SEAN PHILLIPS: How to attract funding to beef up the declining water sector in SA

A communique issued by the International High-Level Panel on Water Investments for Africa at the 79th UN General Assembly in New York in September reads that “investments in water are lagging and it is estimated that at least $30bn additional finance needs to be mobilised annually by 2030 to meet the UN sustainable development goal (SDG) on water and sanitation” (SDG6). 

In theory, investments in water should be low risk with a reasonable return on investment, and should therefore be attractive for long-term investors such as pension funds. There will always be demand for water, it is a limited resource that is not substitutable, and water utilities are usually monopolies with no competition. 

However, for the water sector to become an attractive investment opportunity the institutions receiving the investments must be capable of generating the required return on investment. In addition, the water sector must be largely self-financing. This means that apart from the supply of free basic water to the indigent citizens and industries must pay for the water they use.

Stepped water tariffs should be used to cross-subsidise the cost of water between the rich and the poor, and to provide the right incentives for water to be treated as a scarce resource. Citizens who use large volumes of water should pay more per unit of water than citizens who use small volumes of water. 

If the water sector is to be self-financing it must be run in a businesslike way. This means revenue must cover expenditure; revenue must be sufficient to finance the renewal and development of infrastructure; and expenditure must be efficient and result in a reliable and acceptable level of service. This requires water institutions to have effective billing and revenue collection systems and the capability to maintain and operate their infrastructure properly.

Attracting investment

Well-governed, professionally managed and financially sustainable water institutions are thus a prerequisite for attracting investment in the water sector. The creation of such institutions in member countries should be at the centre of the efforts of the AU to mobilise additional investments in water.

In SA, national water institutions are sufficiently well governed to be able to attract investment. For example, there is strong investor appetite for the bonds issued by the Trans-Caledon Tunnel Authority (TCTA), an entity of the department of water & sanitation, which raises finance in the markets for large national water resource infrastructure projects such as the $2.5bn second phase of the Lesotho Highlands Water Project.

The water-trading entity in the department also has sufficiently effective billing and revenue collection systems in place to provide assurance to the investors in the TCTA’s bonds that they will obtain a return on their investments. In addition, the department’s infrastructure branch has the capability to ensure that national water resource infrastructure is maintained and operated well enough to provide a reliable and acceptable level of service.

However, there is room for improvement, and the recent signing of the National Water Resource Infrastructure Agency (NWRIA) Act by the president will result in the establishment of a single agency to replace the current fragmented institutional arrangements. Ownership of national water resource infrastructure will be transferred to the NWRIA, so that it will have the balance sheet, asset base and revenue streams to enable it to borrow money on the markets without necessarily obtaining guarantees from the National Treasury.

Many opportunities

Most municipal water institutions in SA are not sufficiently well governed to attract the level of investment in water services required to achieve SDG6. The Blue, Green and No Drop reports released by the department in 2023 provided evidence of a sharp decline in the reliability and quality of water services on average across the country over the past 10 years. In addition, municipal nonrevenue water increased from 37% to 47%.

There are many opportunities for private sector investment in municipal water services, including, for example, seawater desalination, wastewater reuse and reduction of nonrevenue water. However, due to institutional challenges in municipalities little private sector investment in municipal water services is taking place.

To address this, the department proposed amendments to the Water Services Act and the National Treasury is implementing a reform of metropolitan trading services programme. Both of these reform initiatives are aimed at addressing the underlying institutional causes of the decline in municipal water services and the lack of bankable investment opportunities in water services.

The aim of the reforms is to ensure that revenues from the sale of water are ring-fenced for water services; that there is single-point accountability for all aspects of delivering the water service; and that water services institutions have the technical and managerial capability to ensure that infrastructure is properly maintained and operated.

• Dr Phillips is director-general of the department of water & sanitation.