Infrastructure investment requires innovative funding mechanisms




Inadequate water and sanitation infrastructure continue to impede sustainable development and inclusive growth across the world, with some countries suffering a 7% GDP loss per annum as a result.


About 2.1 billion people lack access to safely-managed drinking water services, while 4.5 billion lack access to basic sanitation. More calamitous, poor water and sanitation services claim 675 000 lives globally each year.


TCTA Senior Manager: Evaluation & Knowledge, Xolani Ngonini, shared some of these statistics during an internal knowledge -sharing session held on 27 August. “Water will play a key role in achieving the Sustainable Development Goals (SDGs) by 2030, making water-related investments a necessary foundation for sustainable development and inclusive growth,” Mr Ngonini emphasised.


Amid a growing, urbanising and increasingly consumptive population, public sector capacity to finance projects has rapidly dwindled over the past few years. As a result, it has become increasingly clear that to close the infrastructure gap more capital from the private sector is needed. 


The knowledge-sharing session looked at the emergent water sector financing mechanisms and the unique role that private corporations occupy in the system. 


It placed blended-finance under the spotlight, with Mr Ngonini, the facilitator, presenting a paper titled “The Potential of Blended Finance in Water & Sanitation Towards Achieving SDG-6”.


Blended-finance is a recent addition to development finance terminology and a mechanism that crowds-in private capital into development funding.


Some of the questions the knowledge-sharing session grappled with include: What is the potential of blended-finance to leverage private sector capital? What are the conditions for making blended finance work in the water sector? Where has it successfully worked in South Africa?


Mr Ngonini highlighted some of the intractable challenges involved in financing water infrastructure projects. “The rate of return that water infrastructure assets can sustainably generate depends on the income associated with those assets,” he said. “(Meanwhile), sources of income are user charges, government subsidies, and transfers such as development assistance. 


“Water supply and service   tariffs levied in many municipalities and utilities around the world do not cover the full economic cost of water provision, particularly when operating, maintenance and replacement expenses are taken into consideration.”


Thus, the government, according to recent studies, needs not only to review water pricing strategies but also administrative and institutional structures that shape and influence infrastructure investment. 


During the session, a case study of a water entity that utilised a “blended/hybrid approach” to address vital water infrastructure needs in Rustenburg was considered to draw lessons.


In the main, the success of this case lay in the establishment of a trust to secure revenue from bulk water sales and an off-take agreement with two local mines. 

Therefore, the revenue security and the ring-fencing of the Rustenburg Water Services Trust as a special purpose vehicle (SPV) allowed access to commercial finance in the form of a bank loan. 


This model ensured the sustainability and resilience of the SPV, with an added potential of transactions representing an important source of regenerative capital that could allow for further investment without having to secure additional funds from financial markets. 


It was further proposed that water infrastructure projects can be combined within a diversified portfolio to provide a blend of economic, financial, social and environmental returns. This would require fostering an enabling environment underscored by a well-articulated pipeline of development projects that are suitable for private financing.


Lack of well-prepared projects at lower levels of government is a “critical challenge (for) attracting private investment” in water infrastructure, according to the World of Water Council Report (2019). 


SA ministers of human settlement, water and sanitation, and finance have both stressed the need for private funding for some of the water infrastructure to ease the burden on the national fiscus.


The framing of the session aimed to highlight recent key debates on water infrastructure financing, both locally and internationally.