South Africa on the Brink of an Infrastructure Transformation

This article is sponsored by Brand South Africa

“My message is straightforward,” declared Dean Macpherson, the recently appointed South African Minister of Public Works and Infrastructure, shortly after joining the cabinet in July. “I am determined to turn our country into a major construction hub that fosters growth and creates jobs. We envision building cranes in every city and town.”

While Macpherson’s concept of a nation resembling a colossal Lego landscape may not resonate with everyone, there is a clear movement within South Africa to support the minister’s construction aspirations.

For years, the country has faced infrastructure that inadequately meets the goals—and often the fundamental requirements—of its population, affecting sectors from transport and logistics to ICT and water services.

Although notable strides were taken post-apartheid to rectify racial inequities through ambitious construction projects, advancements have floundered in recent times, impeded by economic strife and political challenges that have impacted the delivery achievements of various ANC administrations.

The gross value added by the construction industry plummeted from R150bn ($8.5bn) in 2017 to just over R110bn ($6.2bn) in 2023, as reported by the governmental body Infrastructure South Africa, which attributes this decline to “external shocks as well as national issues,” including “policy vagueness, governance hurdles, and structural problems within the sector.” In 2016, the construction industry represented 4% of GDP, which dwindled to only 2.6% by 2023.

Before the coalition government’s announcement and the ascent of the Democratic Alliance’s Macpherson, investors acknowledged the necessity for transformation.

“Recently, the government has sought solutions to urgent infrastructure challenges from the private sector,” commented an ESG expert from a South African infrastructure fund before the election.

“Much of South Africa’s infrastructure is outdated and has deteriorated over the years. The government recognizes that it cannot solve these issues alone and is now introducing policies that appeal to investors. Asset owners are beginning to view infrastructure as a promising investment opportunity.”

Turning a New Leaf

The funding needs are staggering. A World Bank report from January suggests that South Africa must invest between R4.8 trillion and R6.2 trillion ($272bn to $352bn) in areas such as transport, water & sanitation, basic education, and vocational training from 2022 to 2030 to achieve the UN Sustainable Development Goals. This expenditure would necessitate an annual average of 8.7% to 11.2% of GDP.

Importantly, the previous ANC-only administration had already initiated steps to address these requirements.

In March, the government and Infrastructure South Africa introduced the Construction Book 24/25, a collection of infrastructure projects initiated by the government and state-owned enterprises for the fiscal year. This document presents “significant opportunities” for private sector involvement through 153 projects totaling a capital expenditure of R158.54bn.

The initiatives range from sustainable water supplies for remote communities in Limpopo to improvements in arrival and departure areas at the airport in the affluent coastal town of George. Investors view this book as a clear invitation from the government to engage.

“They (the government) have acknowledged their need for the private sector as they cannot address these challenges independently. The urgency of these pressing issues fosters a collaborative atmosphere between the government and private enterprises,” remarked an infrastructure transaction lawyer at an asset management firm.

“Over the last 18 months, we have seen an escalation of urgency, necessity, and demand for capital investment in South Africa,” he added.

This active infrastructure planning offers long-term investment opportunities for pension funds and institutional investors alike.

Transport and Water: Urgent Investment Needs

The most critical requirement for new capital is in transport infrastructure. Road projects, valued at R60.4bn, comprise 123 of the 153 projects listed in the Construction Book, while rail (2 projects, R10.1bn), ports (3 projects, R9.82bn), and airports (4 projects, R7.8bn) also present significant investment requirements. Transnet, the state-owned entity, has faced ongoing criticism for its inability to effectively manage the freight rail network and national ports.

The World Bank’s report from January indicates that while some segments of the transport infrastructure function adequately, “others are in severe decline or complete failure.”

The most significant deficiencies are seen in accessibility, both in rural and urban areas. According to data from 2020–21, only 57.5% of the rural population is within 2 kilometers of an all-weather road, and less than 10% of unpaved rural roads meet good or very good condition criteria.

Urban transport systems also suffer from neglect and do not meet mass rapid transit standards due to “poor connectivity between rail, bus rapid transit, and minibus taxis,” as noted by the Bank. Improvements would mandate a minimum investment of R1000bn from 2022-30, or about 1.68% of GDP.

