Reforming the sector though innovative funding

There is a dire need to invest in the water sector, but it is an extremely difficult space to finance. While the availability of funding is not an issue, the bankability of water projects and project pipelines need to be addressed to access that funding.

By Kirsten Kelly

The Infrastructure Investment Programme for South Africa (IIPSA) is working to tackle these challenges.

An EU-funded programme managed by the Development Bank Southern Africa (DBSA), IIPSA is designed to fast-track infrastructure delivery in municipalities by capacitating them through the development of long-term financing plans and project management assistance in preparing infrastructure projects for funding.

IIPSA is tasked to mobilise debt financing from participating development finance institutions (DFIs) and promote blended financing options with the private sector. “Funding from IIPSA is used to raise additional capital than what was originally possible,” says Alwyn Coetzee, technical advisor, IIPSA.

The €100 million (R1.7 billion) programme is directed towards the SADC region, of which €42 million (R714 million) has already been assigned to various infrastructure projects in the energy, roads, ICT and water sectors. Of the 22 projects currently being implemented, eight of these projects are in the water sector in South Africa.

Selecting projects

A list of priority infrastructure projects was compiled by the IIPSA steering committee, which has been established by National Treasury, involving key government departments. The DBSA then appraises those projects, presents them back to the steering committee, concludes contracts and implements them.

Within the water and sanitation sector, IIPSA reviews projects that improve water source management, enhance water management capacity, improve maintenance of water and wastewater infrastructure, and promote environmentally friendly technologies.

“Before any work is done on projects, IIPSA engages at municipal level to verify if the project is indeed a priority,” says Coetzee.

He adds that funding from IIPSA creates added value – it must be in addition to what would be achieved by the infrastructure project. “The idea is that without IIPSA funding, the projects would have achieved positive results, but with the IIPSA funding, projects would be brought forward or the client’s cost of borrowing money would be lowered. There can be no replacement of existing capital with IIPSA funding.

Funding products

“When IIPSA started, over 200 priority projects were presented for funding. None of these projects were bankable or ready for implementation. We had to prepare these projects for investment – which is a challenging task,” states Coetzee.

Other funding products used by IIPSA are direct capital grants, interest rate subsidies and loan guarantees. Capital grants are used when a project is too expensive to the enduser.

A capital grant would then be available with the debt financing. The interest rate subsidies would also make the project more affordable to the end-user and assist with cash flow during the construction phase of a project, especially with projects relying on a revenue stream upon completion. Loan guarantees provide a form of insurance for projects, especially during their initial stages.

City of Tshwane’s water conservation and water demand management project

A successful IIPSA water project is ongoing at the City of Tshwane.

With a 700 km pipeline and water infrastructure valued at R22 billion, the metro loses millions of rand annually due to water losses in the transmission and distribution network, and has poor cost recovery. Estimates of physical losses (leaks) in the municipality’s network range between 25% and 40%.

The impact of deteriorating water distribution and transmission infrastructure is not limited to physical losses only. In an environment of limited maintenance, water meters are typically the type of device where maintenance falls short or is neglected completely. As a result, the proportion of non-functional water meters has grown rapidly. This has a direct impact on billing and cost recovery.

“We received project preparation assistance from the DBSA as well as grant funding (R34 million) from IIPSA in 2019 to start a feasibility study for a water conservation and water demand management (WC/WDM) programme. Additional funding of R6 million was received for programme management and R20 million for meter installations. A pilot project is being implemented in the Cullinan, Rayton and Refilwe region,” explains Lesego Lekubu, programme manager: WC/WDM Programme, City of Tshwane.

The detailed feasibility study was completed a year ago; it took a programmatic approach that evaluated water resources, infrastructure and tariff modelling. From there, a financial model was developed to determine if the WC/ WDM project is bankable and feasible.

“With the assistance received from IIPSA, we managed to create a clearly defined, bankable WC/WDM project that showed anticipated returns and benefits. This generated support from all stakeholders from the Department of Water and Sanitation, the city’s finance department, revenue collection department, as well as from the mayor. IIPSA funding has built capacity within our municipality where training has been provided on the management and maintenance of pressure reducing valves,” adds Lekubu.

The financing approach for the programme is a hybrid between conventional balance sheet finance and project finance. The intention is to strengthen the financial position of the municipality. This will be achieved by generating alternative future cash flows stemming from the interventions that are implemented on a sub-project level.

