Seven reasons why water crisis is far worse than Eskom

NOVEMBER 3, 2015

Like Eskom, South Africa’s drought reveals structural defects that are exposed by unexpected events, according to an emerging markets analyst.

“The water crisis is not so much about a system that is at every moment in crisis or deficit, but about a system that has structural defects that are exposed by weather and ‘unlucky’ events such as technical problems,” said emerging markets economist Peter Attard Montalto of Nomura on Tuesday.

“At present, that has meant a lack of rainfall and record-low levels in dams, combined with high temperatures in some areas,” he said.

Nomura’s report, SA: Water is the new Eskom, highlighted seven reasons why the water crisis will be far worse than Eskom woes:

1. Markets should care

Markets should care, because of the inflation risks and monetary policy implications, as well as the impact of water restrictions on output. Nomura has now added the full drought impact in and reduced SA’s gross domestic product (GDP) forecast to 1.6% for 2016, keeping 2015 at 1.6% and 2017 at 2.4%. It continues to highlight exceptionally strong downside risks for next year from Eskom, labour and external demand.

2. Just like Eskom in 2008

The El Niño event was the trigger that has exposed structural weaknesses on water security in SA. In this sense, it’s like Eskom 2008 - a crisis waiting to happen and a random event (wet coal) that pushed the system over the edge.

3. More complex

The water is more multifaceted than the lack of security of electricity supply. Underinvestment in infrastructure and an increasing demand (like with Eskom), SA is spending vast amounts of money on upgrading infrastructure, but it has started too late and delays and cost overruns affect delivery.

4. You think the R1.4trn nuclear deal is expensive?

The Department for Water Affairs (DWA) calculates that in the coming 10 years the country will need about 20% more water supply than it does now. It has identified R2.7trn of potential projects to satisfy this demand increase over the next 20 years. However, spending will likely remain about R117bn over the future rolling three-year medium-term expenditure framework period. That works out to only some R1.4trn between now and 2035 in nominal terms, so there would be a shortfall of R1.2trn.

5. Serious lack of technical skills

There is a serious lack of technical skills in engineering especially (as well as management) within water boards and water departments at various levels of government below Pretoria. While the DWA is skilled and effective at identifying water policy, priorities and infrastructure plans, the ability to carry these out is severely constrained (alongside the usual labour, tenderpreneurship and related issues). Implementation remains a key issue as a result.

6. Double whammy

South Africa suffers from the proxy impacts of El Niño and La Niña through feedback loops in the tropics, which cause extremes in weather patterns.

7. Acid mine water

This is an issue in Gauteng and around Johannesburg in particular, where acid waste from mining operations has poisoned the water table and is slowly rising. Fixing the problem will be expensive and time-consuming, with health risks if left too long.