The regulation of South Africa’s water sector is about to change

Out-Law Analysis | 07 Feb 2022 | 3:15 pm | 6 min. read

The way that South Africa’s water sector is regulated is set to change, but there is a risk that the reforms will not have the desired outcomes unless more thought is given as to how to incentivise private sector investment in water infrastructure.

As things stand, the South African government’s planned reforms still require clarity on exactly how institutional functions will be effectively divided to ensure that private participation is encouraged and to address failing infrastructure at municipal level.

What is proposed?

The planned reforms aim to "increase investment in the maintenance and construction of water infrastructure and improve water quality". To achieve this, water sector regulation in South Africa is to be strengthened and a new National Water Resource Infrastructure Agency (NWRIA) will be established to develop and maintain national water infrastructure.

Specific aims of the reforms for the regulated sector include  improving the water-use licensing process, implementing a revised raw water pricing strategy, and strengthening regulation of water pricing and service standards. There is also a desire to address institutional inefficiencies in the municipal water and sanitation services.

The planned reforms to the regulation of the water sector in South Africa form part of the government’s 'Operation Vulindlela' – a broader initiative aimed at fast-tracking the modernisation and transformation of network industries such as transport, digital communications, electricity and water.

Functions of the NWRIA

In South Africa, bulk water provision and associated infrastructure is carried out by the national government and regulated under the National Water Act. A number of different bodies have a role in the market.

As it currently stands, the Department of Water and Sanitation (DWS) is the department responsible for water affairs. In addition to this, the Trans-Caledon Tunnel Authority (TCTA), which reports into DWS, was established to develop and operate the Lesotho highlands water project and has since raised commercial finance for other water schemes around South Africa. It is envisaged that the NWRIA will take over the functions currently split between DWS and TCTA, including the duties of the National Water Infrastructure Branch and Water Trading Entity within DWS.

While there is already a degree of overlap in the responsibilities of the Water Trading Entity and the TCTA, this potential merger represents something of a resurrection of previous plans for the establishment of a single water agency which dates back several years.

A number of justifications for the creation of the NWRIA, which has been championed by both TCTA and DWS, have been put forward to parliament. There is support for:

  • addressing the fragmentation of water infrastructure investment management between DWS, the TCTA, and water user associations;
  • allowing for better strategic management of existing assets through economies of scale and leveraging of existing assets for new debt;
  • removing one of the layers of transactions from the water infrastructure value chain – i.e. whereby TCTA is responsible for bulk infrastructure yet DWS is responsible for recovery from municipalities;
  • addressing the disruption of revenue flows in the water sector value chain arising from user non-payment, poor credit control, vast payment debts owed to DWS and water boards, sub-economic tariffs, and historically poor revenue management.

Although the full extent of its mandate is still to be finalised – in particular the segregation of functions between DWS and NWRIA – broadly, the NWRIA will be a “well-resourced State-Owned Enterprise” which is responsible for:

  • the provision of sustainable water supply for all citizens in the most equitable manner;
  • ensuring that all citizens have access to sufficient clean water;
  • ensuring that the economy has sufficient water so that it is functional and continues to expand, and;
  • supporting the vision of universal dignified sanitation.

For the proposed reforms to succeed, cooperation with municipalities, water boards, various financial institutions, the agricultural community and other related sectors is anticipated. The NWRIA will be tasked with mobilising finance for new projects and improving the management of existing water assets, and it has been reported that it will rely on a blended financing approach, similar to TCTA.

It remains to be seen how the NWRIA will be operationalised and how Operation Vulindlela aims to build capacity within this new institution to coordinate and perform the functions that have, to-date, been carried out by two separate bodies.

While a more streamlined and efficient entity makes good governance and budgeting sense in the short term, there is an increasing tendency, where well-functioning parts of government take over the functions of dysfunctional or badly performing department units and divisions or entities, resulting in capability and expertise becoming concentrated in small pockets of excellence. This is not a sustainable model for an efficient public administration over the longer term.

The need for private sector investment   

The provision and treatment of water around South Africa remains underfunded and in need of private sector investment.

Broadly, issues faced in the water sector include but are not limited to:

  • concerns around water quality;
  • undercharging for water which results in under-investment in water infrastructure, and;
  • system losses from ageing distribution infrastructure which has resulted in a significant increase in non-revenue water.

Operation Vulindlela, in addressing some of these concerns, endeavours to ensure that "municipalities and water boards are held accountable for the quality of water, and that prices are set correctly to ensure adequate investment in water infrastructure".

However, municipalities are often compelled to spend money on capital budgets, as unused budget is otherwise lost, and this at times results in capital being spent unwisely. This risk is compounded by the fact that while municipalities are, in terms of the Water Services Act, defined as 'water services authorities' responsible for the distribution and sanitation of water services, they seldom have the budget or institutional capacity to maintain, let alone expand, water services. This means that, apart from the large metropolitan municipalities and a handful of water boards that mainly that service large municipalities, local government in general is failing to meet its mandate.

Another issue is that a number of municipalities have growing populations and not enough drinkable water to cater for this new constituency. This is difficult to square with the vision that the reforms will ensure the provision of clean water to the public in the most equitable manner.

The need for private sector expertise and finance is evident. There is, therefore, likely to be a call for innovative and blended funding models in the water sector as part of the extended institutional mandate of the TCTA and eventually NWRIA.

Considerations that a water programme will need to address

While the South African government has recognised the need for introducing a water programme that leverages private sector skill and money, it remains to be seen how such a programme would be structured. The following issues need to be considered:

  • Whether the programme should encompass various sub-programmes depending on the nature of water interventions that are necessary. These separate sub-programmes could include, for example: non-revenue water; water recycling or re-use, especially in regions with larger industrial or commercial off-takers; and water provision through desalination and other technologies.
  • Whether the programme requires regulatory interventions. An important step would be to address the municipal public-private partnership (PPP) framework, which is currently overly complex and beyond the capabilities of most municipalities to execute. An amendment to the Municipal PPP Regulations under the Municipal Finance Management Act (MFMA) could provide for simplified feasiblity and procurement processes.
  • If the programme should provide for various contract forms, from standardised concession agreements to performance-based contracts, which have worked particularly well in other countries. This would require an assessment of successful water reform initiatives and practices from other countries. In any event, contracting parties would need to acknowledge that agreements would need to be tailored to some degree on a project-to-project basis, particularly in the allocation of financial and operational risks and depending on the capabilities of the relevant municipalities.
  • Recognition should be given to the fact that most municipalities do not have a balance sheet to attract private sector capital. The programme would need to consider how best to fund projects, applying a blended finance model on a project-by-project basis. The Infrastructure Fund, also established as part of the presidency’s infrastructure and economic reform agenda and managed by the Development Bank of Southern Africa, could support the financing of water projects.

Our view on the reforms

While Operation Vulindlela’s water reform agenda is bold in its objectives and such a water programme is undoubtedly required, the NWRIA cannot address water infrastructure needs on its own. It is also anticipated that many projects will not be attractive to private sector capital – necessitating the assistance of the state and a carefully crafted municipal water programme.

Operation Vulindlela’s approach correctly places emphasis on sustainability, which should be considered from project inception and evaluated during procurement to ensure success of water projects. This is because it is often the case that water infrastructure projects are long-term investments and full life-cycle considerations are necessary to avoid saddling municipalities with crumbling infrastructure that they don’t have the means to upkeep.

Co-written by Reuben Cronjé and Aliyah Ince of Pinsent Masons