Water is a vital human need. Without clean water there is disease, hardship and misery.  Regardless of whether water is a right or a privilege, it makes fundamental sense for any government to provide water to its citizens. The economic benefits and improvements to living standards are not debatable. 

South Africa is a water scarce country with a highly skewed rainfall distribution pattern that leaves it susceptible to drought. This makes managing the water resource a particularly important issue to the wellbeing of the South African population and economy. Unfortunately, like most infrastructure assets, the effect of under-investment and substandard maintenance on water infrastructure takes many years to become apparent and therefore, during times of budgetary cuts, these critical assets often suffer the most. 

From Investec’s experience of financing similar infrastructure assets we have found that delaying maintenance generally leads to a greater whole life cost. Remedial maintenance is more expensive than planned maintenance and fraught with difficulties.  Losses from the system further add to the financial burden. South Africa currently loses between 50% and 100% more water from the system than international norms, a clear sign of an ageing system.

One solution to the management of water infrastructure is to involve private enterprise in the management of portions of the water cycle. Investec has worked closely with a number of private operators and has found that by contracting in a private party over a long term period, the Government will avoid the vagaries of annual budget cutting and achieve a long term cost certainty. 'Privatisation' in various forms has been undertaken in many industrialised, transitional and developing countries and has produced a wealth of experience and knowledge. Investec has been active in supporting many of these transactions from inception to completion.

Private sector involvement
Private involvement in the industry can include:

• A service contract where the responsibility remains with the public sector but the execution is passed to the private sector. Service contracts last 1-3 years and include services such as meter reading, billing and maintenance.

• A management contract under which the private operator is responsible only for the running of an asset or assets. These contracts are generally for 3-5 years. The simplest of these involve paying a private firm a fixed fee for performing managerial tasks. More sophisticated management contracts can introduce greater incentives for efficiency, by defining performance targets and basing remuneration at least in part on their fulfilment.

• A lease contract, under which asset(s) are leased to the private operator but ownership resides with the public sector. The lessor assumes much of the commercial risk of the operations. Under a well-structured contract the lessor's profitability will depend on how much it can reduce costs while still meeting the quality standards in the lease contract.

• A concession, under which the private operator is responsible for running the assets and has responsibility for investment decisions. Asset ownership remains with the government, however, and full use rights to all the assets, including those created by the private partner, revert to the government when the contract ends, usually after 25-30 years.

• Build-own-operate-transfer is usually used for system infrastructure development such as water treatment plans that require significant finance. The private operator is required to finance, construct, operate and maintain the facility for a specific period of time, often in excess of 20 years.

• Total divestiture of the water and sewerage assts to the private sector.

South Africa’s experience with private sector participation has generally been limited to the service and management type of contracts. In the few examples where greater delegation of control has been attempted, Investec has found that a number of fundamental issues have arisen. 

Concerns with private involvement
The first is the general perception that the private sector’s profit is an additional cost to the consumer. In a well procured contract, profit should only accrue due to improvements delivered by the private sector. It is common though that any privatisation is combined with a significant capital rehabilitation programme which results in increased cost per litre. This cost increase is normally attributed directly to the private operator and results in the familiar anti-privatisation backlash.

The second issue is payment defaulters. Because of Government’s commitment to provide free basic water and the humanitarian issues involved, no organisation, whether public or private, can have the right to cut off water supply to a household. This removes the ultimate deterrent and creates a significant risk to private operators who depend on payments to operate at agreed standards.  This responsibility is ultimately the government’s although the private sector can provide a number of innovative technological solutions and apply defaulter management experience in reducing the occurrence of non-payment.

Finally, knowledge of the state of the asset being transferred to the private sector is normally poor and difficult to validate. The private operator will have to apply a risk margin or pass the risk of increased costs back to the government if they incur costs above a certain threshold.  Whilst this might result in the government not achieving the desired risk transfer, there are sharing mechanisms which have been successfully applied in a number of contracts.

South Africa is entering a period where action is required. Government has a responsibility to deliver safe, affordable water and sanitation to the broad population. This needs to be achieved in the most economically efficient manner possible. To achieve this, Government will need a quiver of options to address the specific issues across the water network.

These options must include some level of privatisation and preferably an integrated public private partnership for the benefit of all South Africans. It is Government’s responsibility to manage the process appropriately and commit the political capital to delivering water to the broad community cost effectively.  Once Government commits this political capital, we as Investec and the private industry, can support their service delivery and achieve affordable water and sanitation for all South Africans.

For more information:

Contact: Alistair Herbertson, Project & Infrastructure Finance Consultant
Tel: +27 11 286 8584
Email: aherbertson@investec.co.za