Very few water projects are bankable

A water lobbyist and originator for water deals, Redeem Ngadze from Nedbank, talks to Water&Sanitation Africa about the funding of water projects.

What is your role in Nedbank? RN As part of a team, I help to create an environment that is conducive to the rollout of water projects. A few years ago, while all eyes were focused on energy issues, the Nedbank board had the foresight to prioritise water as a key factor to achieve sustainable economic development. As a result, I was appointed to interact with stakeholders in both the public and private sector in the water industry and create a solutions-oriented approach for the bank. There is a need to coordinate roles and expectations between private and public stakeholders, but there is a universal agreement that we are facing a water crisis requiring that we collaborate to ensure survival.

How do you make water a more attractive investment opportunity? There is no simple answer to this. Water is not just a resource; it’s central to human dignity and is a basic human right. It’s also an economic enabler. This makes the financing of water projects terribly important, but also very complicated. Legislation, politics and funding need to be synchronised and work in tandem.

The water sector is largely comprised of municipal-owned and -run infrastructure such as treatment plants; however, not all municipalities have a credit rating or palatable risk profile that is sufficient to sustain a loan in the eyes of commercial banks. There are, however, examples where financial resources were easily made available for water treatment plants such as Siza and Mbombela (both in which Nedbank is invested) thanks to financial structuring.

How do you make water projects bankable? There is more than enough money to finance water projects, but very few water projects are currently prepared to bankability. Projects are seldom sufficiently developed to meet funding requirements.

Each project presents its own circumstances, which inform how bankability can be achieved for that particular project. There certainly is not a ‘one size fits all’ approach. Some of the factors to be considered

Redeem Ngadze, senior client coverage banker: Power and Infrastructure at Nedbank Corporate and Investment Banking

in terms of making water projects bankable include environmental considerations and community concerns. If there is no community buyin, there will likely be discord. If the water is in an indigent community, subsidisation needs to be a consideration, which means that there must be some creditworthy off-takers to anchor revenue streams for debt service. The project must be structured to show full visibility and robustness of cash flows, and the availability of equity for investment by project sponsors. A single funder will unlikely finance an entire project, especially utility-scale projects. There may be a need for a payment guarantee to give lenders comfort. The structuring of water projects should be well thought through, with no ambiguity. Operational costs of the water project (like staff, maintenance and replacement of equipment parts) need to be included in the water project proposal – this is because the money made after the operational costs of a water project will repay debt. A bankable project is also one that meets all necessary approvals, such as environmental impact assessments and the necessary licensing, among others.

Must water subsidy and tariff structures be revisited? With the energy sector, the National Energy Regulator of South Africa regulates the price of energy – resulting in the predictable pricing of energy tariffs for funders. The water sector does not have a distinct or independent regulator, and the result is that water charges vary across South Africa.

The pricing and pricing expectations of water are key concerns when financing a water project. Comparatively, water prices in European countries are higher than our local water prices. But because access to water is a human right, it’s a difficult balancing act to achieve because water must be priced without impeding people’s right to access it. These factors need to be weighed in with the need for pricing to be cost-reflective for the service to be rendered in an economically viable manner. The subsidy in water is an unavoidable fact given the inequality existing in our society.

To incentivise efficient use, tariffs are largely tiered. But, there is generally poor water literacy in South Africa. People do not know how much water they use or what they pay for it. Improved water literacy concerning its scarcity and cost would generally improve efficient usage.

When evaluating the risk of a water project, what factors are considered? This will vary from project to project but a bank will generally look at the following (not exhaustive): • technology choices • track record of the project sponsors • the provisions of the offtake agreement and other contracting • equity funding and financial strength of the sponsors • compliance with the relevant legislation • available security (including payment guarantee where required) • the robustness of revenue streams • government support, which allows for competitive pricing as the project then assumes government risk.

Can PPPs be used as a means of attracting extra finance in the water sector? The Department of Water and Sanitation released a 2017 study detailing a R33 billion deficit per year for 10 years in order to bring about equitable access to water and sanitation. Simply put – government does not have the money. The private sector has to be brought into play to bridge that budget deficit. Public-private partnerships (PPPs) are crucial to the water industry.

PPPs leverage private sector funding and expertise that hold it accountable for service delivery. Major upfront capex is left to the private sector to arrange. The required project skill sets are sourced from the private sector. The private sector is held accountable for delivery and, through this process, government delivers on its mandate to provide water security.

The solution for our water crisis does not only sit with government – there has to be collaboration

The agricultural sector is the biggest user of our water

Water is not just a resource; it’s central to human dignity and is a basic human right. It’s also an economic enabler. This makes the financing of water projects terribly important, but also very complicated.”

between the private and public sectors.

Are there any types of water projects that should be prioritised? Most water projects are interconnected via the water life cycle – for example, if wastewater treatment is neglected, there will be a greater cost in treating water downstream to bring it to potable standards. Wastewater pollutes and destabilises the ecology, such as eradicating wetlands, and can also present significant health costs to affected populations. Nationally, sewage treatment plants need significant investment.

There needs to be greater attention paid to the agricultural sector – the biggest user of our water (up to 70%), which mostly depends on old water infrastructure. We need to support the farming community and encourage efficient water use.

Projects that reduce non-revenue water should definitely be prioritised, as this wastage – of up to at least 41% of all treated water – costs the fiscus billions of rand annually and affects equitable distribution.

Seawater desalination becomes topical for coastal regions. It is, however, an energy-thirsty option that produces relatively expensive water and projects would need to achieve significant scale for competitive water tariffs to be achieved.

What has government done and what more should it do to attract more investment in water? We have world-class legislation. Some parts of the Water Act (No. 36 of 1998) and the Water Services Act (No. 8 of 1997) may have to be updated to include water recycling. We, however, perhaps need legislation to accommodate the programmatic roll-out of water projects such as we do in the energy sector under Renewable Energy Independent Power Producer Procurement Programme, which is incidentally a form of PPP.

With regard to Covid-19, I think the Department of Water and Sanitation has worked hard to distribute water around the country to increase access to water and the necessary hygiene. When Minister Lindiwe Sisulu launched the National Water and Sanitation Master Plan, it was clear that government has a realistic understanding of the current state of the water sector.

However, the rate of project preparation – including the conclusion of necessary feasibility studies on various aspects, including bankability – needs to be stepped up for bankable projects to come to market for implementation. To unlock this backlog, perhaps various capabilities inherent in government structures should be utilised, such as the preparation capabilities of the Development Bank of South Africa, the TransCaledon Tunnel Authority and the Department of Human Settlements, Water and Sanitation. The PPP Unit of National Treasury could be called upon on to run the tendering process of the projects once project preparation is complete. What is Nedbank’s role in the water sector? At Nedbank, we believe that South Africa’s social, economic and environmental sustainability depend on a healthy and secure water supply. We are the first South African bank to sign the CEO Water Mandate – a special initiative of the UN Secretary-General and the UN Global Compact that mobilises business leaders to address global water challenges through corporate water stewardship. Nedbank has also partnered with the Strategic Water Partners Network, New Partnership for Africa’s Development, and the World Wildlife Fund.

At a banking level, we have banking relations with pertinent water stakeholders and are transactional bankers for two of the country’s largest water boards. We believe that water education is key. Nedbank has released a water savings guide on how one can use less water on a daily basis. Over the past five years, Nedbank has invested R93 million in 41 wateraligned projects through the WWF Nedbank Green Trust.