CASE STUDIES IN BLENDED FINANCE FOR WATER AND SANITATION Municipal Project Finance in the Municipality of Rustenburg (South Africa) August 2016 ANGOLA ZAMBIA MALAWI Summary Overview Location: Rustenburg, South Africa ZIMBABWE NAMIBIA Approach to Blended Finance: To address vital wastewater infrastructure needs, the Municipality of BOTSWANA MOZAMBIQUE Rustenburg created the Rustenburg Water Services Trust (RWST) to finance and upgrade infrastructure. The Trust Rustenburg secured revenues from municipal bulk water sales and SWAZILAND an off-take agreement with two local mines. This revenue security, and the ring-fencing of the RWST as a special purpose vehicle (SPV), enabled commercial finance to be SOUTH LESOTHO accessed in the form of a bank loan. AFRICA The establishment of a Trust, with revenues ring-fenced from the municipality and strong operating arrangements, provided comfort to the lenders and helped to soften lending terms. Revenues provided by the two mines for the purchase of effluent created a strong revenue stream IBRD 42437 | AUGUST 2016 for the Trust, and helped secure a commercial loan from Under South African legislation, Rustenburg Municipality ABSA bank. The public sector (including the Department has been designated as the Water Services Authority, of Water Affairs and Rustenburg Municipality) played a which means that it is responsible for ensuring access key role to help structure a transaction that addressed to water services in the municipal area. It receives critical water resource needs for the municipal area. water from two main suppliers, Rand Water and Magalies Water. By early 2000, stress on water supply in the municipality was intensified by the fact that the Context Rustenburg Wastewater Treatment Plant had reached full capacity and was releasing sub-standard effluent into In the Municipality of Rustenburg, South Africa, water the Hex River. This caused heightened pollution levels in supply has been constrained for a long time. The the downstream Bospoort Dam, and led to system shut Rustenburg economy is heavily dependent on the min- downs. Infrastructure upgrades were necessary, includ- ing industry, which accounts for roughly half of all formal ing refurbishment and expansion of the wastewater treat- employment in the municipality. The expansion of mining ment plant, restoration and modifications of the water operations has spurred population growth in the region, treatment plant, and repair of the pipeline infrastructure which in turn increased water demand for domestic and to improve the reliability of water service provision. industrial uses, and has put pressure on existing waste- water treatment facilities. Rustenburg Municipality faced constraints in terms of institutional and financial capacity, which limited its abil- ity to finance and upgrade infrastructure. For example, Case Studies in Blended Finance for Water and Sanitation: Municipal Project Finance in the Municipality of Rustenburg (South Africa) its poor credit rating made it unable to raise finance. In Financial Structure and Approach to an effort to address both water resource management Blended Finance constraints and improve infrastructure, the Municipality turned toward the private sector for a potential solution. In 2003, the RWST was established as a financially inde- At the same time, the mining sector offered to support pendent municipal entity under the Municipal Services the Municipality in its efforts to identify a way to address Act, and the infrastructure project was effectively ring- the urgent water and sewage treatment needs. fenced under the Trust to protect assets. A Board of Trustees was setup for RWST, with four representatives The result was the selection of a consortium consisting from the Municipality, and three from the consortium of Magalies Water (public partner), ABSA bank (finan- (Magalies Water, ABSA bank and Bigen Africa). The cier) and Rustenburg Consulting (led by Bigen Africa), Municipality is the majority stakeholder and sole benefi- all of which joined forces, and in collaboration with the ciary of the Trust. The structuring of the project ensured Municipality formed a special purpose vehicle (SPV), that the municipality maintains full control over the Trust, the Rustenburg Water Services Trust (RWST). The in accordance with South African legal requirements. RWST signed a 25-year concession contract to finance, However, the Trust’s constitution regulates the transfer upgrade, and operate water infrastructure. The initiative of funds between the Trust and the Municipality, thereby was supported by two major platinum mines (Anglo Plat reducing the risk of municipal interference. and Impala Plat), which agreed to purchase the non- potable treated wastewater produced. Financial close for The RWST obtained a limited recourse loan from ABSA the deal was achieved in December 2003, and construc- to finance the water and wastewater infrastructure tion began one month later. upgrades and expansion. The loan was for R280 million (equivalent to US$37 million at historical exchange rates), with a 20-year term. The key to securing commercial FIGURE 1  Municipal Project Finance in Rustenburg, South Africa: Financial Structure Commercial Bank Bulk Off-Takers Municipal Bulk Water Rustenburg Municipality (ABSA Bank) Mining Companies and Sewerage Services Commercial Bank Loan Debt Lease of Trust Revenue Pledged Water Legend Service Assets Deed Stream Tariffs Supply of Finance Repayment Flows Credit Enhancement Rustenburg Water Service Trust Public/Donor Agencies Assigns Funds 5 Year 5 Year Construction to an Operating Operating Private Financiers Contract O&M Account Contract Contract Financial Intermediary Operator Technical Support Service Provider Contractor (Magalies Water) (Bigen) TA/Other 2 Water Global Practice Case Studies in Blended Finance for Water and Sanitation: Municipal Project Finance in the Municipality of Rustenburg (South Africa) finance from ABSA bank was the long-term off-take Lessons Learned agreement between the RWST and the two local mines. The sale of treated effluent to the mines constitutes 50 The Rustenburg case proves that relatively small and percent of the SPV’s revenue, and created a reliable financially weak municipalities can raise significant revenue stream, important