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Non-revenue Water
Financing NRW projects post Covid-19
The continuous supply of clean water is more important than ever as the globe fights the Covid-19 pandemic. Reducing non-revenue water (NRW) is one of the most effective ways to improve water supply.
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By Danielle Petterson
With handwashing being the cheapest, most widely available defence against Covid-19 infection, reliable piped water supply to premises is vital. However, as utilities come under financial pressure, ensuring this water supply may become more difficult.
Covid-19-induced challenges According to David Ehrhardt, chief executive, Castalia, water utilities are facing reduced income and increased expenses due to the Covid-19 pandemic.
Utilities around the globe are reporting a cash flow reduction of anywhere between 30% and 90%. This is largely due to reduced demand from large industrial and commercial consumers, payment holidays granted by utilities, consumers being unable to pay their bills, and a suspension of disconnections due to non-payment.
This is coupled with higher operating costs due to PPE and social distancing requirements, and generally more difficult operating conditions.
“In cities with dense underserved communities, as is the case in many African countries, there is not much people can do to protect themselves aside from frequent handwashing and good hygiene. If you don’t have a safe water supply, or must queue at a water point, it creates a greater health risk. Utilities are therefore under increasing pressure to supply services with less money,” says Ehrhardt.
South Africa has rolled out thousands of water tanks to communities and schools across the country to enable better hygiene practices in underserved areas. However, this comes at a time when dam levels in parts of the water-stressed country are declining, and some areas remain in the grip of a devastating drought.
Why NRW projects? Ehrhardt believes that NRW projects do not get enough attention, often because people in the water sector, government and funding agencies don’t realise how effective NRW reduction could be in helping water utilities to provide services and, more immediately, survive the pandemic.
“NRW projects are very useful for many water utilities at the best of times, but especially now. First, if you can convert NRW to revenue water, you can earn more money. Second, by reducing physical losses, you gain more resources, increasing water availability in the network,” he explains.
In a situation where you need more water to meet demand or extend water supply into previously unserved communities, reducing NRW is one of the cheapest and quickest ways to achieve this.
For drought-stricken areas, such as South Africa’s Eastern Cape, NRW reduction should form an integral part of drought response initiatives. Ehrhardt and his team at Castalia worked with the City of Cape Town to help develop its long-term strategy following the Day Zero threat. NRW was a key focus area for Cape Town and proved very successful.
Furthermore, most governments around the world are seeing significant economic declines due to the pandemic and are looking for sources of economic stimulus. This traditionally comes
from infrastructure projects. “While big infrastructure builds are important, we need stimulus projects that act quickly. NRW projects are highly labour intensive and mostly performed by locals, putting them near the top of the list in terms of bang for your buck,” says Ehrhardt.
Performance-based contracts Ehrhardt argues that for many cashstrapped utilities, the only solution will be for government to give them longterm loans or grants so that they have enough cash to keep operating.
However, cash flow is down for most governments and many developing countries (South Africa included) were already at the limit of their borrowing capacity prior to the pandemic. As a result, there is little money available for infrastructure stimulus. The best available option is to acquire private funding for projects.
According to Ehrhardt, NRW projects offer good rates of return, commonly between 30% and 50%, and sometimes as high as 100%. Payback periods of less than two years are also achievable. These figures are attractive to private financiers, as they exceed returns on water treatment plant BOOTs, for example.
“With that kind of return, you can attract private capital that is seeking to earn a 10% to 15% rate of return on funds invested, and still have benefits left over for the public sector.” Importantly, the project must be profitable, which depends on factors such as the tariffs and level of NRW.
This can be done using performancebased contracts (PBCs), where a private company – skilled in NRW projects – is paid on a performance basis, measured on how much NRW is converted to revenue water. The rate of payment is agreed on by both parties and is calculated to cover the private company’s operating and capital costs for the project.
The utility benefits from reduced NRW without incurring the risks and costs associated with the project.
While PBCs are not appropriate in every case, and utilities can implement effective NRW projects in-house, analysis shows that PBCs are about 70% more effective in achieving NRW reduction than utility-led NRW reduction programmes.
According to Ehrhardt, a lack of information is one of the biggest problems when it comes to designing PBCs. It is very important to know the level of NRW and its composition up front. If this information in unavailable or inaccurate, the cost of reducing NRW is not known.
“The problems with negotiating this contract at the start is that you don’t
really know what it should cost to reduce NRW, and you need an accurate and objective way of measuring success.”
Ehrhardt recommends agreeing on an upfront price based on what the water is worth to the utility – less than the tariff at which the water can be sold or the cost of acquiring new sources of water. Contracts can be structured to focus on a limited amount of NRW reduction initially. Thereafter, a better idea can be gained on the costs to further reduce NRW. Typically, it becomes more expensive the lower the level of NRW you try to achieve.
“Utilities doing this for the first time would be well advised to get an expert consultant. This doesn’t have to be an expensive task, but there is a specific way of designing these contracts and getting it wrong could create a lot of problems. Having a specialist to deal with questions and develop a contract is likely to be a good investment,” says Ehrhardt.
Castalia has assisted in creating material to assist in establishing and managing PBCs for NRW projects, which can be accessed here: pppknowledgelab.org/pbcsfornrw.
