal’s decision is tainted by four errors.
First, the Supreme Court of Appeal “cherry-picked” provisions of the pricing policy and neither considered the policy as a whole nor the relevant legislation and regulations.
Second, the Supreme Court of Appeal erred when it found that there was no reason why other municipalities which also operated at a loss were not treated the same way as Siza.
Third, the Supreme Court of Appeal was incorrect to conclude that there was no empowering provision for the “discrimination” between Siza and other customers.
Finally, the Supreme Court of Appeal was incorrect when it found that the elimination of Siza’s subsidy would not have a material effect on Umgeni Water’s financial situation.
Siza contends that this matter has become moot and it is not in the interests of justice to grant leave to appeal. Siza alleges that on 3 June 2020, it concluded a settlement agreement with Umgeni Water. In addition, Siza contends that the High Court and Supreme Court of Appeal applied settled principles of administrative law. In its view, the argument advanced by the Minister and Umgeni Water that this matter raises a constitutional issue because it implicates the constitutional right of access to water is misguided. Siza submits that, at best, the matter concerns the misapplication of an accepted legal test and findings of fact by lower courts, which do not engage the Court’s jurisdiction. On the merits, Siza argues that Minister’s decision to approve the tariff increases constitutes administrative action in terms of PAJA. It contends that once it is accepted that Siza is acting as an organ of State in the concession area, by discharging Ilembe’s constitutional and statutory obligations, then it is irrational to differentiate between it and Umgeni Water’s other customers solely because it is a private entity. It submits further that neither of the purported justifications for the differentiation are rational. First, the cross-subsidisation argument must fail because it is not sanctioned by Umgeni Water’s pricing policy. Second, the plough-back argument must fail based on the Court’s decision in Allpay Consolidated Investment Holdings (Pty) Ltd v Chief Executive Officer of the South African Social Security Agency in respect of private entities otherwise standing in the shoes of organs of State.
Umgeni Water, in supporting the Minister’s application, contends that the appeal should succeed. Umgeni Water claims that the matter is not moot and that the settlement
agreement does not resolve the central issues in dispute before the Court. In respect of the applicable standard of review, Umgeni Water submits that the Minister’s decision is polycentric in nature. As such, it argues that the principle of legality applies.
Furthermore, Umgeni Water contends that it was empowered in terms of the norms and standards prescribed by the Minister in terms of section 10 of the Water Services Act 108 of 1997, as well as the pricing policy to differentiate between Siza and its other customers. Finally, it argues that the Supreme Court of Appeal’s approach was incorrect, in that it did not consider the multi-faceted approach that Umgeni Water is empowered and permitted to adopt, in order to ensure its financial viability. On these bases, Umgeni Water argues that the tariff determination and the Minister’s subsequent approval of that determination were rational.
