Finding funds for water

FINDING FUNDS FOR

A greater focus and creative thinking are needed to make critical, but commercially problematic, water projects bankable. IMIESA talks to Amber Bolleurs, senior transactor: Infrastructure Sector Solutions Division at Rand Merchant Bank (RMB), about funding water infrastructure.

Amber Bolleurs, senior transactor: Infrastructure Sector Solutions Division, Rand Merchant Bank

RMB strongly supports the development of water infrastructure. Water security is fundamental not only to the lives and health of South Africans, but to the growth and sustainability of our economy. It is as vital as power, but unfortunately it has not received the same focus from the private sector to date. That said, we do anticipate more attention on water from both the private and public sector in the coming months,” says Bolleurs.

Traditionally, water infrastructure has been funded via a combination of on- and off-balance-sheet lending in the form of public-private partnerships (PPPs), as well as bonds or loans in the sustainability linked market. These financing structures are well established and should continue to be utilised to finance water infrastructure. However, Bolleurs believes that the industry needs to get creative with the financing of projects for struggling municipalities and water boards who still need to deliver critical infrastructure as part of their mandates.

The Komati River

PPPs to deliver water infrastructure

The South African PPP framework has been used with varying degrees of popularity to deliver public infrastructure since its establishment in 1998. Legislation such as the Public Finance Management Act (No. 29 of 1999) and Treasury Regulation 16 regulate national and provincial PPPs, with the Municipal Finance Management Act (No. 56 of 2003) in place to guide municipal procurement.

The Durban Water Recycling (DWR) Project is a great example. RMB assisted in structuring finance for the project in 2001. “DWR was one of the first PPPs within the water sector and, two decades later, it is still in operation. Two other thriving PPPs are Siza Water in Ballito and Silulumanzi in Mbombela. They are evidence that there is a case for PPPs as a framework and for procuring water infrastructure in the sector, and this model has been underutilised. PPPs are well suited to large projects like wastewater treatment, desalination plants and bulk water supply,” she adds.

The PPP model not only allows for the delivery of public infrastructure by the private sector, without encumbering the public sector financial resources, but further adds a robust contracting structure. All institutions undertaking such partnerships require approval from National Treasury. All PPPs also go through regulatory tests (assess value for money, affordability and appropriate risk transfer) to check compliance before they are implemented.

However, Bolleurs cautions that the current procurement framework does not encourage the private sector to formulate and drive new PPPs. “This is because if a consortium pitched an idea for a PPP that was well received by the municipality or water board, it would be put out to tender, where competing consortiums could bid. This does not encourage innovation or new ideas from the private sector, who would need to put investment time, funds and energy into a pitch, only for their proactivity to result in a public tender. Therefore, government needs to drive PPPs.”

Traditional financing

Credit quality is a key factor when raising on-balance-sheet finance for a water project as this determines bankability.

The Durban Water Recycling Project

“A typical example of water projects delivered by way of traditional financing is the Trans-Caledon Tunnel Authority (TCTA). This is a great state-owned enterprise (SOE) that has delivered many successful water projects. They have good credit quality and as such do not have any problem raising funds from multiple sources. The SOE does not use traditional project finance, but a hybrid model,” explains Bolleurs.

She adds that RMB has a long history with TCTA. The bank served as principal funder for the Komati and Mokolo-Crocodile pipelines that deliver water to critical power stations. “They have a large project pipeline and we will continue to support them going forward.”

Large metros (like City of Cape Town and City of Joburg) as well as large water boards (like Umgeni Water and Rand Water) that are well run also manage to raise on-balance-sheet funding. Last year, RMB arranged R1.2 billion in sustainability-linked bonds, as well as a R500 million 10-year bullet bond for Rand Water. This marked two Africa firsts: Rand Water was the first stateowned company (SOC) to receive a sustainability linked bond and it was the largest South African rand denominated sustainability bond at the time. The bank acted as sole arranger and sustainability agent. “Sustainability linked bonds or loans provide a different source of capital outside of the banks, such as pension funds, offshore companies and investors, and development finance institutions (DFIs),” states Bolleurs.

Making the ‘difficult’ water projects investment-friendly

Given the very important obligation of the country to supply clean, potable water to all communities in South Africa, it is understandable that not all water projects are commercially viable, or easily banked. This, coupled with the tariff structure for water in South Africa, which for similar reasons can make cost recovery difficult, has resulted in a number of water projects stalling when attempting to raise financing. These projects require some creative thinking and collaboration with the private sector. Blended financing structures, government grants, DFI funding and other concessional or ESG funds should be leveraged alongside commercial funding to get these types of projects delivered. One possible solution could also involve explicit government support for water projects for the smaller, struggling municipalities and water boards, similar to what was done in the larger Renewable Energy Independent Power Producer Programme (REIPPP) projects. Instead of government providing water tariff breaks or direct funding by way of grants, they could provide direct support to a PPP-type model to make the project bankable. They could also partner with DFIs or the Infrastructure Fund to provide more levels of subordinated lending that attracts cheaper debt to make the project more affordable,” suggests Bolleurs.

REIPPP has attracted international interest and investment and has been an undisputed success story for the country by providing power and jobs. Conceivably, this model could be tailored for water – and we hope to see this thinking developed further by the Water Partnership Office.

Water Partnership Office

The Development Bank of Southern Africa (DBSA) and the Department of Water and Sanitation (DWS) have established a Water Partnership Office with the aim of attracting private sector water participation in water infrastructure and its management. It will develop programmatic-type structures that assist in delivering on the broader National Water and Sanitation Master Plan (NW&SMP) framework.

“We are hoping that this office will develop programmes implementing the PPP framework in the water sector, as well as programmes around funding the more difficult water infrastructure such as reticulation and distribution,” states Bolleurs.

There will be a number of sub-programmes within the Water Partnership Office: • to scale and escalate water reuse projects across the country • non-revenue water, focusing on both physical and revenue losses • addressing wastewater treatment challenges • off-grid sanitation programmes • ecological infrastructure programmes • desalination • agricultural water-use projects • rural water supply. “This development is very promising and we are excited to engage with the Water Partnership Office on this initiative. RMB will continue to support water infrastructure projects going forward, and we are committed to developing solutions to address the water constraints of our country,” concludes Bolleurs.