Unlocking Investment and Finance in Emerging Markets and Developing Economies (EMDEs): A development strategy for unlocking funding for South Africa's water sector.
3. THE CHALLENGE: WATER SCARCITY
South Africa expects to face a 17% water deficit by 2030 unless bold
action is taking today.
South Africa is a water scarce country receiving about ½ the global average
rainfall
Water demand is escalating as a result of population growth, urbanization,
rising standards of living, unsustainable and wasteful use, and water
pollution
Climate change will accelerate this demand
4. THE CHALLENGE: LACK OF WATER
SERVICES
35% of South Africans do not have access to safe and reliable water
supplies
Infrastructure is rapidly aging and water losses increasing
5. THE CHALLENGE: LACK OF FUNDING
In order to address the water scarcity and water service challenges,
South Africa will need to invest over $65 billion in the next 10 years.
Projected available funding only meets about 2/3 of this need meaning
there is a current funding gap of approximately $20 billion.
6. DEVELOPMENT GOAL
1. Address water scarcity by augmenting water
supplies and reducing water losses
2. Expand access to water by expanding
municipal distribution systems and improving
treatment facilities
3. Build resilience to future climate shocks
Achieve SDG 6 ensuring universal
access to safe and reliable drinking
water for all South Africans
7. BRIDGING THE FUNDING GAP
Existing sources of finance
Government transfers
Own revenues/tariffs
Short-tenor (3-7 years) commercial
bank loans
Bilateral grant funding
Additional sources of
financing
Blended finance – DFI’s and domestic
commercial banks
PPPs – only 2 municipal water service
PPPs currently
Capital markets – 5 years since last
bond issuance by a municipality
Climate financing facilities – building
adaptation
8. MOBILIZING FINANCING
Two blended financing facilities are currently
under development involving DFIs such as
DBSA, AFD, and IFC in cooperation with
domestic institutional investors targeting
secondary city municipalities.
These could be further supported by technical
assistance aimed at structuring the instrument
as well as credit enhancements.
Need to increase engagement between DFIs and
domestic investors to better understand each
others needs and motivations
Blended Financing
9. MOBILIZING FINANCING
South Africa only has 2 current municipal water
services PPPs
Need to educate policy-makers and municipal
leaders on PPPs
Identify those revenue-producing projects that
can be ring-fenced
Credit enhancements and other instruments will
be required to assure potential investors that
public partner can be relied upon to protect
investment.
IFC support will be critical to expanding role of
private sector.
PPPs
10. MOBILIZING FINANCE Large credit-worthy cities in South Africa (Cape
Town, Durban, and Johannesburg) have
successfully issued bonds in recent years.
Other large cities need to improve their
creditworthiness to access capital markets.
Smaller cities need to look to pooled financing
mechanisms to increase the scale of the
issuance to attract sufficient interest.
World Bank creditworthiness training could play
a role.
Capital Markets
11. MOBILIZING FINANCE
Climate finance facilities such as the Global
Environment Facility (GEF) and Green Climate
Fund (GCF) have not been accessed to date for
investment in South Africa water sector
Need to identify those projects that can be
shown to provide adaptation to climate change
– ie, those that go beyond meeting current
needs.
GCF Accredited Entities such as IFC and DBSA
need to increase their commitment to
promoting adaptation projects as opposed to
mitigation which to date has been
overprescribed.
Climate Finance Facilities
12. MAXIMIZING FINANCE FOR
DEVELOPMENT
In all cases outlined above, additional financing sources need to be
focused on achieving the development goal of meeting SDG6 Universal
Access to Safe and Reliable Water
Least concessional financing principles should be applied to maximize
the availability of these funds for pro-poor development and to reduce
the risk of market distortion
Financing for new capital investment should be accompanied with
technical assistance aimed at reducing wastage and promoting
conservation of resources
External financing should be structured to crowd-in domestic sources
of capital.