Financing water services infrastructure through private sector partnership
28 January 2020
The Department of Human Settlements, Water and Sanitation recently released its master plan, indicating that it will cost nearly R900 billion over the next ten years to deal with the country’s water crisis. It hopes to raise a third of the money needed from investments and private sector involvement. Developing and refurbishing water services infrastructure forms a large part of the funding needed. This brief explores the use of public-private partnerships (“PPPs”) in the water services sector in South Africa and the lessons to be learnt.
PUBLIC-PRIVATE PARTNERSHIPS IN SOUTH AFRICA’S WATER SERVICES SECTOR
Since 1994, private sector involvement in water service delivery was initiated in quick succession by two municipalities in Limpopo and KwaZulu-Natal towards the end of the 90s. It resulted in two large, long-term PPPs that took the form of concessions. Since then, smaller projects have been initiated across the country, but appetite for larger ventures seems to have faded slightly. Perhaps because the PPP model is technically complex, it must be commercially viable for the private sector to pursue and it raises issues of profit making within the context of delivering a fundamental right.
Despite concerns and the apparent reluctance to conclude PPPs in the water services sector, a PPP unit has been established within National Treasury – to provide administrative support and guidance – indicating government’s inclination to facilitate private sector involvement. PPPs are also regulated at national and municipal level. Regardless of the type of PPP, government may only enter into an agreement if substantial risk is transferred to the private sector party, it is affordable and it offers a value-for-money solution. In addition, given the complexity of PPPs, government must be satisfied that the private sector party has sufficient capacity and expertise to deliver the project and that the PPP procurement model is the best possible solution for the project itself.
LESSONS TO BE LEARNT FROM PPPS IN THE WATER SECTOR
A brief review of literature highlights some important principles for PPPs in water services delivery.
1. Identify the most suitable model
Given the technical and financial resources required, PPPs will not be suitable for all municipalities in South Africa. They are complex, particularly given the intricacies of water services management. Undertaking a PPP process requires proper planning and transparency. Government and private-sector stakeholders must know and understand the service area well before committing to a PPP process. Stakeholders must therefore determine whether a PPP is the best model to solve the public need; and if so, what type is best suited to the local context.
Moreover, South African cities are still severely affected by stark remnants of apartheid era spatial planning. Servicing underdeveloped and outlying areas remains less attractive to the private sector – particularly in delivering water services to consumers – as outputs are higher but revenue income is lower. Customer service may be adversely affected as a result. However, markets may be more open to opportunities offered by desalination, water reuse, wastewater treatment and non-revenue water.
2. Public engagement and support
Labour has been particularly sceptical about private sector involvement in traditional municipal functions like delivering water services to communities. Key concerns relate to the consequences of PPPs for workers, their benefits and their job security. These concerns must be explicitly dealt with in the PPP agreement. Issues of upskilling and transformation should also be acknowledged and addressed throughout the process.
In addition, a study conducted by the National Business Initiative shows that there is little consumer appetite to involve the private sector in the delivery of water services. Therefore, extensive public consultation is required to ensure communities understand PPPs and can participate in the process. Ensuring that a PPP is founded on a transparent basis, and allows all stakeholders the opportunity to participate meaningfully may garner support needed from unions and increase the level of trust and support from consumers.
Ensuring the public is sufficiently empowered to contribute to the process is important. This includes establishing clear procedures and mechanisms to facilitate public accountability, as the municipality remains accountable to the community for the delivery of water services.
3. Clear responsibilities, objectives and outcomes
Clear performance indicators should be defined from the outset to ensure that the municipality’s social objectives are achieved and commercial viability maintained. In addition, continuous capacity building within the government and private sector institutions involved in the PPP is essential. While there is currently some degree of policy certainty, the national water and sanitation master plan may bring with it changes to the management and governance of water services in South Africa. Where stakeholders are appropriately capacitated, changes to the economic situation, policy contexts and risk fluctuations are better dealt with. Both the Limpopo and KwaZulu-Natal PPPs have been reported to implement strong employee training and development programmes, which has ensured the technical capacity to manage the project.
4. Active state participation
Delivering water services to communities is ultimately a function of the state. Where the state has entered into an agreement with a private body to implement this public function, it cannot be absolved of the responsibility to render the service. PPPs require active oversight, monitoring and enforcement mechanisms from both national and municipal government. Therefore, municipalities must develop monitoring mechanisms to ensure operational, technical and financial compliance. But reviews of both concessions, for example, have shown that municipal monitoring and enforcement has been weak as municipalities remain under-capacitated. This is despite monitoring costs contractually flowing from the concession with no direct cost to the municipality. Deficient monitoring reflects municipal governance issues. Municipalities must strengthen their internal municipal systems and procedures to improve their contract management capacity.
5. Supportive legal and policy context
Two large-scale changes affecting how municipalities functioned were introduced soon after the concessions were concluded: the demarcated areas in which municipalities governed were altered and free basic water policy was introduced. Significant adjustments to the concession agreements in both Mbombela and iLembe municipalities needed to be negotiated. This affected the degree of risk initially transferred to the private sector parties. Institutional and policy certainty is therefore important to ensure risks are manageable.
Municipalities are required by law to have a clearly defined and binding strategy for development and water services delivery. Therefore, projects must be supported by their integrated development plans and water services development plans.
Given current fiscal constraints and the deteriorating state of water services infrastructure and management, an integrated approach to water management is necessary. This includes private sector involvement in some form, including PPPs where appropriate. However, PPPs are by no means the only way to secure private sector involvement. The use of PPPs should always be assessed as to whether it is the best possible model for local circumstances. Given the high level of corruption in procurement procedures, PPPs must be supported by strong governance and accountability structures within municipalities.
Michelle Toxopeüs, Legal Researcher, HSF, 28 January 2020
 “Lindiwe Sisulu unveils master plan to tackle water woes in South Africa” 28 November 2019.
 National and provincial PPPs are regulated by the Public Finance Management Act 1 of 1999. Treasury Regulation issued under the PFMA also applies.
 Municipal PPPs are primarily regulated by three documents. First, Chapter 11 of the Municipal Finance Management Act 56 of 2003 regulates municipal PPPs. In addition, section 78 of the Local Government: Municipal Systems Act 32 of 2000 establishes the procedure that must be adhered to when a private actor provides a municipal service. Lastly, regulations have been published to further regulate issues affecting PPPs in local government.
 National Treasury regulation 16.
 Robbins G. (2004) “A water sector public-private partnership case study iLembe District Municipality – Siza Water Company” p. 24.
 GreenCape, (2019) “Water Market Intelligence Report”; NBI (2019) “KopanoYaMetsi Report Series: Water PPP Opportunities in South Africa”.
 Robbins above note 5 p. 9 & 32-3.
 Robbins above note 5.
 Chetty S. & Luiz J.M. (2014) “The Experience of Private Investment in the South African Water Sector: The Mbombela Concession”, ERSA working paper 429, p. 15.
 Robbins above note 5 p.44.
 Bender P. & Gibson S. (2010) “Case Study for the 10 years of the Mbombela (Nelspruit) Water and Sanitation Concession, South Africa”, World Bank, p. 45; and Robbins above note 5.
 See AAA Investments (Proprietary) Limited v Micro Finance Regulatory Council and Another ZACC 9 at para 40; and AllPay Consolidated Investment Holdings (Pty) Ltd and Others v Chief Executive Officer of the South African Social Security Agency and Others (No 2)  ZACC 12 at para 58.
 Bender above note 13 p. 45; Robbins above note 5.
 Robbins above note 5 p. 26; Bender above note 13 p. 45.