Funding model for bulk raw water infrastructure in South Africa

Abstract

South Africa is expanding its bulk water infrastructure on a large scale to meet increased water demands for both domestic and industrial use. The funding mechanism used depends on each project’s financial viability. Government utilises its limited fiscal funding to target social water requirements whereas commercially viable bulk water projects are usually funded off-budget from government. In this instance, Trans-Caledon Tunnel Authority (TCTA), as an arm of government, negotiates long-term off-take agreements with end-users against which it raises funding. This two-pronged approach ensures innovative and sustainable water infrastructure development. TCTA is a state-owned entity created under the National Water Act as a special-purpose vehicle to implement and fund such off-budget projects on behalf of the Department of Water Affairs. Projects implemented to date include the Lesotho Highlands water project phase 1A and 1B, Berg water project (BWP) and the Vaal pipeline (VRESAP) project. The financial and contractual arrangements are designed to achieve the optimal credit rating for the projects. Both BWP and VRESAP are rated AA+(zaf ) long term and F1+(zaf ) short term by Fitch Ratings. Currently TCTA manages ZAR23 billion (±£2·3 billion) worth of debt on the projects implemented to date and has received directives for four more projects to be implemented in the next 5 years to the value of ZAR11 billion (±£1·1 billion). This paper presents the methodology applied by TCTA to implement and fund large bulk raw water infrastructure with respect to institutional arrangements, risk allocation, tariff setting, governance framework and raising of finance without explicit government guarantees.