“We will never know the worth of water till the well is dry” - Thomas Fuller
Water is a finite resource that is fundamental to life. Global demand for clean water will continue to grow and as such, water scarcity is acknowledged to be one of the most critical issues of our time. Water scarcity jeopardises economic growth and undermines social development. As one of the 30 driest countries in the world, South Africa is particularly vulnerable to such risks. This article looks at supply and demand challenges in South Africa and investment opportunities for pension funds in this space.
South Africa is characterised by low rainfall, limited underground aquifers, and a reliance on significant water transfers from neighbouring nations. The nation’s vulnerability to drought and adverse weather conditions has never been more apparent as drought relief is rolled out to affected provinces. Continued overexploitation of water resources poses a serious threat to our progress as an emerging economy.
[1] According to estimates by the Water Resources Group, global water demand is on track to outpace supply by 40% within the next two decades. According to the Department of Water Affairs, the supply-demand curve shows that South Africa will face a supply-demand deficit of approximately 17% representing 3.8 billion kilolitres of water by 2030. This is a shortage of 1.52 million olympic size swimming pools!
Most of the economically available yield from surface water resources has been fully developed and used. Opportunities for developing new dams are few with 98% of South Africa’s water resources already allocated. Water supply is further undermined by water losses of 37% at municipal level, mainly through physical leakages.
Agriculture accounts for the largest portion of water demand at 57%. Although agriculture only contributes 3% of GDP, it is a key sector in terms of job creation, food security and social capital of rural communities. Municipal demand makes up 27% of the total water demand which is driven by population growth, urbanisation and rising income levels. 2% of water demand comes from power generation with coal-fired power stations being highly reliant on dependable water supply. New builds, Medupi and Kusile, will apply dry-cooling technology which requires approximately 15 times less water than wet-cooling technology. This is a step in the right direction; however, Eskom is still South Africa’s single largest water customer.
Swift and decisive interventions are necessary to safeguard South Africa’s resources and future development. Water resource planning, development and infrastructure management is a key strategic theme that has been raised at various levels of Government. The Department of Water and Sanitation has launched the “War on Leaks” programme to address technical skill shortages. National Treasury noted the critical nature of the water resource challenge in its R15 billion budget allocation to the Regional Bulk Infrastructure Grant programme for the construction of bulk water and sanitation infrastructure. The much anticipated Lesotho Water Highlands Project Phase 2 is scheduled to start construction in 2016 with water delivery scheduled for 2022, which is critical to water security in coming years.
There is greater engagement with Government and the private sector in exploring various funding options for water infrastructure projects through Public Private Partnerships, term loans and the debt capital markets. Currently, the water sector is dominated by highly regulated water authorities such as Rand Water, Umgeni Water and the Trans Caledon Tunnel Authority. These entities do not face the same challenges as the electricity sector due to a history of cost reflective tariffs which underpins their operational sustainability. The utilities are strategically important and their low debt levels and strong internal cash generation make them relatively low risk assets for long term investors such as pension funds.
Water has been widely reported as the next “megatrend of our time” and as such, public and private sector initiatives to improve efficiency and reliability of water supply through new technologies are on the rise. The development of dams and transfer schemes, desalination projects, wastewater treatment, aquifer water storage and other technologies present investment opportunities. It is our view that as the sector develops it has the potential to offer sustainable returns off a diversified asset for years to come.
Through our 20 year track record of managing infrastructure and developmental investments and our experienced Investment team, Futuregrowth is well positioned to invest in our nation’s water infrastructure development. This unique position presents the opportunity for risk-adjusted returns for our clients while supporting economic growth and social development in South Africa.
[1] http://www.mckinsey.com/insights/sustainability/confronting_south_africas_water_challenge
