This article is sponsored by Brand South Africa
“My aim is unequivocal,” expressed Dean Macpherson, the recently appointed South African Minister of Public Works and Infrastructure, right after joining the cabinet in July. “I plan to turn our country into a massive construction hub that fosters growth and creates jobs. We aspire to have building cranes in every community and city.”
While Macpherson’s vision of a nation that resembles an expansive Lego Land may not resonate with everyone, there is a palpable shift in South Africa towards realizing the Minister’s construction ambitions.
For years, the country has grappled with infrastructure that does not meet the aspirations—and often the fundamental needs—of its people, affecting sectors from transportation and logistics to ICT and water services.
Although considerable strides were made after apartheid to rectify racial inequalities through ambitious construction ventures, progress has stagnated in recent years due to economic challenges and political obstacles that have compromised the efficacy of various ANC administrations.
The construction sector’s gross value added decreased from R150 billion ($8.5 billion) in 2017 to just over R110 billion ($6.2 billion) in 2023. According to Infrastructure South Africa, this decline is due to “external shocks as well as internal challenges within the country,” such as “policy uncertainties, governance issues, and structural difficulties in the industry”. In 2016, the construction sector represented 4% of GDP, which diminished to only 2.6% by 2023.
Prior to the coalition government’s announcement—and the ascension of Democratic Alliance’s Macpherson—investors acknowledged the pressing need for transformation.
“Recently, the government has sought the private sector’s assistance in addressing urgent infrastructure dilemmas,” commented an ESG expert from a South African infrastructure fund before the election.
“Much of South Africa’s infrastructure is quite outdated and has deteriorated over the years. The government is coming to terms with the fact that it cannot resolve these issues in isolation and is now developing policies that attract investors. Asset owners are beginning to view infrastructure as a legitimate investment opportunity.”
Embracing Change
The financial requirements are staggering. A World Bank report from January indicates that South Africa must invest between R4.8 trillion and R6.2 trillion ($272 billion to $352 billion) in transportation, water and sanitation, basic education, and vocational training between 2022 and 2030 to achieve the UN Sustainable Development Goals. This investment translates to an annual average of 8.7% to 11.2% of GDP.
Intriguingly, the previous ANC-only administration had already initiated steps to address these numbers.
In March, the government and Infrastructure South Africa unveiled the Construction Book 24/25, a compilation of infrastructure projects launched by the government and state-owned enterprises for the fiscal year. This document presents “great opportunities” for the private sector through 153 projects with a combined capital expenditure of R158.54 billion.
The initiatives range from sustainable water supplies for isolated communities in Limpopo to enhancements of airport arrival and departure areas in the upscale coastal town of George. Investors interpret this book as a direct invitation from the government to get involved.
“They (the government) have acknowledged their need for the private sector as they cannot resolve these issues independently. The urgency of these critical challenges fosters a collaborative atmosphere between the government and the private sector,” stated an infrastructure transaction attorney at an asset management firm.
“In the past 18 months, we have witnessed an increasing urgency, necessity, and demand for capital allocation in South Africa,” he added.
This proactive approach to infrastructure planning provides long-term investment opportunities for pension funds and institutional investors alike.
Immediate Investment Requirements in Transport and Water
The most urgent area for new capital lies within transport infrastructure. Road projects, valued at R60.4 billion, account for 123 of the 153 initiatives listed in the Construction Book, while rail (2 projects, R10.1 billion), ports (3 projects, R9.82 billion), and airports (4 projects, R7.8 billion) are also in dire need of investment. Transnet, the state-owned enterprise, has long faced criticism for its ineffective management of the freight rail network and national ports.
The World Bank’s January report highlights that while certain segments of the transport system operate effectively, “others are in a state of severe decline or total collapse.”
The most significant deficiencies are apparent in accessibility, both in rural and urban areas. Data from 2020-21 reveals that only 57.5% of the rural population lives within 2 kilometers of an all-weather road, while fewer than 10% of unpaved rural roads are in good or very good condition.
Urban transport systems face similar neglect and fail to adhere to mass rapid transport standards, as noted by the Bank, due to “poor connectivity between rail, bus rapid transit, and minibus taxis.” Improving this sector would necessitate a minimum expenditure of R1 trillion from 2022-30, or about 1.68% of GDP.
