In seeking solutions for the current water crisis, Cape Town and other drought-prone areas should learn from the experiences of South Africa’s renewable energy programme, which worked with the private sector to produce electricity alongside Eskom.
Although there are countless short-term measures aimed at helping Cape Town avert a Day Zero scenario, when the taps will be turned off and people will have to queue for water at collection points, we need medium- to long-term solutions. Inviting the private sector to invest in the construction and operation of water infrastructure could go a long way to ensure we don’t find ourselves in this situation again.
We don’t have to look further than our Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) for examples of successful collaboration between the public sector and private companies for infrastructure delivery. In fact, the programme has been extolled as the most successful public-private partnership in Africa in the past 20 years.
Partly in response to electricity load shedding, the programme was designed to kickstart private-sector investment in renewable energy. The first bids were received towards the end of 2011 and barely two years later some of the projects were already up and running. So far, more than 6 300 megawatts from about 90 renewable energy facilities — mostly wind and solar — have been awarded.
The socioeconomic effect has also been substantial, with projects required to contribute a percentage of revenues to ensure local residents benefit directly from the investments attracted into an area.
The success of the programme is the result of a well-designed and transparent bidding process free of corruption allegations, reasonable profit margins achievable by private operators and the fact that government has put in place measures to address some of the major risks. A specialist independent power producer office, which acts at arm’s length from the department of energy and is managed by a knowledgeable team, further contributed to the programme’s credibility.
Each renewable energy project has an agreement with Eskom whereby the utility is committed to purchase a certain amount power at a fixed, inflation-adjustable rate for 20 years. This electricity is then fed into the national grid. These agreements have an explicit treasury guarantee, which means that, if Eskom fails to pay, the treasury has to settle any outstanding amounts, giving the investments the same risk profile as government bonds.
Confidence in the process has led to investors relaxing their risk-reward requirements, resulting in the prices of wind and solar dropping by 68% and 42% respectively since the first bidding round.
The independent power producer programme provides a blueprint for public-private partnerships in water delivery. This typically entails giving a private company the exclusive rights to supply drinking water, and the responsibility of maintaining the associated infrastructure, in an area for 20 years or longer.
An example of such a project that could be implemented in Cape Town is converting sewage into drinking water, as much of the city’s wastewater is not channelled back into the system.
The private company would be responsible for the building and operation of the sewage treatment plant. The municipality would pay it a fixed inflation-adjusted tariff for the delivery of water and the treatment of sewage for the duration of the contract term.
But why engage private companies in the first place? With government budgets under strain, the private sector has the funding to invest in large-scale water schemes, allowing the state to allocate money earmarked for these projects to other areas. Private operators are also highly incentivised to build top-quality water facilities that will last for the life of the agreement, and taxpayers are shielded from any cost overruns.
But private sector participation in water does have its detractors. One of the biggest criticisms is that it could lead to a rise in tariffs, which is a problem in a developing country such as South Africa.
Learning from the renewable energy programme, this can be prevented through transparent water purchase agreements between operators and the municipalities. Public-private partnerships don’t mean private companies own the water, they merely have rights to treat and distribute it.
Concerns about water quality can similarly be addressed through strict performance standards baked into the contracts, with noncompliance subject to heavy penalties.
Although additional water infrastructure projects should have been implemented years ago, it is better late than never. We regularly speak to financiers with a large appetite for these kind of investments but they won’t part with their money unless there is policy certainty and a proper investment framework, such as the one provided by the renewable energy programme.
The opportunities for public-private partnerships also exist in other areas of infrastructure, including roads, railways, ports and information communication technology. The enthusiasm with which fibre internet providers have turned our sidewalks into construction zones to instal their cables is proof of the speed at which the private sector can move when given the space.
“Estimates of sub-Saharan Africa’s annual infrastructure gap put it at around $100-billion. Unless and until it acquires the modern transport systems, power generation capacity and other basic infrastructure that it needs, it will lag behind not only the developed world but other emerging regions as well,” states a report by the Boston Consulting Group that was published last year.
The management consulting firm’s research continues: “Africa’s governments recognise the infrastructure problem, but they have neither the financial resources nor the technical ability needed to close the gap by themselves. Private capital and expertise must be mobilised, too.”
By adequately planning now, we can avert future infrastructure-related crises and unlock the full potential of our country and the wider continent.
Tumi Leie is an analyst at Gaia Infrastructure Partners, which acts as the investment manager for Gaia Infrastructure Capital