PPPs for the water sector

The Vuthela iLembe Local Economic Development Support Programme held a seminar to share stakeholder experiences of South Africa’s first PPP for water services.*

About 24 years ago, a 30year contract was agreed to between the then Borough of Dolphin Coast and Siza Water, a private company, to provide water to communities in an area that is now part of KwaDukuza Local Municipality (LM).

One of four municipalities under iLembe District Municipality (DM), KwaZulu-Natal, KwaDukuza LM includes the rapidly developing coastal towns of Ballito and Shaka’s Rock, as well as a few peri-urban communities.

The PPP’s concession area covers 12.5 km² and services 55 000 to 60 000 users, who vary greatly – from the poorest to the wealthiest, from urban to rural, from residential to commercial and light industrial. The initial model used by the Siza Water PPP saw investment made in water and sanitation infrastructure, as well as maintenance. Siza Water does not own water supplies; it buys in bulk from Umgeni Water. In recent years, with the new developments that have been built in the area, the property developers have built their own infrastructure, thus reducing the obligation on the PPP to invest in infrastructure expansion.

Striking a balance

In the early years, the performance of the PPP was mixed, with performance in the wealthier areas far outweighing that in the poorer areas. Different models were used in different areas. Significant water charge increases have challenged Siza Water to deliver on the contract at various times, but there is a general consensus that it has more or less achieved its obligations over the years, and that the overall impact has resulted in improvements in levels of water loss, water quality, faults and maintenance.

“The tension between the municipality’s social aspiration to provide water to all residents equitably and the private sector’s need to generate profits by serving more affluent areas is starkly apparent in the concession area. Siza Water has provided water services in both areas, according to the terms of the contract,” explained Shyam Misra, managing director, Siza Water.

This has been achieved through using innovative technology solutions in many areas of its operations, making it highly efficient. Furthermore, Siza Water has been awarded both Blue Drop and Green Drop certifications, highlighting the quality of its water services.

The company has invested about R500 million in water infrastructure, including upgrades at seven reservoirs, six sewer pump stations and two sewer treatment works. These projects were financed through developer contributions or Siza Water’s own funds. The company had reduced losses in the water system from 33% in 1999 to 8% in 2021.

“However, many indigent communities within the concession area were still served by shared standpipes and unsatisfactory toilet facilities. PPPs perpetuate inequality and underdevelopment. Private sector investment provide services in areas that make money. Most indigent areas (that are still dealing with the legacy of apartheid) do not have access

Vuthela Ilembe Local

The programme is funded by the Switzerland State Secretariat for Economic Affairs. With the aim to improve the economic future of iLembe DM residents through sustainable growth of the local economy, the programme is being implemented in partnership with the KwaZulu-Natal Department of Economic Development, Tourism and Environmental Affairs; iLembe DM; as well as the KwaDukuza and Mandeni LMs.

to these areas,” added Sikhumbuzo Hlongwane, executive director: Economic Development and Planning, KwaDukuza LM.

Linda Mncube, head: Enterprise iLembe – the DM’s economic development agency – noted that PPPs have great potential for efficient service delivery. “However, contracts should set targets for capital investment to unlock development. Equitable profit-sharing models should be created and the concession’s tariff structure and finance model should cater for redistribution and the provision of a higher level of service in historically underserviced areas.”

Water Partnership Office

There is a growing appreciation of the value of PPPs to provide efficient services emanating from national government circles. A dedicated unit – the Water Partnership Office (WPO) –has been established as a partnership between the Department of Water and Sanitation and the Development Bank of Southern Africa to accelerate private sector participation in providing water services.

This comes as many municipalities are losing the battle to provide secure water services to an expanding consumer base amid rising costs, diminishing resources and high levels of nonpayment for services. Compounding the economic challenge is the social imperative to provide equitable services to regions that include both affluent and indigent communities.

The WPO is developing standardised national programmes for private sector participation in municipal water and sanitation services. This will make it quicker, easier and cheaper for municipalities to enter into partnerships to provide services.

The WPO will support municipalities to prepare bankable projects, undertake feasibility studies and financial structuring, and to facilitate blended financing, which includes foreign direct investment.

Johann Lubbe, head of the WPO, told the seminar that while municipalities faced financial and technical constraints, South Africa’s private sector had substantial expertise. Banks and pension funds were now eager to invest in public water and sanitation infrastructure.

Private sector investment in public infrastructure was feasible where there was a sustainable revenue stream associated with the investment, allowing the private sector to get a reasonable return on its investment.

“The project must be bankable. There must be a focus on projects with sufficiently large and sustainable revenue streams. The larger the revenue stream in relation to the investment and the more sustainable the revenue stream, the greater the likelihood that the project will be bankable,” said Lubbe.

PPPs remain a key default mechanism to enable private sector participation. With national government about to issue revised regulations for the participation of PPPs in providing essential municipal services, the ensuing opportunities emerging from the WPO will be closely watched by iLembe DM and its stakeholders as officials prepare for the end of the Siza Water contract.

*This information is from a seminar held by the Vuthela iLembe Local Economic Development Support Programme to share stakeholder experiences of South Africa’s first PPP for water services.