“South Africa serves as a critical gateway to many inland countries on the continent… prioritizing this sector is crucial for the entire region,” added the ESG expert.
Water infrastructure also requires significant investment, necessitating R1.125 trillion, or 1.97% of GDP, from 2022 to 2030 to meet the World Bank’s minimum spending standards. This funding aims to guarantee universal access to a basic level of service, while also accommodating alternative technologies and conservation efforts. The Bank underscores the necessity of maintaining and upgrading existing water systems over developing new ones.
“Given the water scarcity challenges in various regions, including Johannesburg, this is a matter of great concern,” noted the ESG professional.
“Projects like the Lesotho Highlands are critical for supplying water to Gauteng. There are significant opportunities.”
The Highlands project, which has its origins in the late 1990s, involves constructing an extensive network of tunnels and dams to channel water from the mountains of Lesotho to South Africa.
In August 2023, the New Development Bank, also known as the BRICS Bank, provided a loan of R3.2 billion 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, as well as roads, bridges, and other related infrastructure components. Additionally, three further initiatives highlighted in the Construction Book seek enhanced private sector involvement.
Government’s Role in Infrastructure Development
Indeed, a primary concern for infrastructure investors regarding large-scale projects is the often ineffective role of governmental entities. The projects within the Construction Book heavily depend on close collaboration with the government or its state-owned enterprises—partners that private investors sometimes prefer to circumvent.
“We’re unlikely to see the government completely withdraw from these assets; rather, we will witness partnerships with private stakeholders,” states the transaction lawyer.
“It’s crucial to find a balance between government initiatives and private capital involvement, which provides reassurance, especially since these are state-owned entities. However, their operational standards must align with the interests of the private sector. This is where the demand lies. We may not see the full privatization of Transnet, but incremental steps like unbundling, similar to those seen with Eskom, are likely.”
Consequently, sectors that might attract the most investor interest include those with historically limited government engagement. Investors now view renewable energy—as a sector previously overlooked by the government and Eskom in favor of fossil fuels—as a major opportunity. Recent governmental policies have relaxed regulations for private entities to produce and sell their power, thereby reducing reliance on Eskom, which has been plagued by frequent power outages.
Investment in energy infrastructure rose from R30 billion in 2021 to nearly R38 billion the following year, according to data from Infrastructure South Africa. The Renewable Energy Independent Power Producer Procurement Programme has catalyzed private sector participation in solar, wind, and other renewable sources.
“The South African government plans to derive about 49% of its energy from renewable sources by 2030. Although this goal is ambitious given the ongoing load shedding, the Construction Book identifies this sector as a governmental priority, with independent power producer (IPP) frameworks facilitating investments in renewables,” asserts the ESG expert.
Equally, the digital technology sector presents infrastructure investors with a relatively open field.
“From an economic infrastructure perspective, we’ve observed substantial advancements in information communications technology, particularly regarding digitalization and fiber deployments,” explains a fund principal from another significant investment firm.
“There’s considerable momentum towards deploying fiber in peri-urban or township areas. Discussions about data centers are also ongoing. With the rise of AI, there’s an increasing demand for robust network support, resulting in a surge in financing requests.”
Creating a Sustainable Impact
Aside from generating returns for shareholders, these initiatives can produce considerable social gains, argues a private equity expert at a firm active in the South African market.
“We view economic infrastructure as a catalyst for development, not solely from an economic standpoint but also a social one. Typically, when funds are dedicated to developing roads or airports, the societal benefits include increased job opportunities, boosted economic activity, and support for SMEs [small and medium enterprises] through contracting. Our focus on economic infrastructure encompasses both commercial realities and the wider social and economic benefits that such investments can yield for communities.”
This sense of optimism is encouraging for the new infrastructure minister as he envisions cranes populating the sky across the nation. During a visit to Infrastructure South Africa in Johannesburg, Dean Macpherson emphasized that his coalition government is prepared for a transformative era and asserted his commitment to being the foremost political champion for the industry.
“My objective is for infrastructure to become a fundamental element of economic advancement in South Africa… we cannot drive economic growth without a surge in infrastructure development in this country.”
