As South Africa grapples with the ongoing drought and increasing water demand from the burgeoning urban population, the development and maintenance of water infrastructure is expected to move higher up on the agenda. With government budgets already under pressure, the private sector could play a meaningful role in the financing, development and management of water and sanitation infrastructure.
The value of South Africa’s water infrastructure is expected to show real growth of 5.7% and 3.3% in 2017 and 2018 respectively, according to forecasts by Business Monitor International. In the period from 2017 until 2026, the water-related construction industry requirements are set to increase by 35.5% annually in real spending terms.
The question many are asking is where the required funding is going to come from, especially against the backdrop of the 2017/18 budget primarily focusing on the maintenance of existing infrastructure assets rather than the rollout of major new projects.
“Throughout the world there are numerous examples where the private sector is delivering water and sanitation services to the benefit of all stakeholders. The most obvious advantage is the private sector’s ability to bridge the funding gap between available state resources, and the investment required over the coming decades,” explains Mich Nieuwoudt, Chief Investment Officer at Gaia Infrastructure Partners.
“The private sector is highly incentivised to ensure the timely delivery of high-quality assets designed to last for the duration of the contract. The private financing of infrastructure also means taxpayers don’t have exposure to cost overruns. The state can therefore use the money originally earmarked for these projects, elsewhere for other urgent needs. In addition, consumers benefit from set quality standards,” he adds.
According to Nieuwoudt, the success of South Africa’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) illustrates the significant contribution the private sector can make towards infrastructure development.
However, he emphasises the importance of ensuring all water-supply agreements are governed by clear contracts that ensure the wellbeing of end users by holding private-sector participants to strict standards of delivery, while at the same time providing certainty to financiers and investors.
Nieuwoudt says to attract private-sector investment in water and sanitation delivery, there needs to be a transparent procurement framework, similar to the REIPPPP initiative. In addition, private investors also require assurance that they’ll be able to recoup their investment in case the municipalities, to which the water is supplied, can’t pay for this service. Access to water is a human right, which means water providers can’t close the taps in case of non-payment. Again, a solution could be found in the renewable energy programme, where all power purchase agreements signed with Eskom have an explicit National Treasury guarantee, meaning that if Eskom fails to pay, Treasury has to settle any outstanding amounts. These investments therefore have the same default risk as government bonds. Investors’ confidence in the process and reduced levels of perceived risk have translated into lower renewable energy prices, with the cost of solar and wind falling by 68% and 42% respectively since the first REIPPPP round.
Solutions to the Western Cape water crisis
Commenting on the crisis in the Western Cape, where water rationing has been implemented, Nieuwoudt highlights the maintenance of leaking pipes and the reclamation of wastewater as some measures to stretch existing supply.
“It is much easier to use the available water more efficiently, than to increase supply. For instance, partnering with private plumbing and water experts to reduce leakages, could have a considerable impact,” he says.
South Africans have generally resisted the idea of drinking reclaimed sewage water. However, according to Nieuwoudt, perceptions about the health risks are often not based on truth. In fact, properly-treated wastewater is normally cleaner than water pumped from the rivers. In Singapore, high-grade reclaimed water is an important pillar of the city state’s water sustainability strategy. Produced from treated used water, which is further purified through advanced membrane technologies and ultra-violet disinfection, it surpassed the World Health Organisation’s standards.
In terms of augmenting overall water supply, a variety of solutions have been suggested, including desalination and groundwater extraction projects. Nieuwoudt says while the private sector can play a role in boosting water supply, care should be taken to ensure that short-term solutions to the crisis don’t lead to excessive water tariffs in the decades to come.
“The short notice period and considerable policy uncertainty associated with quick-fix solutions would require the private sector to price in additional risk. This would bring about an increase in water tariffs that might not be sustainable. For instance, what if it starts raining again? While the current crisis certainly warrants a bold response, it shouldn’t be to the detriment of public sector budgets and taxpayers over the long run,” notes Nieuwoudt.
He points to the fact that South Africa’s celebrated renewable energy programme was initiated in response to severe power generation constraints at Eskom, and that similarly there should be a national dialogue on public-private partnerships for the delivery of water infrastructure.