How impact investment can tackle our water shortages | Fin24
 
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How impact investment can tackle our water shortages

Nov 14 2018 12:22
Steve McCallum & Suzette Viviers

While you read this article, over 50 people globally would have died from diseases linked to unsafe drinking water.

Access to potable water (also called safe drinking water) is a basic human right. Humanity is, however, facing a significant decline in the quantity and quality of available fresh water. The harmful effects of water crises on human health and economic activity are widespread and likely to increase in future.

The problem could be partly addressed by recycling more wastewater, building desalination plants and investing in rainwater harvesting infrastructure.

As elsewhere in the world, many South Africans do not have ‘acceptable access’ to potable water. Acceptable access can be measured in terms of distance, availability and quality. The infrastructure necessary to make potable water available to domestic users (e.g. dams, filtration plants, pipes) is, however, costly to build and maintain.

Although the South African government is primarily responsible for providing this public good, private sector investment is urgently needed to alleviate some of the pressure that the Department of Water and Sanitation faces.

The recent drought in some provinces left many citizens extremely concerned about access to drinking water. Furthermore, there is a high probability of increased water shortages in South Africa as the population continues to grow and as the impact of climate change intensifies.

Impact investing provides a possible solution.

It has been described as a responsible investment approach where investors seek to create a measurable social or environmental impact while generating financial return. The impact investment market in South Africa has grown steadily in recent years and could be used in tandem with government funds to address the large and growing water infrastructure funding gap.

Scholars have estimated that investment in certain segments of the water sector can be expected to generate annualised returns of between 5% and 10% until 2030. Institutional investors who devote capital towards water purification infrastructure have the opportunity to create significant impact in these areas.

Alongside the financial returns, the social and environmental advantages of water infrastructure investments include health benefits, education gains, increased productivity, food security and a better quality of life.

Hurdles

There are, however, some concerns that have been raised regarding barriers to investments in South Africa’s water purification infrastructure. A review of the literature shows that these include the possibility of political interference and the lack of skilled personnel. Water contracts and regulatory agreements are susceptible to political re-interpretation and interference.

Furthermore, many municipalities responsible for water provision are ineffective due to in-fighting, corruption and inappropriate appointments.

Another barrier is the financial risks linked to the affordability of water and when potable water becomes too expensive for the poor. High rates of poverty manifests itself in the inability to pay for water services and other basic needs. Another contributing factor to higher financial risk is the high initial costs of water infrastructure.

Make it rain

Unless these barriers are properly understood and overcome, the funding gap will keep increasing due to a lack of private sector investment. Given the urgent need to address the status quo in South Africa, we set out to investigate the role that the impact investors could play in the local water sector.

We interviewed 20 experts who confirmed that there is definitely potential to make social and environmental impact by addressing the funding gap and providing water infrastructure in areas of rapid population growth. They also commented that there are opportunities to provide basic goods and services to an untapped market at the bottom-of-the-pyramid.

According to these experts, the best opportunities are found by investing in a convergence of sectors though innovative technologies in water purification technology. Contrary to the negative perception regarding private sector involvement, there were fairly positive reactions to public-private partnerships and how they could be leveraged to address challenges.

The possibility of political interference remained a primary barrier for most of the interviewees. Contrary to the good return prospects in the literature, the local experts revealed that the current tariff structure in South Africa does not align with the financial returns described previously. This barrier was connected with the difficulty of establishing an affordable price that does not exploit end users, but also generates good financial return.

Two additional barriers that emerged were the complex deal structuring due to the large number of stakeholder engagement needed and the lack of investment-ready deals.

The large public funding gap and the lack of capacity are evidence that government needs assistance to address the difficulties related to the provision, development and maintenance of our country’ water infrastructure.

We recommend that more public-private-partnerships should be used in developing countries more often to combat, among others, inefficient and expensive infrastructure development and maintenance.

The possibility of government subsidisation in rural areas should be considered to decrease the complexity of deal structuring in impact investing in water purification infrastructure and the low financial return expectations.

Such subsidisation could counter the low water tariff recovery rates, paving the way for more investment opportunities. Impact investing in South Africa is booming, which provides a powerful platform through which very tangible problems can be addressed.

*Steve McCallum & Suzette Viviers are academics in the Department of Business Management at Stellenbosch University. McCallum completed his MCom on the topic of private sector impact investing in water purification infrastructure in South Africa in 2017. 

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