Water shortage is a risk for SA business
One of the most severe risks facing South African businesses is the increasing shortage of water. We are used to taking this precious resource for granted but as water shortages become a global reality, water’s growing commodity value is making it the new oil. Prolonged drought could also have a negative effect on electricity generation, further interrupting business operations.
Effects on business
Water shortages will directly affect the bottom line of all businesses that rely on water supply to manufacture their products. Water restrictions can also hamper business growth. Job creation will be affected, as businesses will not be interested in expanding into areas with known water shortages - diminishing employment opportunities in those regions. Water shortages also jeopardise food security. South Africa’s water crisis has reached a critical point and is beginning to affect the overall economic growth of the country.
Business owners should have plans in place to mitigate the risks associated with water shortages and restrictions. Agribusiness, food and beverage manufacturers, refineries, power plants, steel companies and mining operations - to name just a few - are all businesses that cannot function without continuous access to a reliable water source. Business also face increased expenses relating to variable access to water and poor water quality.
Unfortunately, the gap between water demand and water supply will widen considerably due to inadequate water infrastructure, insufficient rainfall and meager water conservation by citizens.
Risks to business due to water shortages include: business interruptions, rising costs, reduced supply, limited output, lost customers, lost jobs and, as a last resort, costs associated with relocation. Businesses may also have to face price inflation and a lack of agricultural products due to crop failures caused by drought.
Further risks include regulation to protect scarce water resources and the environment that may eventually extend to water use licensing and allotment. The next step in regulating water supply could be compulsory water conservation requirements, which will further drive up business resource costs.
Water rights may become an issue for litigation as the battleground beckons over access to reliable water supply for corporations and parastatals.
Insurance and risk planning
Most insurance policies will only respond to unforeseen or sudden events that exclude the deliberate restriction of water supply. Aside from crop insurance, water shortage is not listed as a risk in business interruption insurance cover. Any water supply restriction that is normally associated with a fire policy and caused by insured perils will be covered.
A revision of risk management in the face of restricted water supply is needed, along with long-term plans to mitigate unavoidable water supply shortages in the near future.
Some insurance policies have a warranty related to the maintenance or servicing of sprinkler systems as the efficiency of such systems can be affected by an interruption to the water supply. Insurers should be notified when sprinkler systems are not functioning effectively.
Water conservation will have to become an integral part of every business going forward. Businesses must find innovative ways to reduce their water usage by re-using, recycling and reclaiming water. The ultimate goal will be to render your business operations less reliant on water, or on large amounts of water. This may require additional processes and equipment that will increase expenses but will prove to be a valuable investment over time. Other solutions include installing water tanks on your premises to secure and conserve rainwater.
Talk to your local Garrun broker if you have any further questions with regards to business insurance.