THIAGO ALMEIDA AND ZAKHELE MAYISA: Why there’s a new buoyancy around water and sanitation

SA faces an imminent water crisis that bears remarkable similarities to the energy challenges experienced by Eskom. A significant portion of our population still lacks access to fundamental human necessities such as clean water and adequate sanitation. Worryingly, 30% of our water supply systems produce water that does not meet basic microbiological safety standards, and 40% of our wastewater treatment plants suffer from severe neglect.

To make matters worse, non-revenue water is at more than 46%. This is water that has been produced but does not result in revenue to the water service provider due to a combination of physical losses such as leakages and commercial losses such as water theft and nonpayment. The impending crisis highlights a systemic breakdown that requires immediate attention and decisive action.

At the recent 2024 Sustainable Infrastructure Development Symposium in Cape Town there was much talk about how to tackle the maintenance backlog that is affecting water and sanitation infrastructure, but this is yet to be translated into action. About R30bn is required annually, and — unlike Eskom — this funding isn’t required by just one entity but by numerous water boards and municipalities.

The finance minister made it clear in his medium-term budget policy statement that fiscal capacity is under pressure, so it’s certain that a multi-stakeholder approach will be needed to address the water and sanitation crisis, including bankable projects that can be delivered by a private sector participation model with backing from equity investors and funding from banks and development finance institutions. A supportive regulatory and policy framework will be a prerequisite.

It is therefore encouraging to see the positive policy response in the form of the Water Partnership Office established by the department of water & sanitation and Development Bank of Southern Africa (DBSA). The water and sanitation crisis can be resolved if decisionmakers at the National Treasury and in parliament pull the right levers so that officials in the department, DBSA and the Water Partnership Office can start to transform their vision into reality, with the support of investors that are keen to diversify their portfolios into a vital area of national interest.

The vision is sweeping and impressive, as the director-general of water & sanitation, Sean Phillips, explained at a recent networking forum in Johannesburg hosted by Nedbank and the Nepad Business Foundation. It starts with the creation of the National Water Resource Infrastructure Agency, which will address fragmentation in the department by merging the Trans-Caledon Tunnel Authority (TCTA), which raises finance on the markets for infrastructure projects; the water trading entity, which collects the revenue from water sales; and the infrastructure branch, which maintains and operates dams.

This will create an entity with assets and a balance sheet, unlike the TCTA, meaning that in time it will be able to raise finance in the market without the constraint of needing Treasury guarantees. As it is, a pipeline of government infrastructure projects has already been unblocked by water & sanitation minister Senzo Mchunu, and the private sector has committed 60% of the funding.

The role of the Water Partnership Office, led by the DBSA’s Johann Lübbe, will be to support municipalities in developing bankable projects. Lübbe told the networking forum that the office is developing standardised programmes to create, prepare and structure public-private partnership (PPP) projects so that municipalities do not constantly have to reinvent the wheel. “All of our initiatives are aimed at private sector participation, creating opportunities for the private sector to come in and support government with the provision of water services,” he said.

Priority areas include water reuse, and the loss of water and revenue through leaks, involving the private sector in building, operating and maintaining wastewater treatment plants and introducing “independent water producers” to build and operate desalination plants in coastal cities. The office is also developing a way to give companies in the private sector management contracts to support municipalities in fixing their water businesses.

It is important to note that the Water Partnership Office cannot force municipalities to accept its help. However, widespread municipal dysfunction is being tackled through amendments to the Water Services Act. A new system will mean services can be provided only by an entity with an operating licence. Licensing requirements will specify minimum competence and performance levels for service providers linked to gazetted norms and standards for water and sanitation services.

Municipalities will have to fulfil licence conditions if they provide the services themselves, and if they persistently fail the minister will be able to force them to contract with a licensed water services provider. This is a key change with the potential to quickly transform water and sanitation.

It provides an objective basis for municipalities to evaluate service providers and opens the door to municipalities using companies in the private sector, water boards, NGOs or community organisations as service providers. This should lead to a competitive market in which municipalities have a pool of competent service providers to choose from.

Similar reforms in Brazil, which also had a nationwide water and sanitation crisis, implemented important improvements to legislation and saw vast parts of the country adopting private sector water service providers almost overnight. Service delivery improvements quickly followed.

Phillips said the department is pressing the Treasury to issue “simpler and quicker” regulations on PPPs and to strengthen its credit control measures so municipalities with growing debts to water boards can have their equitable share allocations withheld. This will incentivise them to fix the weak billing and revenue collection systems that leave them with increasing debts that imperil the survival of water boards.

All this progress is long overdue, though while the existing PPP framework is strong, it falters when it comes to capacity and efficiency. However, minimal investment in water and sanitation infrastructure means institutional knowledge and technical skills have been lost. That’s why a critical part of creating momentum will be to rebuild capacity in municipalities and the private sector so that investors’ funds are wisely spent on productive and efficient projects.

Fortunately, we have examples of where the private sector’s involvement in providing water services is effective and financially beneficial for a municipality. One example is Siza Water, which has a 30-year concession with iLembe District Municipality on KwaZulu-Natal’s Dolphin Coast and pays half its profits into municipal coffers. Siza has cut water losses from 50% to 10%-12%, and MD Shyam Misra told the forum: “We’re basically managing the primary resource for growth and development, and the ripple effect is phenomenal for the whole economy.”

The government recognises that public‐private partnerships (PPPs) can be an important lever to deliver much‐needed infrastructure and ease pressure on stretched government finances given past successes in the implementation of PPPs in key sectors such as the water sector. Most importantly, investors in PPPs are looking for active management that squeezes every bit of efficiency out of projects. That will be good for shareholders and even better for water users.

• Almeida is divisional executive, and Mayisa co-head of Africa infrastructure finance, at Nedbank CIB.