Sinenhlanhla Zulu & Thanzi Ramukosi | Water infrastructure crisis in SA: Investment opportunitie

Inadequate investment in water infrastructure along with increasingly severe water scarcity have emerged as the two major challenges contributing to South Africa’s water crisis. This has been exacerbated by multiple factors including rapid population growth and urbanisation, climate change, inefficient water management practices and ageing infrastructure, and unequal distribution of water resources. This crisis has negatively impacted many sectors of society, casting a long shadow over agriculture, industry, public health, and local communities.

While South African households and companies have implemented solutions – notably solar – to cope with Eskom's load shedding, solving the rising water infrastructure crisis may not be as simple. Ensuring a dependable water supply and proper wastewater treatment is a critical priority for South Africa's future: The magnitude of this challenge is not to be underestimated, as the Department of Water and Sanitation (DWS) estimates that a staggering R90 billion per year of investment in water and sanitation infrastructure is required over the next decade.

This investment is essential to refurbish and upgrade existing systems and construct new infrastructure to support the growing population and foster economic growth. Regrettably, the DWS has fallen short of this ambitious goal, with expenditure hovering around R17 billion annually for all water programmes, including new projects and maintenance, between 2018 and 2022. Even the latest budget allocation from the National Treasury for the 2023 to 2025 period, totalling R69.3 billion, fails to bridge the gap, falling R200 billion short of the necessary target. The consequences of these underspending realities are far-reaching and demand urgent attention to secure the future well-being of our nation.

The non-revenue water issue needs to be urgently addressed

The causes of the under expenditure fall heavily upon the water and sanitation sector, which is grappling with an array of financial challenges. This situation stems from several factors, including an alarming funding gap, soaring levels of non-revenue water, the relentless erosion of existing asset value, and tariffs that fail to reflect the true costs. Non-revenue water, encompassing unbilled authorised consumption, commercial losses (theft), and physical losses (leakage), signifies an astonishing volume of water – almost 50% of the supply – provided by the utility but yielding no income. The bulk of this loss lies in the 70.2% attributable to leakages, painting a stark picture of inadequate operation and maintenance of the water distribution infrastructure.

A significant challenge in the water sector is a strong culture of non-payment by customers, which has put strain on the financial stability of the water boards and the Water Trading Entity (WTE) within DWS. As of September 2022, outstanding payments owed to the WTE amounted to R24.5 billion, of which municipalities and waterboards owed R8.5 billion and R7.7 billion respectively.

While the situation may seem daunting, there is room for optimism. Improvements in payment practices by municipalities would substantially narrow the funding gap, signaling progress in ensuring adequate water infrastructure and addressing supply shortfalls. Recognising the scale of funding required, proactive steps towards payment compliance can bring us closer to a future where our water resources are sustainably managed, and our supply needs can be met with confidence.

Unlocking the potential for private sector involvement

Almost all of South Africa’s water infrastructure is developed and managed by the public sector, municipalities and the government. However, years of underinvestment and neglect have awakened the private sector to the opportunity to invest in water infrastructure. Likewise, the government has recognised the scale of the funding required for broader infrastructure, with focus on water, energy, and transport, and is now actively seeking private sector participation. There is strong recognition from the relevant players in the water industry that mismanagement and corruption in government have led to over regulation, limiting the agility of responses and leading to inefficient procurement processes and under expenditure.

During the 2023 budget review, National Treasury indicated that there will be a simplification of the procurement process of the Public Private Partnership (PPP) legal and regulatory framework through legislative changes. A new Public Procurement Bill was tabled in Parliament in 2023 and government expects this to help with access to funding as well as implementation of water projects. Government has prioritised 11 strategic projects with an estimated value of R115 billion. These projects span the entire country and are expected to create about 20 000 jobs during construction and 14 000 jobs during operation. Projects are at various stages of funding and are expected to be completed between 2026 and 2030.

While these projects show movement in the right direction, it is essential to recognise that resolving non-payment issues is paramount to fostering a strong partnership between the public and private sectors. But with the right policies and regulations in place, the government can create an enabling environment, encouraging increased private sector engagement in water infrastructure projects. This collaborative approach holds the key to unlocking new opportunities, ensuring sustainable and innovative solutions to the water infrastructure crisis, and paving the way for a prosperous future for South Africa's water management.

*Ninety One investment specialists, Sinehlanhla Zulu and Thanzi Ramukosi.