Water scarcity is a major challenge in South Africa that also represents a substantial opportunity for investors and businesses in the water sector.
Water scarcity has been a key driver for investment in the Western Cape water sector due to severe drought conditions and expected longer-term water constraints in the region. GreenCape non-profit organisation drives the widespread adoption of economically viable green economy solutions. Their interesting report looks at the emerging longer-term investment opportunities linked to water scarcity and focuses on insights relating to the four key urban water markets in South Africa:
- Commercial and industrial businesses
- New property developments
Based on population and economic growth projections, South Africa could have a 17% gap between supply and demand by 2030. Not all areas will be equally affected, with severe shortages expected in key industrial areas, e.g. Gauteng, Mpumalanga, KwaZulu-Natal, and the Western Cape.
In the Berg River management area (which includes Cape Town), the future water supply deficit is projected to cost the region more than R146 billion and almost 650 000 jobs per year by 2040 if no new water resources are developed.
Overcoming water scarcity is clearly a major challenge in South Africa. At the same time, it represents substantial opportunities for investors and businesses in the water sector, as summarised in the graphic table.
These figures are based on the system input volume divided by the population served. The system input volume includes commercial and industrial demand, and water losses through infrastructure leaks.
The following are some of the key drivers and risks to these opportunities:
- As the risk of water scarcity increases, the demand for water solutions increases.
- Conversely, demand drops during periods of improved water security.
- Water tariffs affect the business case for investment in water technologies, and in some cases are too low to drive demand.
However, future tariffs are likely to maintain an upward trend. While the municipal sector represents the largest opportunity for investors, there are a few barriers specific to this market. They relate to access to funding, capacity constraints, procurement processes, and cost recovery.
Overall, there are good prospects in the Western Cape, and more widely in South Africa, for investment in technologies that would advance resilience to drought and adaptation to longer term water scarcity.
Water scarcity is a major challenge in South Africa that also represents a
substantial opportunity for investors and businesses in the water sector.
South African context
The ‘water crises’ challenge was ranked by the World Economic Forum (WEF) as the third highest risk for doing business in South Africa in 2017, and is also one of the top risks globally (WEF 2017). South Africa is ranked as the 30th driest country in the world. It is a highly water-stressed country, with extreme climate and rainfall fluctuations (WRI 2015). Despite being a water scarce country, consumption is around 233 litres/capita/day (l/c/d), compared to the international benchmark of around 180 l/c/d (DWS 2017a)3.
South Africa has a reliable yield (i.e. supply from current infrastructure) of around 15 billion kl/year (at 98% assurance of supply – or 2% annual probability of supply failure), of which the majority is from surface water (68%) and return flows that support surface water (13%),
Current water usage is ~15-16 billion kl/year, and in many water supply systems water usage exceeds the reliable yield (DWS 2017a). This essentially means that whilst water supply sources can meet this increased usage, supply assurance drops to below 98%, i.e. the annual probability of supply failure increases to above 2%. As shown in Figure 2, agriculture is the largest water use sector (62%), followed by municipalities (27%), which include residential, commercial, and industrial users supplied by municipalities (DWS 2017a). (Note: The relative proportion of municipal and agricultural use differs between provinces and municipalities, depending on settlement patterns and local economy)
Based on population and economic growth projections, water demand in South Africa is estimated to be 17.7 billion m3 in 2030. This means that South Africa could have a 17% gap between supply and demand by 2030 (2030 WRG 2009).
Not all areas will be equally affected, as shown in Figure 3 (McKinsey and Company 2010), with severe shortages expected in key industrial areas, e.g. Gauteng, Mpumalanga, KwaZulu- Natal, and the Western Cape.
Opportunities and barriers
Food and beverage companies, and the broader agro-processing sector, is a key market for water technologies and services in SA, with a steadily growing Gross Fixed Capital Formation and industrial action plans supporting growth.
The drought opened up the residential market for water technologies and services in the Western Cape. While there is continued demand for these solutions in the province, the broader opportunities lie in metros across Southern Africa, many of which face significant water challenges (see Section 2). The nature and extent of the demand for water technologies during the WC drought provides valuable insights into the opportunities in the rest of South Africa.
