A look at two reforms that aim to thwart municipalities’ spendthrift ways.
The seemingly impossible task of preventing municipalities from spending water and electricity revenues on salaries and other services has been debated at national level for more than a decade.
Now, it is finally receiving the attention it deserves. Two reforms in particular aim to curtail municipalities’ spendthrift ways.
National Treasury’s amended Public-Private Partnerships (PPP) regulations came into effect in June, exempting infrastructure projects below R2 billion from some of the more cumbersome procurement processes.
This will unlock opportunities at the municipal level, says Chito Siame, head of private equity at Mergence Investment Managers.
“In water, this could support more localised projects such as wastewater upgrades, pipe replacement, or alternative water sources in drought-prone areas,” says Siame.
“Encouragingly, there is also movement on project preparation and financial structuring, supported by development finance institutions and the Infrastructure Fund. These reforms signal growing alignment between the public sector’s development goals and the private sector’s capacity to deliver at scale.”
ALSO READ: Fixing SA’s water crisis starts with accountability
Ring-fencing and SPVs
Another planned reform is to ring-fence electricity and water revenues at the municipal level to ensure funds are used specifically for maintaining and upgrading related infrastructure.
In theory, municipalities are expected to spend 8% of their property, plant and equipment valuations on maintenance, but very few do. Some do close to zero. The result is visible across the country in untended water leaks, deteriorating roads and electricity outages.
Municipalities owe Eskom close to R100 billion and a further R23.4 billion to SA’s nine water boards. Revenues are being collected from residents and, in many cases, not paid over. Money is being used at a frightening rate to fund ever-larger salary bills and other services (including tenders).
Rand Water CEO Sipho Mosai, speaking at a PSG Think Big presentation this week, said the ring-fencing of municipal water revenues will go a long way to recovering the nearly R8 billion it is owed for bulk water services.
“Water services are highly profitable for municipalities, but these funds are used for other services. In the future it will be ring-fenced, and that will go a long way to servicing this debt.”
Auditor-General Tsakani Maluleke sees municipalities as a particularly weak link in the governance chain, with mayors, municipal councils and executive teams failing in their oversight duties.
“When councils are unstable, performance suffers, budgets go unfunded, and infrastructure crumbles,” said Maluleke at a recent press briefing.
Kasief Isaacs, CEO of Creation Capital, which will launch an infrastructure fund later this year, says private sector partnerships are one way to fix municipal water issues, but these require special purpose vehicles (SPVs) to manage the service end-to-end and to preserve the water revenue stream. To function effectively, these SPVs must have their own management and budget.
“One of the problems we have faced up to now is around this issue of ring-fencing. Another issue is interdepartmental dependencies. You dig up a road to repair a broken pipe or need to procure a subcontract and are forced to rely on other departments for these services. Those interdependencies are difficult to manage. The SPV should be allowed to manage this entire process,” says Isaacs.
ALSO READ: Rand Water maintenance deepens Joburg water crisis
eThekwini breaks the ice
In April, the eThekwini Municipality in KwaZulu-Natal announced it would follow National Treasury’s guidance and ring-fence revenues from water sales to ensure it had sufficient budget to repair and maintain its water infrastructure, reduce non-revenue water and illegal connections, and repair leaks.
Not surprisingly, eThekwini reports a significant reduction in water leaks and is now in the procurement stage to bring in a private sector partner to help reduce non-revenue water.
There has been stiff opposition from the unions to the government’s tentative embrace of PPPs, which are seen by some as a betrayal of the national democratic revolution. They would rather see municipalities better managed than handed over to private operators for profit.
These fears are not unfounded, as customers of Thames Water in London discovered. It was privatised in 1989 and over the years paid out £10.4 billion in dividends while accumulating close to £20 billion in debt, much of which was used to fund these payouts rather than fix ageing infrastructure. By 2023, it was said to be close to financial collapse, prompting the UK government to consider nationalising it.
“Rather than viewing PPPs as a threat to municipal control, we should frame them as enablers, tools to deliver better outcomes, strengthen financial sustainability, and ensure that communities receive the reliable services they deserve,” says Siame.
“Standardised PPP templates, municipal support programmes and ring-fenced revenue models could go a long way to building trust and capability in this space.”
In the future municipal water services could be run by water boards, private operators, or the municipalities themselves, provided they meet the standards required.
The two privately run water systems operating in SA – Siza Water in Ballito in KwaZulu-Natal and Silulumanzi in Mbombela, Mpumalanga – have achieved enviable efficiencies, with water losses of 15-20% against the national average of 47%, all while supplying the 250 000 and 500 000 customers in both areas considered indigent – meaning they get free basic water.
The question is, does SA have a water shortage or a leaking pipe problem?
Actually, it has both. National rainfall is about half the global average, but nearly half the water distributed is lost to leaks and other problems.
Non-revenue water – water that earns no revenue – exceeds 47% nationally, which is way ahead of the global average of 37%. The cost of this is conservatively estimated to be north of R7 billion a year.
It simply leaks away, untreated and unbilled. The reasons are many: burst pipes, degraded infrastructure, broken pumps, and increasingly, sabotage. The water boards are generally well run, so the problem is happening at the municipal level.
Moneyweb previously reported on criminal gangs deliberately destroying municipal infrastructure so the water mafias can sell water from tankers at extortionate rates – often with the connivance of councillors.
ALSO READ: At least R900 billion needed to fix SA’s water woes
Operation Vulindlela
The water issue also has the attention of President Cyril Ramaphosa’s Operation Vulindlela, aimed at reforming key bottlenecks to promote faster economic growth.
It’s in the process of establishing a National Water Resources Infrastructure Agency to take over the functions, staff, and assets of the Trans-Caledon Tunnel Authority, responsible for feeding water to Gauteng.
This will be flanked by the appointment of a new Independent Economic Regulator for the water sector and the establishment of a Water Partnerships Office to assist in implementing performance-based contracts to reduce non-revenue water at six metros – eThekwini, Tshwane, Mangaung, Buffalo City, Nelson Mandela Bay and Polokwane.
Part of the funding for this will come from the newly created Infrastructure Fund, which ultimately aims to manage around R100 billion and disburse a range of financing options for infrastructure projects.
Parliament is also reviewing the Water Services Amendment Bill, which aims to separate water service authorities (mainly municipalities responsible for water delivery) from water service providers (such as Rand Water, which supplies municipalities in bulk). Under the current Water Services Act, municipalities often act as both water service authorities and providers, meaning they regulate themselves.
This leads to weak oversight, poor accountability, and mismanagement. The evidence shows they frequently fail to enforce performance standards such as water quality or address inefficiencies like non-revenue water losses.
All of this will hopefully culminate in municipalities being stripped of many of the powers and privileges that helped create the national water crisis in the first place.
This article was republished from Moneyweb. Read the original here.