The Water Crisis in South Africa is a risk for business. Although the government has not deemed it a crisis countrywide, the situation in the Western Cape will impact the country as a whole if Day Zero is reached, when taps are turned off across Cape Town and several of the province’s municipalities. Slowed GDP growth and downgrades are among the very real risks. So too are the prospects that other provinces are set to face the same issue.
As the Institute for Security Studies asserted recently, South Africa is running out of water, “not just Cape Town, the entire country.”
Infrastructure investment has been minimal, and maintenance has been poor. Combined with lower than normal rain fall in a system of reliance of ground water and overallwater security has come sharply into question.
Pressures on the fiscus for infrastructure have occurred with government spending directed to address the immediate socio-economic situation, given slow economic growth and the lack of job creation (recognizing too corruption has had a toll, as will be detailed below).
While infrastructure investment in the context of slow growth has been lacking, so too has the policy framework for solutions.
On infrastructure, the National government is responsible for bulk water supplies. It has struggled on its duty; the Department of Water and Sanitation is bankrupt, withirregular expenditure and debt in the billions. The department blames municipalities, like the City of Cape Town, for a failure to plan, including encouraging timeous reductions in resident usage.
While it may appear to be a politicised fight with the DA government (certainly a factor), the national Department of Water has also let ANC-run municipalities run dry without intervention. Their message is simply that residents need to save more. Day Zero in the view of the Department is an opposition strategy of scare tactics, more than an imminent event, as was evident in the then Minister Nomvula Mokonyane’s address to the Cape Town Press Club in late January, together with her Director General (who remains in place).
Ineng’s Unathi Kwaza was among those present at the event. Kwaza engaged directly with the Minister, describing the impact the crisis has already had in the case of a car wash business that has had to close down. Furthermore Kwaza asked it the seriousness of the situation and its impact has been fully understood by all.
Civic responsiveness of residents has been good, but while commendable, is wholly insufficient as a long term solution taking into account the effect water restrictions have on economic growth. Business such as the construction industry have difficulty planning for the long term, as was seen in the case of uncertainty in electricity supply.
Assuming the current reliance on surface water, South Africa as a whole is running dry, even if Cape Town enjoys a rainfall of the type that Johannesburg received after a short period where some areas began running out in 2015.
When the ANC says the crisis is overstated (and more recently, “manufactured” in the case of the Western Cape), they do so blaming a lack of work done by the municipality, not the data.
The allegations of a “manufactured” crisis by the DA authorities in the Western Cape rest on claims of plans for private procurement. These allegations underscore ideological hostility to the role of the private sector itself.
Of course, every company would need to bid in an open procurement system (if the rules are followed). These include long-term purchase agreements.
A good spot of news was Cyril Ramaphosa’s pronounced at Davos in January that he would endeavor to find a solution for Cape Town. Minister Gigaba proposes R6 billion set aside for drought relief in the tabling of the budget, with the money split across five municipalities. Amidst the work facing the new President, further action on the Davos commitment has not yet been announced and the R6 billion is a small sum compared to the need, given the scale of the situation and the budgets that should be in place in the Department of Water and Sanitation, were it not for the massive issues at the department.
Most importantly the role of partnerships and restructuring the current approach are absent in each respective pronouncement at present. The President’s team to avoid Day Zero, promised at Davos, must look into these longer-term matters.
Former Minister Mokonyane (recently reshuffled to Minister of Communications on 26 February) paid lip service to private sector involvement, asking it not be done on the basis of “supply side” economics. In other words, no models of “profit and loss,” nor a more conducive environment for private players. A move completely unwilling to untap the potential that exists for water security.
Mich Niewoudt, who leads an infrastructure investment firm, points to the fact that South Africa’s celebrated renewable energy programme was initiated in response to severe power generation constraints at Eskom, and that similarly there should be a national dialogue on public-private partnerships for the delivery of water infrastructure.
In the meantime Moody’s Investor Services says that the water crisis poses a credit risk to Cape Town’s debt rating, which is currently at the lowest level of investment grade – Baa3, as Fin24 reported:
Moody’s added that the city was on review for a downgrade. The ratings agency also said that due to the marked income inequality in the City, Cape Town’s watercrisis posed a possible threat to social order. It said the crisis would have wide-ranging consequences for the city finances and economy.
The reputational damage is real and undermines sentiment. Even if South Africa, or a city within it, does not run out, the uncertainty is a key risk.
Tourism, an industry now bigger than gold, has recorded good growth and significant untapped potential when South Africa’s accolades are compared with much higher visitor numbers to destinations with similar recognition. Cape Town, the “jewel in the crown” has seen cancellations, according to Cape Town Tourism CEO Enver Duminy: “As long as there is uncertainty about the water crisis, there will be an impact.” Exact figures have not yet been released.
What we do know in this sector is that tourism accounted for an estimated 9 percent of South Africa’s economic output last year, or 412 billion rand ($35 billion), as Reutershas shown.
Economist Mike Schussler compares the overall situation with the electricity crisis a few years ago in which South Africa “missed out on a lot of growth”. The impact of waterblackouts will be worse according to virtually every projected account.
The government cannot be held to blame for weather shifts, but it can enable responses that go beyond reliance on its own tight fiscal space and current framework that relies on ground-water: South Africa needs private sector involvement as part of a plan to eliminate the risk to the greatest possible extent. In the limited municipal scope and mandate the City of Cape Town invited private sector solutions, it received hundreds of proposals. National government-led reform by the President can drastically change the entire outlook far beyond anything possible in the City of Cape Town or any metro acting on its own.
|“Throughout the world there are numerous examples where the private sector is delivering water and sanitation services to the benefit of all stakeholders …The private sector is highly incentivised to ensure the timely delivery of high-quality assets designed to last for the duration of the contract. The private financing of infrastructure also means taxpayers don’t have exposure to cost overruns. The state can therefore use the money originally earmarked for these projects, elsewhere for other urgent needs. In addition, consumers benefit from set quality standards,”
– Mich Nieuwoudt, Chief Investment Officer at Gaia Infrastructure Partners
The risks remain for now under the current situation: the country, or significant parts of it can run out of water. If the current framework is not changed, in a best-case scenario the cost of uncertainty alone will not only remain in place, but likely escalate.