During the drought, residential users in the Western Cape were motivated to invest in water technologies due to severe water restrictions, high tariffs, and risk of water shortages. This resulted in an unprecedented demand for:
- ■alternative water installations (groundwater and rainwater harvesting, including
- treatment systems); on-site reuse systems (greywater and pool backwash water reuse); and
- water efficient devices (e.g. low-flow shower heads and tap aerators, and pool covers).
In December 2017 Gumtree (an online classified website) reported an ‘explosion’ in demand for water-related products and services, including plumbers and borehole service providers – which in Cape Town had doubled in a year. In the Western Cape, more than 50 specialist suppliers of water-recycling systems were listed; as well as over 1 300 listings for pool covers (which were traditionally a small category), and over 1 400 listings for water tanks. The demand for and supply of water-efficient landscaping products, e.g. artificial grass, water-wise plants, paving and decking, had also significantly increased on the website (Masuabi 2017).
A leading water tank supplier experienced a 10-fold increase in demand in the WC between October 2017 and February 2018, with lead times of between 10 and 12 weeks. However, by June 2018 (when dam levels started to recover) lead times for tanks had decreased to around one week, primarily because of lower demand.
As water security improves in the WC and other areas of SA, the opportunities within the residential market are more limited to technologies with a strong business case, including:
- easy to install, low-cost, retrofit water technologies with short payback periods; and
- water efficient appliances (such as washing machines and dishwashers) when they need to be replaced, as consumers are more water conscious.
Across SA, the largest opportunity lies in the wealthier households as they have the highest rate of ownership of water consuming assets, and can afford to invest in water technologies.
Figure 25 shows a breakdown of household water consumption by income quintile in Cape Town (the 5th quintile being the wealthiest 20% of households) prior to and in the midst of the drought (Visser 2018).
The dramatic reduction in water consumption by the wealthier households is partly because they invested in alternative water supplies (e.g. groundwater and rainwater harvesting and treatment systems) and water saving devices, and partly because they refrained from watering gardens or topping up pools with municipal water. By April 2018, only around 10 000 non indigent households consumed more than 20 kl per month in Cape Town, down from almost 120 000 in December 2016 (CoCT 2018a). While this limits the market in Cape Town, the steeply inclining stepped tariffs provide a good business case for the adoption of water technologies in these high consuming households.
Within the industrial market the food and beverage sector is a significant water user, and this market is expanding. Nationally, product sales have increased from around R110 billion in Q2 2010 to R130 billion in Q2 2018 in constant 2018 ZAR (StatsSA 2018a). Gross fixed capital formation (GFCF)28 for the food, beverages and tobacco sector has increased since the 1970s and is projected to continue increasing. Conversely, the GFCF of the textiles industry has steadily declined over this period (Quantec 2018a).
Agro-processing (which includes food and beverages) is also a key sector earmarked for national growth and development in various policies and mandates, including the Industrial Policy Action Plan. In the Western Cape, the gross value add (GVA) of the food and beverage sector was ~R27 billion in 2017, which is roughly a third of the total manufacturing GVA for the province (Quantec 2018b). Accordingly, the food and beverage sector represents a key market with the industrial sector for investment in water technologies and services.
Globally, there is a shift towards improved water management in businesses. For example, of the 2 025 large international companies that reported water risks to CDP29 in 2017 (representing US$20.3 trillion in market capital), 987 (or ~50%) now monitor and report on water consumption, compared to 594 (or ~30%) in 2015 (CDP 2018). This provides opportunities in the commercial and industrial (C&I) markets for water technologies and services.
In the Western Cape, demand from the commercial and industrial sectors has been largely driven by the drought. By 2018, industrial and commercial businesses in Cape Town had reduced their consumption by around 30% and 10% respectively, compared to pre-drought levels (CoCT 2018a). These businesses have generally invested in technologies and services in four key areas:
- improved monitoring and metering systems for water quality and use;
- water efficient devices;
- wastewater reuse schemes; and
- alternative water systems.
A survey of 58 WC-based companies highlighted that they had collectively invested around R120 million in water-saving measures in 2017/18, as shown in Figure 22 (GreenCape analysis).