Chito Siame, Head: Private Equity, Mergence Investment Managers

South Africa’s water crisis is dire. The causes are manifold, but lie largely in historical municipal challenges and lack of capacity, resulting in decaying or defunct infrastructure; delays in government partnering with the private sector to mobilise investor capital; and an alarming rise in recent months of criminal elements in the water tanker sector deliberately and systematically sabotaging water infrastructure.

South Africa is not however alone. Other countries are also facing water crises and in fact, globally, demand is expected to outstrip the supply of fresh water by 40% by 2030, according to a landmark report “Turning the tide” by the OECD’s Global Commission on the Economics of Water.

The report sets out seven key recommendations, including reshaping the global governance of water resources, pricing water properly, establishing “just water partnerships” to raise finance for water projects in developing countries, and scaling up investment in water through public-private partnerships (PPPs).

In this article, I will be exploring the notion of PPPs in the South African water context, as a potential long-term solution to the crisis, while outlining some of the challenges.

By way of brief context – but beyond the scope of this article – it is important to note that progress is being made by the authorities on various fronts. These include:

• the reintroduction of the transparent Blue Drop, Green Drop and No Drop quality reporting standards;
• the establishment of the Water Partnership Office in the Development Bank of SA (DBSA); and
• pending legislation which will, amongst other things, introduce a compulsory operating licence system obligating municipalities unable to achieve the required standard to outsource water provision to an external, licensed service provider.

A “Water REIPPPP”?

South Africa has run a highly successful and world-renowned renewable energy independent power producers procurement programme (REIPPPP).

Many institutional investment managers, have had exposure to the REIPPPP for many years and have seen that the model could possibly be adapted for the water sector. Indeed, there have already been discussions around this by all stakeholders.

For such a model, a PPP framework can be created to facilitate water supply and management by means of private water concessions.

As proof that private water concessions through PPPs can work, two 30-year private water and sanitation concessions were created in 1999, prior to municipalities being granted control of water through the Municipal Finance Management Act No. 56 of 2003.

The two PPPs are formed between the local municipality and the concessionaire which is responsible for the operation, repairs and management of the water infrastructure as well as the supply of water, which they either buy from the Water Board or obtain through the production of their own potable water.

The two concessionaires are Siza Water, in Ballito, Kwa-Zulu Natal and Silulumanzi, in Mbombela, Mpumalanga. The two private concessions came about as both areas were struggling financially, lacked the necessary expertise to efficiently operate the infrastructure, and could not finance the upgrade of infrastructure of the existing asset base nor facilitate the expansion of their services for new developments. Hence, the PPP route was considered best.

The impact has been significant and includes:

• Approximately 250,000 of the 500,000 customers that SAWW serves are classified as indigent communities and who receive free basic water daily.
• Siza Water has also commissioned one of SA’s largest water recycling plants where they recover three million litres of potable quality water per day, thereby reducing the draw on bulk water supply from rivers and dams by 25% per day.
• Technical water losses at the SAWW concessions average 20% compared to a national average of 37%; unfortunately this excludes the indigent communities where challenges remain.
• Green Drop certification has been achieved at Siza Water (this measures holistic management of a sewer system and must score more than 90% on all metrics to be accredited).
• Blue Drop certification has been achieved by both Siza and Silulumanzi (this measures the entire potable water system and a score of at least 90% is required for certification). In the 2023 Blue Drop results, the they accounted for five of the 26 Blue Drop accredited systems in SA.

Challenges

The above description of two successful private water concessions looks positive and – yet – we are still faced by significant challenges. I highlight some of these below with the hope that any discussions around the way forward for the water sector, including a model based on PPPs, will take such factors into account:

1. The municipalities need to pay service providers. Concessions are operated on a bill-and-collect basis but there is a portion of fees that needs to go through municipalities for payment to the concessionaire, as described further below. Municipalities are often either unable to pay at all or the payment sits in a hierarchy leading to very slow payment. This impacts on the ability of the concessionaire to do its job properly in terms of maintenance etc.

2. Equitable social grants. These grants are made by National Treasury to the municipalities in order to cover costs for the portion of basic water that is delivered free of charge to the indigent consumer, but the grants are not conditional nor ring-fenced, leading to the problems described in 1) above. We would suggest that the grants be moved to the Water Partnership Office of the DBSA, for centralised and controlled management.

3. There are no effective credit control tools to use. There are no punitive measures available to apply to defaulting municipalities. Contrast this with Eskom where, if payment is not made, power is simply cut off. Water is a basic human right and so concessionaires would not be able to cut water supply, merely trickle it if need be.

4. Land ownership. Taking the challenges even further, many parts of SA are occupied by people illegally, with no existing title to property. Under such circumstances, providers are not able to provide essential services in the absence of a properly zoned town plan. Thus, illegal water is supplied, feeding further the so-called water mafia.

Conclusion

This article paints a picture of a multitude of challenges within the country’s water sector; unfortunately that is what all stakeholders are up against. There is a need for huge political will and cooperation by all stakeholders for long-lasting solutions to be found.

We hope that with the Government of National Unity breathing fresh air into the economy, we will be able to make progress and reach a situation where water, one of the most basic human rights, can be safely and effectively supplied to all citizens.

ENDS