CHITO SIAME: The water crisis — there is some movement

There is much negativity, understandably so, about the water crisis in SA, with the prospect of water-shedding hanging over parts of the country.

Municipalities lose an estimated average of 40%-50% of potable water before it reaches the end user. Despite being ranked as the world’s 30th-most water-scarce country, SA’s average consumption of 235l per person per day is higher than the global average. Another sobering fact is that the World Economic Forum has listed water as the third-largest risk of doing business in SA.

The causes for the water crisis are manifold, but lie largely in municipal mismanagement and lack of capacity resulting in decaying or defunct infrastructure, and historically limited appetite by the government to partner with the private sector and mobilise investor capital.

The government does in fact have a plan — the national water and sanitation master plan was published in 2018. It includes extensive, detailed schedules of projects, relating among other things to water augmentation schemes, such as new dams, the Lesotho Highlands Phase II, desalination projects, and plans to reduce nonrevenue water losses, However, it remains a work in progress with little published information on progress on the plan.

Despite the gloom about the worsening crisis, there are encouraging developments.

In 2022 the department of water & sanitation reintroduced the so-called Blue, Green and No Drop reports, which had been stopped in 2014. (The Blue Drop report provides an assessment of drinking water quality; the No Drop report focuses on water losses and non-revenue water; and the Green Drop report provides an update on the performance of wastewater management systems at municipal level.)

The reinstatement of the Drop reports signals encouraging transparency and accountability by the government to actually measuring the scale of the problem, openly sharing the results, and mobilising assistance to municipalities. However, according to the 2023 Blue Drop report, despite all the support being provided to municipalities, water services continue to decline, and fundamental reform is required to arrest and turn around the continuing deterioration of municipal water and sanitation services. This has led to the following:

• In August 2023 the establishment of the water partnership office in the Development Bank of Southern Africa to bring together the department of water & sanitation, National Treasury, other departments and financiers to work with municipalities on long-term solutions to the water crisis. This includes allocating infrastructure grants worth more than R20bn a year to municipalities, providing technical and engineering support and assistance, capacity building and training, and financial management advice and support.
• Enabling legislation: the National Water Services Amendment Draft Bill as well as other amendments to water legislation were gazetted in November 2023 and opened for public comment.

The legislation distinguishes between a water services authority, which is the part of the municipality responsible for ensuring that water services are provided according to national norms and standards, and a water services provider, the part of the municipality responsible for providing water and sanitation services to the customers of the relevant water services authority.

Water boards, of which there are nine, have historically been mandated to operate dams, bulk water supply infrastructure, some retail infrastructure and some wastewater systems. Some also provide technical assistance to municipalities. Through their role in the operation of dams they also play an important role in water resources management. Some water boards are now also gearing up to extend their roles to include acting as a water services provider and to assist with wastewater treatment.

Take time

The National Water Services Amendment Draft Bill introduces a compulsory operating licence system for water service providers to be registered, vetted and managed by the department of water & sanitation as the national regulator. This will enable water service authorities and the department of water & sanitation to ensure that water service providers have minimum competence, capability, and performance levels in future. Those unable to achieve the required standard will be obliged to outsource water provision to an external, licensed service provider.

These government initiatives are most encouraging but it will take time before we see a turnaround. Meanwhile, there is an additional solution, which Mergence Investment Managers as an institutional investment manager has been discussing with the authorities — in the form of public-private partnerships (PPPs) managing private water concessions.

Here, a PPP framework can be created to facilitate water supply and management through 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 municipalities were granted control of water through the Municipal Finance Management Act.

The two PPPs are 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, KwaZulu-Natal; and Silulumanzi, in Mbombela, Mpumalanga.

These two private concessions 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 issues and so the PPP route was considered best.

Mergence Investment Managers, through its private market business unit, acquired a majority equity stake in Siza Water and Silulumanzi in 2018, and is actively involved in their management via a special purpose vehicle, SA Water Works (SAWW). The investments are housed in the Mergence Infrastructure & Development Equity Fund, an infrastructure fund invested across various sectors, including affordable housing, renewable energy, water and sanitation, and digital infrastructure.

Mergence is also assessing other viable projects in the water sector to assist in remedying the challenges. We have already mobilised and deployed more than R800m in this sector and are willing to raise and deploy significant amounts of further capital as opportunities arise. We recently received a request for information from a large metro.

Institutional investors are now able to allocate up to 45% of assets to infrastructure due to changes to Regulation 28 of the Pension Funds Act in 2022. Such private market investments, when done with the requisite expertise, offer benefits that include long-term steady returns, diversification, noncorrelation with other asset classes — and a positive impact in terms of environmental, social and governance metrics. We outline below the impact of the Mergence investment in SAWW.

Through the two concessions, SAWW serves more than 450,000 customers daily, and manages more than 1,500km of pipeline and 900km of sewage network.

The following has been achieved:

Environmental

• 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 a national average of 37%; 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).
• Siza operates one of SA’s largest direct water reuse plants, where it recovers/recycles up to 3-million litres of potable quality water a day, set to expand by 1-million litres a day in the next 12 months, thereby reducing the draw on bulk water supply from rivers and dams. We believe water reuse plants should form a fundament consideration as wastewater treatment works are expanded or upgraded.

Social

• About 300,000 of the 450,000 customers that SAWW serves are classified as indigent communities, to whom we supply free basic water daily.
• At Siza, on average the concession serves 70,000 to 80,000 customers a day, however, during the holiday season this number grows to more than 200,000. Siza’s systems and process have been designed to cater for this surge and ensure that customers enjoy a continuous, safe supply of potable water and efficient handling of waste water.

Governance

• The boards of Siza, Silulumanzi and SAWW have been configured in line with the latest King IV recommendations on corporate governance. Mergence has two directors on the respective boards of the concession companies and SAWW.
• Over and above standard financial reporting, Mergence requires management to report on water volumes, nonrevenue water, operational health and safety, as well as other metrics on a quarterly basis.

Siame is Investment Principal at Mergence Investment Managers.