Entitlement to Water-Use Rights

Introduction

Water cannot be owned in South Africa; it is held in trust by the state which allocates the rights to use it under the National Water Act, 36 of 1998 (NWA). This has given rise to a legal view that one cannot transfer water-use rights and since, the argument ran, one cannot sell what one does not own, it is not lawful to sell water.

The Constitutional Court’s decision in March 2023 in the matters of Minister of Water and Sanitation and Others v Lotter N.O. and Others; Minister of Water and Sanitation and Others v Wiid and Others; and Minister of Water and Sanitation v South African Association for Water Users Associations (heard together and referred to here as “Lotter”) clarifies this issue. The judgment explains the circumstances in which the transfer of the rights to use water may occur, whether the transferor may charge a fee, and what that fee may be.

This is particularly relevant where a new project or transaction involves a manufacturing, farming or agri-industrial business that needs large quantities of surface or ground water to operate. It has also more recently been highlighted as relevant where renewable energy projects are to be established, particularly photovoltaic (PV) facilities (which in South Africa are typically located in water-scarce areas). Those projects need water for the construction and operation of the project, to clean the panels. Water is ordinarily needed for the 20-year life of a renewable energy project, and longer where a manufacturing or agri-industry project is contemplated. This is important for reasons that are explained below. 

Applicable law

The law governing the taking of ground or surface water (but not municipally supplied water) is the NWA. Its preamble states that “water is a natural resource that belongs to all people” and it affirms the national government’s obligation to allocate rights to use water. The preamble also records the historical racial inequalities of the allocation of water-use rights. It states that one of the purposes of the NWA is to address these racial inequalities; a goal also articulated in the objectives of the NWA Section 2(c).

The NWA defines “water use” widely to include the taking and storing of water, as well as the discharge of effluent into a water resource and the alteration of the bed, banks and characteristics of a water resource (Section 21). The NWA also prohibits the use of water except under one of several circumstances, which include: using it under a water-use licence (WUL); where one can meet the conditions of general authorised use; or where one is conducting a use that was undertaken lawfully in the two years before the coming into force of the NWA, referred to as an “existing lawful use” or ELU. 

Practically, the primary mechanism for regulating (large-scale, high-impact) water uses is the WUL, typically issued for 20 years (although the NWA permits its issue for 40 years (Section 28(1)(e)). South African courts have determined that a licence is a “purely personal statutory privilege”, which cannot be transferred or ceded by the holder; it can only be transferred by the authority that issued it (Aquatur (Pty) Ltd v Sacks and Others, 1989).  This is based on the doctrine of delectus personae, that is, the authority that is authorised to issue a licence is required to determine whether the person that applies to undertake a regulated activity is a fit and proper person to do so.

There are certain circumstances in the NWA where that doctrine does not apply. For example, where the property on which water use (that is authorised by a WUL) is conducted, is sold to a third party. The new owner may continue to undertake the water uses allowed under the WUL and is only required to notify the Department of Water and Sanitation (DWS) of the change in ownership of the property (no application process is necessary). The purchaser then becomes the holder of the licence (Section 51). This is consistent with the transfer of another category of regulated water use, namely, the continuation of an ELU. In those circumstances, a successor in title may continue to use the water as its predecessor in title did, until prohibited from doing so under the NWA. (For this reason, in any transaction involving the purchase of an existing enterprise that uses water under a WUL, there are compelling reasons to buy the property or the shares, rather than the business.) 

Another exception to the delectus personae doctrine is where a person relies on the transfer under rights under Section 25(1). This states that:

“(1) A water management institution may, at the request of a person authorised to use water for irrigation under this Act, allow that person on a temporary basis and on such conditions as the water management institution may determine, to use some or all of the water for a different purpose [referred to in the Lotter judgment as the ‘First Part of section 25(1)’], or to allow the use of some or all of that water on another property in the same vicinity for the same or similar purpose [referred to as the ‘Second Part of section 25(1)’].

(2) A person holding an entitlement to use water from a water resource in respect of any land may surrender that entitlement or part of that entitlement – 

(a) in order to facilitate a particular licence application under section 41 for the use of water from the same resource in respect of other land; and 

(b) on condition that the surrender only becomes effective if and when such application is granted.”

