South Africa Plans State Water Utility to Lure Private Funds

(Bloomberg) --

South Africa has begun the process of establishing a new utility to help it entice private investment in infrastructure needed to head off potentially crippling water shortages.

The Department of Water and Sanitation plans to submit a bill to the cabinet by the end of April that sets out proposals for the creation of the National Water Resources Agency, according to Sean Phillips, its director general. It will be created by combining the department's Water Trading Entity and the Trans-Caledon Tunnel Authority, or TCTA, and could be operational next year.   

With Africa's most industrialized economy and a growing population, South Africa is struggling to keep pace with water demand. The country is one of the world's 30 driest, with rainfall, while variable across the nation, averaging less than 500 millimeters (20 inches) per annum, and climate change is expected to make it even more arid. A national water plan released in 2019 said 900 billion rand ($62 billion) needs to be spent on water-supply and storage infrastructure by 2030. 

“We want to create an entity to raise non-fiscus finance” and it should have a substantial balance sheet, Phillips said in a March 28 interview. “It would use a variety of different approaches,” including raising money based on revenue streams from particular projects, loans and other forms of finance that will draw in private companies to provide water, he said. 

Concessions, which would allow the private operation of water facilities, would be considered, he said.

A state utility that operates free of day-to-day political oversight may be more efficient at raising finance and running assets, and may help ease pressure on the state to fund water provision. It will also combine two organizations, cutting down on costs and bureaucracy, said Barbara Schreiner, executive director of the Water Integrity Network, an international advocacy group that campaigns for transparency and capacity development in the water sector.

The agency's formation is in line with President Cyril Ramaphosa's stated aim of attracting private investment to fund hundreds of billions of rand of infrastructure, a marked break from the government's previous practice of financing most public water, power and transport facilities itself.

The cabinet will need to approve the bill before it is released for public comment. It will then go back to the cabinet, whereupon it will be referred to parliament for approval and the president to sign it into law as an Act. 

The functioning of the agency will most closely mirror the way South Africa finances its national road network through the South African National Roads Agency SOC Ltd. The country's power also mostly comes from a national electricity utility, Eskom Holdings SOC Ltd.

Still, some of South Africa's state utilities have been mired in controversy. Eskom isn't earning enough money to cover the interest on its more than 400 billion rand of debt and its operating costs, while the roads agency, known as Sanral, has been hit by a campaign of civil disobedience that's seen most road users refuse to pay tolls on highways around Johannesburg and the capital Pretoria.

Water Assets

The replacement value of South Africa's national water assets is currently between 200 billion rand and 300 billion rand, according to Phillips, when asked about the potential size of the entity's balance sheet. 

The Water Trading Entity was created in 1983 to develop, operate and maintain national water assets using money allocated from the national fiscus. The TCTA, an agency of the water department, was established in 1986 and initially raised finance and built the South African section of the Lesotho Highlands Water Project, which supplies the country with water from the mountainous enclave of Lesotho. It has since built a number of other projects.

The TCTA has raised private finance but it has depended on Treasury guarantees that have added to credit-rating risks for the government, which has already accumulated sovereign debt that equates to about 70% of gross domestic product. The authority currently has outstanding loans of 3.8 billion rand, according to data compiled by Bloomberg.

While the TCTA has raised money on a project-specific basis, the new utility could seek funding based on the national revenue stream from water services, Schreiner said. That could see some of the money directed toward providing water for underserved communities, she added.

The establishment of the agency has been under consideration since before the end of apartheid in 1994, but its creation was stalled after South Africa's first democratic elections as the new government didn't regard it as the best structure to make water access more equitable as supply was extended to additional Black households. A renewed attempt to set it up in about 2008 failed and the idea was then revived several years ago.

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