Funding for future sub-projects will be progressively advanced to the municipality in tranches by the participating financiers against strict criteria for the achievement and maintenance of key performance indicators of the sub-projects already implemented. As the programme is rolled out, less debt will be required to finance the new sub-projects, as the municipality will be able to fund a larger portion through own funds generated from the savings and improved revenues stemming from already implemented interventions.

This WC/WDM project is ongoing; it has been implemented in 240 district metering areas. In terms of bulk metering, mechanical meters are being replaced by electromagnetic flow meters. These will help to accurately determine the metro’s water balance and quantify water losses.

eThekwini Aqueducts Project

Another IIPSA project is the Western and Northern Aqueducts in eThekwini Municipality. eThekwini Municipality is the third-largest metro in South Africa. It has a population of 3.7 million people, a balance sheet of R42 billion and an annual revenue of R41 billion – 33% of which comes from water.

“Over the last decade, the eThekwini region has established rapid and largescale urbanisation that has resulted in huge developments. There has been a substantial increase in water demand, which the existing aged infrastructure cannot accommodate,” says Linda Enicker, senior manager: Investments and Borrowings, eThekwini Municipality.

Therefore, a bulk water supply pipeline was planned that will improve the delivery of potable water to the western and northern regions within the metro for the next 30 to 50 years. It will enable eThekwini to also address backlogs for free basic water provision to around 100 000 indigent people.

The Western Aqueduct transports bulk water from the Umgeni Water supply system and Midmar Treatment Works to the Zuma Reservoir. The Northern Aqueduct assists with the supply of water from the Umgeni Durban Heights Water Treatment Works to the Phoenix and Umhlanga reservoirs.

Completion of the Western and Northern Aqueduct projects will result in an assured water supply to over a million previously disadvantaged people living in the region who, at present, are faced with daily water interruptions because of capacity problems in the existing supply system.

The project is valued at R3 billion – the Western Aqueduct project comprising R1.8 billion and the Northern Aqueduct R1.2 billion.

“Both projects started in 2012/2013; however, eThekwini Municipality started to engage with IIPSA in 2014 where we submitted this project for IIPSA funding,” adds Enicker. Traditionally, eThekwini Municipality would generate funding through grants, loans and internally generated funding. “When we looked at the IIPSA structure, we were intrigued, as it meant we would receive direct project funding compared to the general funding received from the municipality,” she explains.

A portion of the debt funding (R700 million) has been received as part of a 15-year loan agreement with the DBSA, and the French Development Agency. These long-term loans have been made possible by IIPSA with a contribution of a R93 million grant to eThekwini Municipality.

In order to follow the correct supply chain management processes, eThekwini Municipality had to go back to the market and request other funders to give prices. “The IIPSA funding package was very costeffective, with a 1.5% lower interest rate than what we would have received in the market,” notes Enicker.

The purpose of the IIPSA funding is, among others, to improve the affordability of water services to the communities within eThekwini Municipality, to fast-track the implementation of the project, and to enable the implementation of other critical water projects within the municipality. A portion of the IIPSA funding is earmarked for investment in ecological infrastructure linked to the aqueducts project. This is the first IIPSA project that has resulted in a lending opportunity being created for the IIPSA participating DFIs.

“The IIPSA funding was very useful, as it allowed us to fund the Northern and Western Aqueduct at a good interest rate. The grant funding also helped us to lower the cost of funding, resulting in lower tariffs for the enduser,” states Enicker.

EUROPEAN UNION

The EU has assigned R1.7 billion to IIPSA and is an important development partner in South Africa and a dominant contributor to DFIs.

“We support South Africa in its efforts to review its strategy, policy and regulatory framework on water management. We are engaged in dialogue around adapting to and mitigating climate change, with a strong focus on water and can facilitate dialogue between local experts and water professionals in the EU,” says Raul de Luzenberger, the EU deputy ambassador to South Africa.

At the EU African Union Summit, a €150 billion (R2.5 trillion) investment package was pledged to help build more diversified, inclusive, sustainable and resilient economies on the African continent. “Water security will be one of the focus areas,” he adds.

De Luzenberger states, however, that development grants are not sufficient when addressing financing gaps. “The EU is keen to scale up its support through innovative finance tools such as blended grants. This is a combination of grant aid with other private or public sources of finance.”