Water infra woes

By Mike Muller

With a bankrupt water department and a national budget running in deficit, where to for water infrastructure?

brokenIt used to be easy to raise money to build big water projects in South Africa. So, the Katse and Mohale dams in Lesotho, which keep water running from Gauteng’s taps, were funded by loans from local and international banks.


 

The former Minister of the Department of Water and Sanitation left a shattered department in her wake when she was reassigned to her present Communications portfolio. Credit: https://about.beauhurst.com


The huge VRESAP pipeline, which takes water from the Vaal Dam to make sure that Sasol in Secunda and Eskom’s Mpumalanga power stations do not run dry, were funded in the same way. So too were a range of smaller projects, including Cape Town’s Berg River Dam (completed in 2009), which saved the city from its Day Zero; the Mooi-Mgeni transfer, which keeps Durban and surrounds water-secure; and the Mokolo pipeline, which will enable Medupi Power Station to keep the lights on (when it is finally fully commissioned).

This flow of funds is now under threat as a result of the shenanigans in the National Department of Water and Sanitation (DWS). South Africans have grown accustomed to allegations that government administration is corrupt and incompetent. While often the problems are exaggerated, that is not the case with DWS.

When the Auditor-General of the country reports to Parliament that the DWS has the worst record of fruitless and wasteful expenditure of any department, you have to take him seriously. He was backed in Parliament by the chairman of the Standing Committee on Public Accounts, who said that criminal charges should be brought against former Minister Mokonyane under whom the Department had completely collapsed.

If there was any doubt, just turn to the report presented by National Treasury to Parliament. This stated that in 2017, the Department’s Water Trading Entity (WTE), which operates the nation’s water infrastructure, had an overdraft of R2.65-billion. By May this year, they had reduced that to just R1.9-billion. National departments are not supposed to run any overdrafts!

As the old story goes, if you owe a little money to the bank, they will repossess your house. If you owe a lot, they will lend you more money to build a bigger one and keep you from collapse.

One consequence of this was that many of DWS’s essential activities are desperately short of money. Some rural water-supply projects have been put on hold, leaving communities high and dry. The long-range water resource planning and monitoring that must be undertaken to ensure that more cities do not end up in a Cape Town-style mess was also cut back. All this, remember, was in part to ensure that contracts could be awarded to companies with whom the Minister and some of her officials had cosy relationships.

But, while the Special Investigating Unit investigates them, this gross mismanagement continues to have serious impacts. And one of the worst affected areas could be the development of major infrastructure, like the second phase of the Lesotho Highlands Water Project, on which Gauteng and the surrounding region depends.

It is often not understood that this huge project is paid for by water users (just Phase 2 will probably cost over R25-billion). Part of all Gauteng’s municipality water bills goes to pay Rand Water for the bulk supplies that it provides. Those bulk supplies come from the Vaal Dam, which is part of the Integrated Vaal River System managed by the DWS’s WTE. So, Rand Water, in turn, pays the WTE for the water it abstracts. The WTE is then expected to pay the Trans-Caledon Tunnel Authority (TCTA), which has borrowed the money from banks and other institutions to pay for the construction of all that infrastructure. The TCTA can then pay back the loans.

Similar arrangements are in place for the other projects. This chain of payment enables TCTA to borrow money at very low interest rates. Its bonds are highly rated because, as credit agency Fitch explained in 2015, the projects’ flexible tariffs “pass on risks to the end users through the DWS. The tariff mechanism therefore helps mitigate most of the risks in the projects, resulting in ratings being close to that of the sovereign ... The projects are supported by a high level of government involvement and commitment through the inclusion of DWS in the tariff payment and debt service arrangement.”

What this jargon means is that TCTA (and thus water users) pay low interest rates because DWS was trusted to pay TCTA.

DWS’s financial crisis has now seen that implicit promise broken. In May, the Auditor-General reported to Parliament that DWS owed TCTA R1.4-billion. This debt was identified by National Treasury as a serious risk, not just to TCTA but to public finances more generally, since failure to pay it would undermine confidence in government’s ability to pay its debts more generally.

Fortunately, this matter is likely to be resolved. As the old story goes, if you owe a little money to the bank, they will repossess your house. If you owe a lot, they will lend you more money to build a bigger one and keep you from collapse. National Treasury cannot be seen to allow a national government department to fail to pay its debts, because that would put the entire government’s credit in question. So DWS will be bailed out. Whether it will be quite so easy for TCTA to borrow again in the future is the next big question that will be asked as the time approaches for the next phase of the Lesotho project to go out to tender.

About the author

Mike Muller is a visiting adjunct professor at the Wits School of Governance. A former DG of Water Affairs and Commissioner of the National Planning Commission, he now also advises on water and development matters. A key recommendation to students and organisations alike is that they should learn from their own successes and the mistakes made by others. DWS and Cape Town are providing him with a great deal of valuable teaching material.

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