The NWA does not define “temporary”. 

Recent case law

In the Lotter matter, the Constitutional Court considered an appeal from the Supreme Court of Appeal regarding the transfer of water rights under Section 25 of the NWA, which the state in that litigation described as “trading” in entitlements. (This was a practice that the DWS – the government department with the power to consider WUL applications – sanctioned for the first 20 years after the NWA came into force.) In two of the three cases that the court heard in this matter, seller litigants had sold water-use rights (for very significant sums) and had surrendered part or all of the water-use rights permitted under their respective WULs. The purpose of doing so, they argued, was to facilitate the WUL applications made by the buyers, as contemplated in Section 25(2) of the NWA. In both cases, the DWS declined to grant the applications because it argued that the NWA makes no provision for the transfer of a water-use entitlement from one person to another.     

The parties to the litigation agreed that the First Part of Section 25(1) allows the holder of a water-use right for a given purpose to use it for a different purpose on the same property. What was in dispute was the Second Part of Section 25(1), that is, allowing the use of some or all of the water on another property in the same vicinity for the same or a similar purpose. The appellants argued that the Second Part of Section 25(1) permits the temporary use of water for the same purpose on the same or a nearby property by the holder of that right (only). 

In relation to Section 25(2), the appellants contended that its purpose is to facilitate an application for a WUL by the holder, not a third party where, for example, the holder wishes to use water on a property other than the one for which the WUL was issued. 

In bolstering this argument, the appellants pointed out that it makes no sense to create a licensing regime in which applicants pay paltry administrative fees for WULs and then trade them in amounts as material as the respondents did. The appellants pointed out that this practice serves to reinforce historical racial inequalities of water-use rights (the trading of water-use entitlements in these cases was conducted by wealthy white farmers).

The Constitutional Court noted with concern that the rights to use water, a scarce national resource, are largely held by white farmers. However, it found that the NWA, as currently framed, does not permit racial redress in the manner contended for by the appellants.

The court found that the interpretation of the Second Part of Section 25(1) argued for by the appellants did not make grammatical or logical sense. The court held that its meaning is that a water management institution may allow the holder to permit some or all of the water to be used on another property by another person. Significantly, it did not define the meaning of “temporary” (because it was not asked to). As a result, any commercial transaction which relies on the transfer of water under this provision may be vulnerable, because a proposed transfer may be found by the water management institution with jurisdiction over it not to be temporary and it may therefore be declined. 

In relation to Section 25(2), the court found that an application for a WUL envisaged by that section may be made by a third party; effectively paving the way for trading in water-use rights. It found, further, that there is no express prohibition on the trading of water-use rights. Regarding the price that may be charged in a transaction involving the surrender by a water-use right holder to a purchaser of those rights, the court noted that the NWA contemplates compensation arising from “any arrangement to use water” (Section 29(2)). It found, further, that the payment of a paltry administrative fee and the subsequent sale for a significant fee for the disposal of a water-use entitlement are unrelated.

Implications

The implications of the Lotter case for anyone wishing to use water for water-intensive projects in rural areas, or where the municipality that has jurisdiction over the project cannot supply the necessary water, are significant. The judgment makes it clear that an existing right-holder may surrender part or all of its water-use rights to a new water user to facilitate the granting of a WUL application, for which it may charge a material sum. The surrender of an existing WUL in favour of a new water-user applicant will likely result in a quicker application process and the chances of the application being refused are materially reduced (because the impacts of that water use would have been considered before in the original application).

The only qualification that must be made to this conclusion is that, unlike any other litigant, the government is able to change the law where a court finds against it. Given the observation by the Constitutional Court that the NWA, as currently framed, does not permit the rectification of the racially skewed enjoyment of water-use entitlements in the manner contended for by the appellants, it is quite likely that the DWS will amend Section 25 of the NWA to address this issue. It is therefore possible that the legal status of the transfer of water-use rights in South Africa summarised here will change to better enable the DWS to achieve one of the objectives of the NWA.