SEAN PHILLIPS AND MOHALE RAKGATE: Infrastructure Fund making inroads in water sector

In his 2021 state of the nation address President Cyril Ramaphosa said: “The R100bn Infrastructure Fund is now in full operation. This fund will blend resources from the fiscus with financing from the private sector and development institutions.”

The R100bn was not simply given to the fund as a lump sum. A budgeting mechanism called the Budget Facility for Infrastructure (BFI) in the National Treasury is used to allocate a government contribution to blended finance projects supported by the Infrastructure Fund, on a project-by-project basis. This is to ensure that proposed projects are scrutinised with the normal rigour by the Treasury before public funds are allocated.

The financing of projects developed by the fund is structured such that projects are derisked to enable private sector participation. The Infrastructure Fund works with willing government bodies to identify suitable blended finance projects and assists them to make submissions to the BFI.

In the last three years the Infrastructure Fund has packaged 26 large blended finance projects, worth R102bn, across the water and sanitation, human settlements, student accommodation, transportation, health and municipal energy sectors. The fund has secured R37bn from the BFI for government contributions to these projects. Private sector (R55bn) and other government grant contributions (R10bn) make up the remaining R65bn.

The government contribution is used for first loss capital grant finance and short and long-term concessional debt instruments, which include credit enhancement facilities, tariff and interest rate subsidies, as well as viability gap funding. The government contribution enables blended finance projects to become bankable.

To date the Infrastructure Fund has secured R23bn from the BFI for seven large water projects worth R51bn (including R28bn of private sector financing).

Three water board projects are already under implementation and receiving disbursements. The other projects are on the path to financial close and will be completed between 2025 and 2032. These projects will deliver 477,390-million cubic metres of water per annum, reduce non-revenue water, and generate about 95,000 jobs during construction.

The R24bn uMkhomazi water augmentation project in KwaZulu-Natal is being implemented by the Trans Caledon Tunnel Authority to ensure water security for the growing population of eThekwini and surrounding areas. This project was delayed for 10 years because the city of eThekwini was unwilling to sign an offtake agreement due to the high cost of the project.

Working with the department of water & sanitation, the Infrastructure Fund secured R12bn for this project from the BFI, which comprises a R6bn grant and another R6bn concessional non-interest-bearing facility. This enabled the tariffs to be reduced to an affordable level and the city signed the offtake agreement in January 2024.

The R25bn Olifants management model programme will provide water to mines and villages in the Sekhukhune district. R12.5bn will be contributed by mining houses, and the remaining R12.5bn will be provided by government. The fund and department obtained BFI approval for R5.9bn for the programme, and the remaining government allocations will be made in later years.

The Infrastructure Fund has assisted the government in putting in place innovative financial structuring, which has made the programme bankable and viable. The financial structuring also obviates the need for sovereign guarantees and provided comfort for lenders to rely on project revenue for security. 

The R5.2bn Moretele North Klipvoor bulk water supply scheme and the R2.9bn Pilanesberg project are being implemented by Magalies Water. The projects will enable increased access to potable water to communities and businesses in parts of the Limpopo and North West provinces. The Infrastructure Fund assisted Magalies Water to obtain R3.7bn from the BFI for these projects and the fund is assisting Magalies Water to raise the remaining funding in the financial markets. 

The R4.5bn Olifantspoort and Ebenezer water supply programme is being implemented by Lepelle Northern Water to address water supply shortages in Polokwane, Limpopo. The Infrastructure Fund assisted Lepelle Northern Water to obtain an allocation of R1.4bn from the BFI, and DWS will contribute a further R1.2bn from its infrastructure grants. R2bn will be raised by the IF and Lepelle Northern Water on the financial markets. 

A R1bn non-revenue water reduction pilot project is being implemented by the eThekwini municipality, assisted by the Water Partnerships Office. The Infrastructure Fund has assisted eThekwini to obtain approval for R400m from the BFI, in the form of a grant and concessional loan facility. These funds will be complemented by municipal funds. The municipality will take the project to the market, and the successful bidder will make a financial contribution as well as provide expertise in nonrevenue water reduction.

In addition to these seven major water projects, the Infrastructure Fund is assisting the department of water & sanitation to develop further blended finance projects, such as the Vaal Gamagara project, to provide additional water to mines and communities in the Northern Cape and the rehabilitation of irrigation infrastructure in partnership with the Vaalharts Water User Association in the Northern Cape.

• Phillips is director-general of the national department of water & sanitation. Rakgate is chief investment officer of the Infrastructure Fund.