The unprecedented water supply crisis in Cape Town will have a direct impact on the city’s operating and capital budgets in the 2018 fiscal year, as well as causing economic challenges whose severity will depend on how long the situation lasts, Moody’s Investors Service said in a report today.
The report is entitled “City of Cape Town: Spending and borrowing set to increase as city battles water crisis, introduces new initiatives to bolster supply”. The research is an update to the markets and does not constitute a rating action.
“Cape Town is facing an unprecedented situation for a major city: having a day in sight when the municipal water supply will have to be turned off,” said Daniel Mazibuko, a Moody’s Associate Lead Analyst and author of 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.”
If “Day Zero” is triggered 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.
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.
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 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.
The city’s initial response to the crisis has 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.
To avoid future crises, Cape Town will need to increase its capital and operating expenditure on water supply and water management. Moody’s estimates that capital expenditure related to water and sanitation infrastructure could be between ZAR8 billion and ZAR12.7 billion over the next five years.
“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,” Mr Mazibuko added.
Cape Town’s water supply is managed by a number of different organisations across multiple layers of government. Clarity of responsibility and action will be imperative in avoiding some of the worst scenarios of this year’s crisis, and providing resilience to future supply shocks.