Water finance: how to move from red to black | Infrastructure news

South Africa’s water finance account has been in the red for years and the numbers are staggering: R898 billion is needed to fund the National Water and Sanitation Masterplan (NW&SMP). Alarmingly, we are adding to that total daily, as the impacts of increased urbanisation and climate-driven weather events take their toll.

Malango Maghogho, founder and managing director, Zenzi Zenzi Sustainable Finance
Zaid Railoun, Specialist: Natural Resources -Power and Sustainable Solutions at Standard Bank Group
This monetary term does not address some of the underlying challenges that the sector faces: lack of cost-reflective tariffs, planning that does not aim to build resilience into water infrastructure, or the poor implementation of pollution legislation. But it does firstly help set a target to aim and is secondly a commonly understood language for the Department of Water and Sanitation (DWS) and the Department of Forestry, Fisheries and Environment (DFFE). These are the two departments that can get us out of the red.

So where will the money come from? How do we move from red to black? In keeping with expressing the need in terms of numbers, here are two strategies to do just that:

  1. Expand financing options
  2. Plan with water in mind
Expand financing options by expanding the horizon of possible financiers

Attracting private finance has been a long-standing refrain, particularly since the Addis Ababa Action Agenda was adopted by UN member countries in 2015. During the launch of the NW&SMP in 2019, the Minister stated that approximately 33% of the R898 billion needed would need to come from the private sector.

And this is not about privatisation. Rather, it’s about building on the fact that underinvestment in a country’s water assets (infrastructure and ecosystems) creates a risk that affects everyone in society, including the private sector.

These risks include droughts, which nearly caused Day Zero in Cape Town and may yet cause Day Zero in the Eastern Cape and affected livelihoods and food prices. Another risk is floods, such as the ones which caused such devastation in Kwazulu-Natal earlier this year. Some scientists claim that the damage was worsened by poor land management practices that increased the amount and power of the floodwaters. This shared risk means that the private sector, with the right enabling environment, should be willing to provide funding if it helps reduce the risk.

There are already examples of this, such as Local Government Support Partnerships (LGSPs) between Corporate  Governance and Traditional Affairs (CoGTA), municipalities, the private sector and state-owned companies. Through an LGSP, Santam has provided funding and technical expertise in flood risk reduction and disaster risk management, among other areas.

Long-term savings in the form of pensions and collective investment schemes, represent one of the largest sources of private finance in the country. And recent research by Sanlam found that  standalone retirement funds anticipate investing 6.6% of their assets, on average, in infrastructure. This is significant given that retirement funds hold around R4.5 trillion in assets. So, there is potential to move the water finance account into the black by focusing on financing structures that attract private finance.

Plan with water in mind: include water considerations in all infrastructure planning

Apart from being essential to life, water is integral to a diverse range of economic activities, including agriculture, construction, energy generation, medical care and maintaining ecosystem integrity. In a nutshell, all these activities can therefore be materially affected by what happens to the water ecosystem. For example, the tourism sector in Cape Town was affected by the drought that began in 2015 and only ended in 2018, because of perceived and actual water risks. Fast track to this year, the floods in Kwazulu-Natal created significant transport backlogs following damage to infrastructure at the ports of Durban and associated road routes, affecting the country’s exports and imports.

Yet a comprehensive assessment of these risks is often not considered when those economic activities are planned. And since it is typically only what is measured that gets done, the water finance gap is exacerbated because these risks are not known, and money is not allocated by the affected parties towards addressing them.

The integration of water risk can be addressed by asking key questions during any planning process, such as:

  • What is the water input demands of electricity generation? How can electricity generation be affected by water-related events such as floods, snowfalls, or drought? A comprehensive review titled ‘The vulnerability of the South African electricity transmission network infrastructure to weather and climate’ indicated that a deeper understanding of such water input impacts on electricity and infrastructure would assist considerably with risk management and risk management and decision making, consequently contributing to the sustainable provision of electricity in South Africa.”
  • How will the water availability in the Orange-Senqu River basin be affected by climate change? This is important given that this river basin contributes 26% to South Africa’s GDP and supplies most of the water consumed in Gauteng province which generates 33.9% of the country’s GDP given that climate change models predict significant changes in precipitation in East Southern Africa in general.
  • What physical water risks does my factory face? What if there was heavier than usual rainfall? Or a heavy storm? Certain industrial processes require a certain quality and purity of the water to work efficiently.
  • Do my employees have access to adequate sanitation at home? Among other things, access to effective sanitation was an important factor in addressing the Covid-19 pandemic and is a marker of human development in general, so this is an important question to ask.
The answers to these questions can help guide the development of appropriate risk strategies that can then be budgeted for and implemented.

At a national planning level, the government announced the creation of a National Water Resources Infrastructure Agency in March 2022 that will have a financing mandate for national water resource assets. This is a welcome development. Here’s to hoping that planning and broadening the horizon of possible financing structures is at the top of its agenda.

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