CHITO SIAME: A proven way to keep SA’s taps running

SA is staring into a water abyss, much as it is with power. Will water shedding be the next thing to contend with? The signs certainly aren’t encouraging — Cape Town narrowly avoided “Day Zero” in 2018, Nelson Mandela Bay metro’s situation remains dire, and more recently the Johannesburg area experienced supply problems.

The causes are manifold and complex. For example, in Johannesburg the problems, ironically, been more to do with load-shedding than water shortages per se: water needs to be pumped from reservoirs to households and businesses, and pumping stations are powered by electricity.

It is the large cities that experience most water demand pressure, partly as a result of rapid urbanisation, but all over the country indigent communities in smaller towns and rural areas also face serious challenges. Among these are:

• Each South African consumes on average 237l of water a day compared with the daily world per capita average of 173l ;
• SA is the 29th-driest country in the world;
• The country loses about 1.5-billion cubic metres of water a year as a result of faulty piping infrastructure;
• The management and collection of water related rates and taxes is undertaken at the municipal level, with sporadic success given the parlous management standards at some municipalities;
• Water infrastructure investment has not matched the increase in demand. For example, Cape Town’s population increased by 79% between 2016 and 2021, while dam capacity rose only 15% over the same period;
•  SA is highly dependent on surface water such as rivers, lakes and wetlands — 77% — while groundwater and recycled water account for 14% and 9%, respectively; and
• In rural areas in particular, a lack of storage infrastructure means 74% of water needs are serviced by groundwater, which can rapidly deplete in dry seasons, affecting quality. 

The government is finally starting to get serious about water. The issue was singled out by the finance minister in his February budget speech and by the president in his July state-of-the-nation address. At the Water Institute of SA biennial conference in September, water & sanitation minister Senzo Mchunu mooted the idea of a water Independent Producers Programme (IPP), modelled on the country’s successful Renewable Energy Independent Power Producers Procurement Programme (REIPPPP). This is encouraging, as it signals a willingness to harness the power of the private sector and seek a holistic, collective solution to the water problem.

The government should force alignment among local municipalities, national and provincial authorities. This will not necessarily be easy. The Municipal Finance Management Act was enacted specifically to ensure thorough public procurement at municipalities thorough, and strong political will is necessary to develop and implement a public-private partnership (PPP) framework so that water supply and management can be undertaken  by means of private water concessions.

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 — before the Municipal Finance Management Act was enacted in 2003 — they are the only two existing private water concessions in SA. Siza Water in Ballito, KwaZulu-Natal, and Sisulumanzi in Mbombela, Mpumalanga, came about as both areas were struggling financially and could not expand their services. In-house human resource capacity and the ability to source funding were problematic, so the PPP route was considered best.

These two PPPs were formed between the local municipality and the concessionaires, which are responsible for the operation, repair and management of the water infrastructure. They are also responsible for supply, which they either buy from the water board or obtain by producing their own potable water.

Institutional investment manager Mergence acquired a majority stake in Siza Water and Silulumanzi in 2018, and is involved in their management via a special purpose vehicle, SA Water Works (SAWW). Our investments are housed in the Mergence Infrastructure & Development Equity Fund, which invests in various sectors, including affordable housing, renewable energy, water and sanitation, and digital infrastructure. This fund has delivered returns of more than CPI plus 7% a year annum since its inception in 2015 to our institutional investors, mainly pension funds.

How to go about it?

Much as with the REIPPPP, a comprehensive procurement programme stipulating the regulatory, technical and financial requirements, and incorporating the lessons learnt from successful and failed programmes in other markets, will lay the groundwork. The right expertise needs to be harnessed from various national, provincial and municipal entities, such as the National Treasury, the department of water & sanitation, the Procurement Office and the department of environmental affairs, to work with their counterparts to design the programme.

The private sector responds well to certainty and predictability. As with the REIPPPP, corporates, entrepreneurs, commercial banks, institutional investors and advisers will answer the call, and competition will drive down prices if the rules of engagement are well defined and the programme has a long-term horizon.

Billions of rand is needed to kick-start the process. Mergence is already engaging development finance institutions, which can help make the initial investment and derisk projects for other investors to step into a more mature market later. Investors in water infrastructure will see returns only several years after the initial investment. This is inherent in infrastructure programmes where, typically, the bulk of the capital needs to be deployed upfront to build or refurbish the necessary infrastructure before revenues start flowing. Investors therefore need a predictable long-term investment framework to commit the necessary capital.

The impact of SAWW

Mergence’s investment via SAWW has both environmental and social impact. Through the two concessions we serve more than 450,000 customers, and manage more than 1,500km of pipeline and 900km of sewerage network. Through Siza Water, SAWW has also commissioned one of SA’s largest water recycling plants where we recover 2.7-million litres of potable quality water daily. That is set to expand by a further 1-million litres a day in the next 12 months, thereby reducing the draw on bulk water supply from rivers and dams by 30% a day.

There has been a marked improvement in water quality and delivery to all communities. Technical water losses at the SAWW concessions average 20%, compared with the national average of 37%. Unfortunately, this excludes 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). Almost 40,000 of our 450,000 customers are classified as indigent communities, to whom we supply free basic water daily.

The success of these two private water concessions highlights the urgent need for government action. It also indicates why pension funds should seriously consider taking advantage of the recent changes to Regulation 28  of the Pension Funds Act, which allow increased investment in infrastructure. This can contribute towards the financial security of their members and bolster the prospects of members retiring in communities where key infrastructure such as water, electricity, connectivity and educational institutions for their children and grandchildren are available and functional.

• Siame is investment principal at Mergence Investment Managers.