“South Africa is a key gateway to numerous inland nations on the continent… focusing on this sector is vital for the entire region,” added the ESG expert.

Water infrastructure also requires considerable investment, needing R1125bn, or 1.97% of GDP, between 2022 and 2030 to meet the World Bank’s minimum spending standards. This investment aims to guarantee universal access to basic services while accommodating alternative technologies and conservation efforts. The Bank emphasizes the importance of maintaining and upgrading existing water systems rather than merely developing new ones.

“Given the water scarcity challenges in different regions, including Johannesburg, this is a major area of concern,” the ESG professional noted.

“Projects like the Lesotho Highlands are critical for delivering water to Gauteng. There are numerous opportunities.”

The Highlands project, which dates back to the late 1990s, involves constructing a comprehensive network of tunnels and dams to redirect water from the mountains of Lesotho to South Africa.

In August 2023, the New Development Bank, also known as the BRICS Bank, extended a loan of R3.2bn to the state-owned Trans-Caledon Tunnel Authority for Phase II of the Highlands project, which includes the construction of a dam and reservoir, a 38-kilometer water transfer tunnel, along with roads, bridges, and other infrastructure elements. Additionally, three other projects highlighted in the Construction Book call for increased participation from the private sector.

The Government’s Role

Indeed, one of the main concerns among infrastructure investors regarding large-scale initiatives is the often ineffective function of government bodies. The projects within the Construction Book depend heavily on close cooperation with the government or state-owned enterprises—partners that private investors frequently prefer to avoid.

“We are unlikely to see the government completely step back from these assets; instead, we can expect partnerships with private stakeholders,” asserts the transaction lawyer.

“It’s critical to find a balance between government initiatives and private capital participation, which provides reassurance, especially since these are state-owned corporations. However, their operational nature must align with private sector interests. This is where the demand arises. While we may not witness the total privatization of Transnet, we will see actions like unbundling, similar to what we have observed with Eskom.”

Thus, the sectors most likely to attract investors would be those with historically limited government involvement. Investors regard renewable energy—as a sector that has previously been overlooked by the government and Eskom in favor of fossil fuels—as a considerable opportunity. New governmental policies have relaxed regulations for private entities to generate and sell their own power, diminishing reliance on Eskom, which has been plagued by persistent power outages.

Investment in energy infrastructure escalated from R30bn in 2021 to approximately R38bn in the previous year, according to Infrastructure South Africa data. The Renewable Energy Independent Power Producer Procurement Programme has encouraged private sector involvement in solar, wind, and other renewable energy sources.

“The South African government intends to generate around 49% of its energy from renewable sources by 2030. While this commitment is ambitious given the ongoing load shedding, the Construction Book prioritizes this sector, with independent power producer (IPP) structures facilitating renewable investments,” claims the ESG expert.

Additionally, the digital technology landscape presents infrastructure investors with a largely untapped opportunity.

“From an economic infrastructure perspective, we have witnessed substantial advancements in information and communications technology, particularly in digitalization and fiber deployment,” explains a fund principal from another major investment firm.

“There’s significant activity around extending fiber networks in suburban or township areas. Discussions regarding data centers are also underway. With the rise of AI, there is an urgent demand for robust network support, leading to an increase in financing requests.”

Creating a Lasting Impact

Beyond generating returns for shareholders, these projects can provide considerable social benefits, argues a private equity professional at a firm engaged in the South African market.

“We see economic infrastructure as a catalyst for development, not just in an economic sense but also socially. Typically, when resources are allocated to develop roads or airports, the societal benefits include increased job opportunities, heightened economic activity, and support for SMEs [small and medium enterprises] through contracting. Our approach to economic infrastructure integrates both commercial factors and the broader social and economic advantages that such investments can deliver to communities.”

This optimism is encouraging for the new infrastructure minister as he imagines cranes populating the skyline throughout the nation. During a visit to Infrastructure South Africa in Johannesburg, Dean Macpherson emphasized that his coalition government is ready for a transformative phase and expressed his ambition to be the principal political advocate for the industry.

“My goal is for infrastructure to become the foundation of economic advancement in South Africa… we cannot drive economic growth without a significant increase in infrastructure development in this country.”

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