Jay Bhagwan Water Research Commission

Transcription

1 Exploring Opportunities for Domestic-local Investment in Water and Sanitation Services- Challenges and Constraints Jay Bhagwan Water Research Commission

2 How a public or municipality sees it..

3 How a banker or financier sees it

4 Overview of investment trends in Water and Sanitation

5 Overview of funding requirements SA requires USD 3.3 billion per year to maintain W&S. Ranked as the greatest need for annual investment in the sector on the African continent (Banerjee & Morella, 2011) Current backlogs (IDC, 2015): 1.4 million households without adequate water supply 2.1 million without access to basic sanitation R670-billion needed Capital investment and infrastructure in W&S sector over the next decade (beyond scope of municipal fiscus)

6 Funding mechanism National Revenue Fund Description National Treasury (NT), uses funds received by the national government through taxes, levies, duties, fees etc. to finance water sector activities through payments, and transfers via national departments (DWA, Department of Cooperative Governance and Traditional Affairs (DCOGTA), and Municipalities). R13.6 billion was allocated to water and sanitation from the NRF in 2014/15. An example of investments from the NRF is the National Water Resources Infrastructure Program (NWRIP) Government grants Tariffs Government grants account for approximately 57% of capital spending by local municipalities on water services. Total conditional grants to local government increased from R26.5 billion to R35.6 billion from 2011/12 to 2014/15. The Municipal Infrastructure Grant (MIG) allocations increased from R11.4 billion to R14.7 billion over the same period and totaled an estimated R90 billion over 10 years from Tariffs form the primary source of revenue for water and wastewater services in South Africa, deriving over 80% of income in the water sector Water boards charges generated revenue increased from R7.2 billion in 2007/08 to about R8.1 billion from tariffs in 2009/10. Surplus in 2009/10 was a little under R1 billion. Most water boards and water service authorities struggle to cover their operating and maintenance costs from tariffs. Financial markets: Public Private Partnerships SPVs such as TCTA and KOBWA are used to access funding from the markets By 2013, a total, R32.2 billion had been raised from the capital and financial markets large water infrastructure projects Few successful PPP in South Africa PPPs have been in the form of 10 year leases, year concessions or 5-6 year management contracts Investment costs have been largely below R500 million

7 Barriers and opportunities of investing in water and sanitation Macroeconomic Commercial Regulatory & Political Project-related risks

8 Barriers to invesments: Macro-economic factors Inflation & Currency Instability Currency flactuations results in significant cost escalations (26% devaluation in 6 months). Resultant rising interest rates with considerable effects on small private business in the water sector. Foreign private companies in PPPs risk incurring increased FOREX rates Currency devaluations increase costs of water utility operations, decreasing consumer ability to pay Country Credit Rating SA currently rated as BAA2. S&Ps rating as BBB-. Fitch rating as BBB (as of April 2016) Junk status concerns for SA- will take ± 5 years to recover Access to capital and borrowing capacity of SA Water Boards to be severely impacted

9 Barriers to invesments: Commercial factors Large Upfront Costs High inputs costs at project inception Low returns on high-risk water resource + extended period to generate returns= Makes no business sense for investors Project Cash Flow Profile Cash flows from rates, fees and taxes also often don t cover the full cost of the investment (Johnson 2012) Projects with strong social element require additional funding from elsewhere Short-term Performance Assessments of Infrastructure Programmes Fluctuations in financial results could result in depressed share prices of water utility companies, which will in term affect their ability to raise capital Contractual Issues With Ministerial discretion over W&S projects permitted via policy, private investors are not guaranteed contractual safeguards

10 Barriers to invesments: Regulatory & Political Shifting Roles & Directives 3 spheres of governance regulating W&S can be challenging to an investor Arbitrary nature of Ministerial intervention backed by policy affects private investor efforts to implement concrete action Lack of Information & Capacity Lack of data on W&S systems and investment records Limited/unavailable municipal accounting records, M&E systems Specialized intermediaries shortage to assist and guide investors Scale Mismatch Different groups and viewpoints at various decision-making levels as a possible threat to contestation for regulatory power Ad hoc boundary demarcations: Accompanied by shift in staff, assets, liabilities. Complexity makes incorporation of risk averse private interests more challenging

11 Barriers to invesments: Regulatory & Political factors Tariffs under Institutional Arrangements Water prices are kept artificially low, revenues are seldom enough to cover project costs Low water prices presents a disincentive for private sector involvement and investment Governance & Expropriation SA Political arena and opposition has questioned pro-business NDP, calls for nationalization make investors anxious 2 nd Quarter of 2013: 67% of SA privately held businesses were putting off investment decisions owing to uncertain political direction of SA (IRMSA Risk Report, 2015) Civic Actions Strong opposition in low-income areas towards installation of standpipes, pre-payment cards, pit latrines Volatility through unrest with over 200 service delivery-related protests in 2014 (Powell et al., 2014)

12 Barriers to invesments: Project related factors Lack of Project Procurement Guarantees Lack of Clarity in Risk Attribution & Mitigation Municipal Inability to pay management fees, due to low tariff collection rates Poor Labour Relations B-BEEE Implementation Challenges Inadequate Water Supply, Fluctuating Bulk Water Prices

13 Opportunities for Promoting Investments in Water & Sanitation in SA Independent regulatory body Sound regulatory framework Political risk insurance Innovative funding mechanisms Deploy institutional tool kits

14 Opportunities for Promoting Investments in Water & Sanitation in SA Raising Funding through Innovative Finance Mechanisms Social Impact Bonds (SIBs)- appealing to socially-motivated investors Innovative Partnerships through use of Credit Guarantee Mechanisms Partial risk guarantees offered by the State- to cover contractual eventualities and encourage investment confidence Open labour negotiations included in contracts Improved Capacity & Information Access Development of a centralised national water resources information system Municipal accounting and reporting systems Multi-stakeholder public dialogues- increase networking, communication, information sharing

15 Opportunities for Promoting Investments in Water & Sanitation in SA Independent Regulatory Body Autonomous regulator can restore investor confidence- objective and fair entity through safeguards Can streamline water management processes Sound Regulatory Framework and Alignment Regulatory harmonisation- better coordination with other govt bodies and institutions and corresponding legislation Framework encouraging competition, political commitment to address corruption Political Risk Insurance Private player insurance against civil disturbance, expropriation, confiscation Currency convertibility- costs incurred in local currency, profits made in foreign currency

16 Thank you