for investor confidence. The funding through well-structured projects with strong remaining 50 percent of RWST revenues come from revenue streams from private sources. The revenues the Municipality, which pays RWST for the supply of received from the mines as part of the off-take agree- bulk water and provision of sewerage services from the ment helped with the establishment of a creditworthy collection of water and sewerage tariffs at the house- body (the RWST), and involved mixing revenues from two hold level. The pricing for bulk water was benchmarked private sources—the mines and households (through against that of a large well-known bulk water operator, tariff collection)—to secure commercial finance. Public Rand Water, to guarantee that the price of water being funds were used mainly to help structure the transaction. produced in the project was not higher. Revenue from The Trust was allowed to ring-fence the project, provide these income streams help service the debt, and pay for O&M capacity, and ensure continued legal compliance. maintenance and operations by the water service opera- The public sector, through the Municipality of Rustenburg tor. The overall financial structure is shown in Figure 1. and the Department of Water Affairs, played an essen- tial role in initiating and driving this transaction forward A strong governance structure, with a ring-fenced Trust, through close. and experienced trustees has ensured sustainable operations and management. During the transaction Granting SPV authority to a public sector entity design stage, the importance of having a strong opera- helped mitigate concerns related to the hand- tor in place was highlighted. Institutional and technical ing over of public resources to the private sector. capacity at the SPV level provided comfort to the com- Rustenburg Municipality was named the beneficiary mercial lenders. The presence of engineering specialists of the RWST (this followed a requirement in the South as trustees, and the procurement of an experienced African Municipal Systems Act), thereby avoiding politi- Operator to manage the facility added to ABSA bank’s cal issues typically encountered over public-private confidence in the investment. A contractual provision for partnerships. automatic review and re-bidding of the Operator after a specified period of time was also included in the overall Benchmarking bulk water tariff pricing allowed over- structure, to ensure that strong performance would be coming of political challenges. The Trust was respon- maintained over time. Furthermore, the risk of operations sible for providing bulk water and sewerage services to and maintenance reserves being drawn on significantly the Municipality, which was then in charge of distribu- for municipal activities outside of specific project pur- tion and bill collection. Potential issues over setting bulk poses has been limited. water tariffs were overcome by benchmarking the tariffs against those charged by another large government parastatal. Results There is high potential for replication in areas The innovative use of private, commercial, and public where industry has a stake in improving outcomes. financing provided the basis for much needed investment Private sector companies can provide reliable revenue and upgrading of water and wastewater infrastructure streams and can pledge such revenues in exchange for in the Municipality, and allowed the Rustenburg mines increased security of supply. A prerequisite for reproduc- to shift from using imported freshwater to using locally ing this model would be to identify private companies treated wastewater. The infrastructure has been suc- that have a high demand for water and steady revenue cessfully operated since, and all debt commitments and streams. obligations have been met. A financially sustainable bulk water and sewerage system was established with cash reserves of US$12 million after seven years of operation. www.worldbank.org/water 3 Case Studies in Blended Finance for Water and Sanitation: Municipal Project Finance in the Municipality of Rustenburg (South Africa) References This case study is part of a series prepared by the World Bank’s Water Global Practice to highlight existing blended 2030 Water Resources Group/IFC. 2013. “Innovative Financing Arrangements and Wastewater Re-use: Rustenburg, South finance experiences in the water sector. Africa.” Managing Water Use in Scarce Environment: A Catalogue of Case Studies. Washington, DC: International Blended finance refers to “the strategic use of develop- Finance Corporation ment finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets,” as per the Bigen Africa. 2011. Case Study: Rustenburg Water. Private OECD definition (WEF OECD, 2015). Concessional funds Sector Participation in Water and Sanitation Services Workshop, October 20, 2011. can be used in a catalytic manner to open up new oppor- tunities for commercial financing, by providing technical Marx, Corrie, Mias van der Walt, and Leon Fouche. 2008. assistance to borrowers and lenders to help them become “The Rustenburg Water Story: Innovative water balance more familiar with each other, help structure transactions, re-engineering.” Bigen Africa Services (Pty) Ltd, The provide credit enhancement mechanisms, etc. Innovation Hub. Pretoria: Water Institute of SA (WISA). http://www.ewisa.co.za/literature/files/2008_023.pdf Private capital flows can help with meeting immediate WEF OECD. 2015. Blended Finance Vol. 1: A Primer for financing needs for investment in the water sector but Development Finance and Philanthropic Funders. Geneva: ultimately need to be repaid. Repayable financing from World Economic Forum. private sources to the water sector can come in vari- ous forms, including as commercial bank loans, bonds or equity. To obtain such financing, water-sector actors need to be able to repay the borrowed amounts and the associated funding costs, which means that they need to be deemed “creditworthy” by providers of finance. Contact Us For further information please contact Joel Kolker (jkolker@worldbank.org) or Sophie Trémolet (stremolet@worldbank.org). Disclaimer © 2016 International Bank for Reconstruction and Development / The World Bank. Some rights reserved. 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