Cape Town would need between R8bn and R12bn over the next five years for water and sanitation infrastructure to deal with its water crisis properly and avoid future water supply crises, according to a report released by Moody’s Investors Service on Monday.

The money needed would, therefore, be 95% more compared to the previous five years.

According to the ratings agency, the water crisis will have a direct impact on the city’s operating and capital budgets in the 2018 fiscal year. One of the most direct of these will be on the City’s own operating revenue, 10% of which comes from water charges. The severity of the economic challenges of the water supply
crisis will depend on how long the situation lasts.

Moody’s emphasised that the report is merely an update to the markets and not a rating action.

In January Moody’s said in a similar report on the water supply crisis that, due to the marked income inequality in the City, Cape Town’s water crisis poses a possible threat to social order. At the time Day Zero was estimated for April 22. More recently the City has indicated that Day Zero could be averted this
year if enough rain falls early in the second half of the year.

According to Monday’s report, it is likely that all of the city’s economic sectors will be affected by the crisis, with tourism and agriculture most exposed. Cape Town is a major contributor to South Africa’s gross domestic product (GDP), generating nearly 10% of the total in 2016.
While a short-term crisis may not have a significant impact on tourism, the industry could face a significant decline if it extends to six months or longer, according to the report.

“The water supply crisis is expected to have a range of economic and financial impacts on the city in the 2018 fiscal year. One of the most direct impacts will be on the city’s own operating revenues as 10% of them are from water charges,” said Daniel Mazibuko, a Moody’s associate lead analyst and author of the report.

“The long-term solutions are likely to require significant capital and operating expenditure, and – importantly – clarity on the governance of water supply in the city, the complexity of which has contributed to the slow response to the crisis.

Clarity of responsibility

Cape Town’s water supply is managed by a number of different organisations across multiple layers of government. That is why the report emphasises the importance of clarity of responsibility and action to avoid some of the worst scenarios raised by the crisis this year. Such clarity of responsibility must also
provide resilience to future supply shocks.

The report finds that the City’s initial response to the crisis had been slow. Although the lack of diversification in its water supply has been identified as an issue for a decade or more, the City has been more focused on demand management, despite a rapidly growing population, the report points out.

The most important organisations in Cape Town’s water supply are the Department of Water and Sanitation (DWS); the Overberg Water Board; the Berg-Olifants Catchment Management Agency; and the Water Services Authority. The national government controls the first three organisations and the City of Cape Town
controls the last.

The report found that, in particular, the slow start-up of the Berg-Olifants Catchment Management Agency, which already published its business case in 2015 and which is expected to strengthen governance and accountability surrounding bulk water supply to the city and surrounding areas, may have contributed to a lack of coordinated decision-making between the national government and the City.

If “Day Zero” is triggered in future and the supply is switched off in 2019, the operating and administrative costs of distributing emergency water supplies will place further pressure on the city’s budget – which is already expected to see a drop of 5% in operating revenues in the 2018 fiscal year,
according to Mazibuko’s report.

The 2019 fiscal year will be more challenging for the city, assuming Day Zero goes ahead. The full expenditure impacts of operating a Day Zero scenario have yet to be fully quantified.