Case  CCT300/19
[2021] ZACC 20

Hearing Date: 10 November 2020

Judgement Date: 23 July 2021

Post Judgment 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 23 July 2021 at 10h00 the Constitutional Court handed down judgment in an application for leave to appeal against the whole judgment and order of the Supreme Court of Appeal, hearing an appeal from the High Court of South Africa, Kwazulu-Natal Division, Pietermaritzburg (High Court), that concerned the unequal implementation of cost increases of potable water by a water board.

On 29 January 1999, the predecessor of Ilembe Municipality (Ilembe) concluded a Water and Sanitation concession agreement (concession agreement) with Sembcorp Siza Water Pty Limited (Siza), a private company. Siza undertook to supply potable water and sanitation services on behalf of Ilembe to a portion of the Ilembe region (concession area) for a period of 30 years. Pursuant to the concession agreement, Ilembe’s predecessor assigned to Siza its rights under an existing bulk water supply agreement it had concluded with Umgeni Water (Umgeni), a water board which provided bulk water to water services providers, including municipalities and private entities. On 7 August 2000, Umgeni as the supplier, Siza as the customer and Ilembe as the guarantor, concluded a tripartite bulk water supply agreement in terms of which Umgeni undertook to supply potable water to Siza.

Until 2014, Siza enjoyed annual tariff increases that were equivalent to that imposed on Umgeni’s other customers. However, in 2014, Umgeni reviewed its financial viability and recommended tariff increases of 41.4% for Siza and 8.3% for the municipalities (including Ilembe). Umgeni justified the decision by contending that the tariff increases were a result of the need to mitigate the effects of the drought which impacted Kwazulu-Natal and to reduce water disruptions. Disregarding Siza’s dissatisfaction of the proposed tariff increase, Umgeni applied to the Minister for the approval of the tariff increase, which the Minister subsequently reduced from 41.4% to 37.9%.

Siza challenged the decisions made by Umgeni and the Minister in the High Court on the reasoning that such decisions were unlawful, unfairly discriminatory and irrational. Whilst Umgeni and the Minister defended the impugned decisions on the bases that they were no longer allowing a “cross-subsidy” on the price of bulk water supplied to Siza, and that Siza was not a municipality and was consequently not allowed to make a profit. The High Court held that Siza was being singled out as a commercial entity, particularly in light of it discharging Ilembe’s constitutional and statutory obligations as a water services provider, and ruled that the tariffs imposed on Siza were irrational.

Aggrieved, Umgeni and the Minister appealed to the Supreme Court of Appeal (SCA). Its appeal was dismissed on the ground that Siza was discharging Ilembe’s constitutional and statutory obligations. It also found that the decision constituted administrative action reviewable in terms of PAJA. The SCA further held that in order for there to be differentiation, there needed to be a rational basis for it and therefore the tariff increases could not be justified in terms of the pricing policy. Umgeni and the Minister appealed further to the Constitutional Court.

In a majority judgment penned by Jafta J and Victor AJ (Mogoeng CJ, Mathopo AJ, Mhlantla J and Tshiqi J concurring), the Constitutional Court established that the issues that arose for determination were: (i) whether Umgeni’s decision was irrational; (ii) whether that decision also constituted unfair discrimination; and (iii) whether the Minister’s decision to approve Umgeni’s tariff was legal.

In dealing with the first issue, the Court found that both the High Court and the Supreme Court of Appeal erred in their conclusions, as they did not apply the rationality test with reference to the decision to raise the tariff charged on Siza or the procedure followed to reach such tariff. On the issue of unfair discrimination, the Court applied the rationality test and found that the facts do not suggest that the differentiation experienced by Siza rose to a level of unfair discrimination. The Court also found that there was no provision in the Water Services Act 108 of 1997 (the Act) which makes it mandatory for the Minister to approve a tariff, however Umgeni was empowered as a water board to set and enforce tariffs for the provision of water services in terms of the Act.

The Court held that the Minister’s decision was illegal, but that the tariff set by Umgeni was legal and rational. In the result, the Court issued an order where leave to appeal was granted, the appeal by the Minister was dismissed, the appeal in favour of Umgeni was upheld and the orders of the High Court and the Supreme Court of Appeal were set aside.

A minority judgment penned by Madlanga J (Theron J concurring) disagreed with the conclusion reached by the majority. It reasoned that Umgeni’s proposal of a 41.4% increase sent to the Minister for approval was a mere recommendation and not a decision. The Minister did not approve that recommendation. Instead she approved a 37.9% increase. It is this increase that Umgeni then sought to implement, and not its own 41.4% recommendation. Therefore, as the Minister’s purported tariff increase must be invalidated due to the Minister’s lack of power to fix tariffs, nothing remains to be implemented. Umgeni’s recommendation of a 41.4% increase was just that – a recommendation. It was never a final implementable decision. And it cannot suddenly and magically become final and implementable just because the Minister’s approval falls away. Thus, the minority judgment would have dismissed both applications for leave to appeal – the Minister’s and Umgeni’s – for lack of prospects of success..

The Full judgment  here