An investment case for African public water infrastructure
The availability and quality of tap water in many African countries is not always reliable and therefore bottled water has become a very large and very profitable business for private investors especially since the required investment is relatively small with potentially large addressable markets with a growing middle class across the continent”
Only water can be so available and yet so out of reach. The lack of access to clean drinking water has been adjudged one of the greatest causes of poverty in African countries. Water-related illnesses are about 80 percent of all ailments in developing countries. According to the World Health Organisation (WHO), only 16 percent of Africans have access to safe pipe-borne water. For one, the 40 billion hours per year invested in collecting water consequently could be put to better economic use. According to the International Water Management Institute, only 7 percent of the total cultivated area of 183 million hectares in sub-Saharan Africa is irrigated. And globally, water is not being replenished as much as it is being used, according to a study by American space agency, NASA. And most of what is being used is for agricultural production, about 70 percent. Thus, short of drastic measures, water could be short in the not too distant future; for agriculture and indeed other purposes. The potential consequences are not just that food may be short, but that wars may be more frequent. To feed a world population expected to breach 9 billion over the next 3 decades, food production must grow by at least 70 percent, studies show. Incidentally, more than half of the world’s uncultivated arable land is in Africa. For that land to become as agriculturally productive as would be needed, it could not just be rain-fed. But even the water that would potentially be used to irrigate it must be made to do much more.
Climate change effects also mean whatever little that is available is fast depleting. Water scarcity is believed to already beleaguer about two-thirds of the world’s population. Nowhere are perhaps the dangers so palpable than on the African continent. Recent droughts in a number of African countries – like Kenya, Botswana, Namibia, Zambia and so on – made writ large their vulnerabilities, with food and power supply constrained significant consequently. Incidentally, the elements coincided with shocks in the international commodity market. As some of them are also resource-rich countries, it was a double whammy of sorts. But they could easily be unscathed by these potential shocks, if they weaned themselves of their dependence on weather-vulnerable sources for their electricity and food. More of Africa’s agricultural production could be irrigated certainly. That is not to say, irrigation is not already gaining ground in a couple of African countries. For instance, data by the International Food Policy Research Institute (IFPRI) show irrigated land in Tanzania is about 150,000 hectares currently, more than four times the 33,500 hectares that were seven years ago. But this pales in comparison to 29 million hectares more that remain to be irrigated in that country.
Do more with less
Regardless, whether in African countries or elsewhere, water usage could be better managed. Google, an American internet company, together with the United Nations’ Food and Agriculture Organisation (FAO) have developed an open-access database called WaPOR, which relies on satellite data to show how much water is being used or consumed in any part of the world. “Water use continues to surge at the same time that climate change – with increasing droughts and reducing water availability – is altering and reducing water for agriculture,” Maria Helena Semedo, FAO’s deputy director-general, told Reuters in April. The information WaPOR keeps is supposed to help governments and farmers better efficiently manage water. Better crop yields and more optimal crop choices are expected benefits. Whatever water is available could be better utilized, though. There is a lot of wastage currently. New ways have emerged that would not only make farmers use half of the water they currently use but to also double their crop yields. The problem is that a viable and sustainable business model is needed. Past ones have proved to be inefficient or outright failures, discouraging development organisations and financiers.
Make water investing attractive
Water infrastructure has not enjoyed as much attention in most African countries, unlike power, roads and so on. Bizarrely, sachet and bottled water plants are ubiquitous. Why is this the case? “The availability and quality of tap water in many African countries is not always reliable and therefore bottled water has become a very large and very profitable business for private investors especially since the required investment is relatively small with potentially large addressable markets with a growing middle class across the continent,” says Zemedeneh Negatu, global chairman of Fairfax Africa Fund, in Virginia, USA. Clearly, the amount Africans spend on sachet and bottled water suggest they would be able to afford to pay for pipe-borne water comfortably. With most Africans expected to live in cities in the near future and at least ten of the world’s largest cities expected to be African by 2100, the accompanying need for a robust water infrastructure is an attractive investment opportunity. So there is a strong economic case. Even so, private investors shy away from investing in public water infrastructure. “Private investment in “public tap water” has been very limited because the investment required is big, and unlike bottled water, the selling price is heavily regulated since it is considered public service. Therefore, the profit margins and IRRs are less attractive compared to bottled water,” says Fairfax’s Negatu. Besides, ensuring that the regulated water rates are paid as and when due can be very difficult. So to attract investors, “a strong sponsor or at least a strong and credible buyer of the water who is prepared to pay a decent market price [would be required],” says Andrew Alli, president and chief executive of Lagos-based Africa Finance Corporation, a major African infrastructure investor. And for the off-grid integrated water and power type infrastructure that smallholder farmers need, is there a viable financing model with scale to make it attractive to big ticket investors and yet nimble enough to make it affordable? For any such model, “you will need someone to intermediate the risk of the small holders at least initially [because] it is unlikely that people will invest the necessary capital on the back of the smallholders’ credit risk,” AFC’s Alli concludes.
- This article was first published by Africa investor magazine in late 2017