“My message is unequivocal,” declared Dean Macpherson, the newly appointed South African Minister of Public Works and Infrastructure, shortly after taking office in July. “I intend to turn our nation into a sprawling construction zone that will drive growth and create jobs. We aspire to see construction cranes in every municipality and city.”

While Macpherson’s vision of a country reminiscent of a giant Lego Land may not resonate with everyone, there is clear momentum within South Africa to support the minister’s ambitious construction agenda.

For years, the nation has struggled with infrastructure that does not meet the ambitions—and often the fundamental needs—of its populace, encompassing critical sectors from transport and logistics to information and communication technology (ICT) and water supply.

Although notable advancements occurred post-apartheid to redress racial disparities through significant construction efforts, progress has stagnated in recent years, hampered by economic challenges and political strife that have impacted the effectiveness of various ANC administrations.

The gross value added by the construction industry decreased from R150bn ($8.5bn) in 2017 to just over R110bn ($6.2bn) in 2023, a decline attributed by Infrastructure South Africa to “external shocks and internal challenges,” including “policy uncertainties, governance issues, and structural difficulties within the sector.” The construction sector’s contribution to GDP fell from 4% in 2016 to a mere 2.6% by 2023.

Prior to the coalition government’s announcement—and the rise of Democratic Alliance’s Macpherson—investors recognized the imperative for change.

“Recently, the government has engaged the private sector for solutions to pressing infrastructure challenges,” noted an ESG expert from a South African infrastructure fund before the elections.

“Much of South Africa’s infrastructure is quite outdated and has deteriorated over the years. The government is now acknowledging that it cannot solve these issues alone and is implementing policies that attract investors. Asset owners are increasingly viewing infrastructure as a viable investment opportunity.”

Turning Over a New Leaf

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

Significantly, the previous ANC-only administration had already begun addressing these figures.

In March, the government and Infrastructure South Africa released the Construction Book for 2024/25, a compilation of infrastructure projects initiated by the government and state-owned enterprises for the fiscal year. This document provides “great opportunities” for private sector involvement across 153 projects with a total capital expenditure of R158.54bn.

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

“They (the government) recognize their reliance on the private sector as they cannot tackle these challenges in isolation. The urgency of these pressing issues fosters an environment of collaboration between the government and private sector,” stated an infrastructure transaction lawyer at an asset management firm.

“Over the past 18 months, we have observed a heightened urgency, necessity, and demand for capital deployment in South Africa,” he added.

This proactive approach to infrastructure planning offers long-term investment prospects for pension funds and institutional investors alike.

Transport and Water: Immediate Investment Requirements

The most acute need for new capital lies within transport infrastructure. Road projects, valued at R60.4bn, constitute 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 demand substantial investment. Transnet, the state-owned entity, has faced ongoing criticism for its inability to efficiently manage the freight rail network and national ports.

The World Bank’s January report indicates that while some elements of the transport system function adequately, “others are in severe decline or have completely collapsed.”

The most significant weaknesses are present in accessibility, both in rural and urban areas. According to data from 2020–21, only 57.5% of the rural population lives within 2 kilometers of an all-weather road, and under 10% of unpaved rural roads are in good or very good condition.

Urban transport systems suffer from similar neglect and do not comply with mass rapid transport standards due to “poor connectivity between rail, bus rapid transit, and minibus taxis,” as noted by the Bank. Improving these systems would require a minimum investment of R1000bn from 2022-30, or approximately 1.68% of GDP.

“South Africa is a crucial gateway to many inland countries on the continent; hence, prioritizing this sector is essential for the entire region,” added the ESG expert.

Water infrastructure also requires substantial investment, needing R1125bn, or 1.97% of GDP, between 2022 and 2030 to meet the World Bank’s minimum spending criteria. This investment aims to ensure universal access to a basic level of service while accommodating alternative technologies and conservation initiatives. The Bank underscores the importance of maintaining and upgrading existing water infrastructure over developing new systems.

“Given the issues of water scarcity in various regions—including Johannesburg—this is a significant area of concern,” noted the ESG professional.

“Projects such as the Lesotho Highlands are critical for supplying water to Gauteng. There are numerous opportunities available.”

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

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

The Role of the Government

Indeed, one of the primary apprehensions of infrastructure investors regarding large-scale projects is the frequently inefficient role of governmental entities. The projects within the Construction Book largely depend on close cooperation with the government or its state-owned enterprises—partners that private investors often prefer to sidestep.

“We are unlikely to see the government fully disengage from these assets; instead, we will observe partnerships with private stakeholders,” states the transaction lawyer.

“It is vital to achieve a balance between government initiatives and private capital participation, which provides assurance, particularly since these are state-owned entities. However, their operational frameworks must align with private sector interests. This is where the demand is evident. While we may not see the complete privatization of Transnet, we will witness movements towards unbundling, much like what has happened with Eskom.”

Consequently, sectors that may capture the attention of investors most would include areas with historically limited governmental involvement. Investors perceive renewable energy—as a sector previously overlooked by the government and Eskom in favor of fossil fuels—as a significant opportunity. Recent governmental policies have eased regulations for private entities to generate and sell their own energy, reducing reliance on Eskom, which has been plagued by frequent power outages.

Investment in energy infrastructure has surged from R30bn in 2021 to around R38bn last year, according to data from Infrastructure South Africa. The Renewable Energy Independent Power Producer Procurement Programme has stimulated private sector interest in solar, wind, and other renewable energy sources.

“The South African government aims to source roughly 49% of its energy from renewables by 2030. While this objective is ambitious given the ongoing load shedding, the Construction Book prioritizes this sector, with independent power producer (IPP) frameworks facilitating investments in renewables,” asserts the ESG expert.

Similarly, the digital technology sector offers infrastructure investors a relatively clear field.

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

“There is substantial activity surrounding fiber offers in peri-urban or township regions. Ongoing dialogues about data centers are also present. With the emergence of AI, there is urgent demand for robust network support, leading to a flurry of financing requests.”

Creating a Lasting Impact

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

“We see economic infrastructure as a catalyst for development, not solely from an economic standpoint but also from a social angle. Generally, when resources are allocated to build roads or airports, the social benefits include job creation, increased economic activity, and support for SMEs [small and medium enterprises] through contracting. Our approach to economic infrastructure encompasses both commercial goals and the wider social and economic advantages that such investments can bring to communities.”

This optimism bodes well for the new infrastructure minister as he envisions cranes populating the skyline across the nation. During a visit to Infrastructure South Africa in Johannesburg, Dean Macpherson reiterated that his coalition government is poised for a transformative phase and expressed his commitment to being the leading political champion for the industry.

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