South Africa’s missing R4 trillion

South Africa has experienced consistent underinvestment in infrastructure for the past three decades, which has led to several crises, such as load-shedding, logistics bottlenecks, and water shortages. 

Alongside these major crises, there has also been a steady decline in the quality of South Africa’s roads, bridges, and passenger rail. 

The country only has one piece of infrastructure that is classified as world-class by the South African Institution of Civil Engineering – the Gautrain. 

To reverse this decline, the country is looking to invest heavily in maintaining and upgrading its infrastructure in the coming years by tapping into the private sector’s capital and expertise. 

However, the country, due to its failure to invest in the past, now faces a R4 trillion funding gap. The government’s R1 trillion planned investment for the next three years is a start, but it is not enough. 

Stanlib head of fixed income private markets Johan Marnewick said this gap will be impossible to close without South Africa drawing on every available source of capital, from private markets to retirement funds and offshore investors. 

“The need is urgent. South Africa has experienced consistent underinvestment in infrastructure for three decades, with only a brief spike around the 2010 World Cup,” Marnewick said. 

“A structural constraint in the domestic financial system is that local capital markets are relatively shallow and concentrated compared to developed economies. Deepening capital markets is not merely a financial ambition but a developmental imperative.” 

Increased investment of this sort is vital for South Africa’s economy, with it being a key driver for sustained economic growth. 

Stanlib chief economist Kevin Lings has repeatedly warned that South Africa’s minor economic recovery is too narrow, with growth heavily dependent on consumer spending. 

Much of this is due to short-term cyclical factors, such as lower interest rates and early withdrawals from retirement funds under the two-pot system. 

This is unlikely to last and drive faster economic growth over the long run, as historically, sustained growth has come from increased investment in infrastructure, equipment, and machinery.

“The current investment level is mainly maintenance capex and kind of treading water, with companies waiting for a better environment,” Lings said. 

“Instead of deploying capital into growth or hiring, corporates are parking it in money market funds or call accounts.”

Lings has explained that this is largely a function of declining confidence from corporates in the South African economy.

Infrastructure myths 

The good news is that infrastructure is becoming an increasingly attractive investment, with the private sector becoming a much larger player in recent years. 

“There is a false, lingering perception that infrastructure is primarily a public-sector responsibility and somehow not commercially investable,” Marnewick said.  

“In fact, investments into infrastructure equity and debt provide an alternative asset class that generates stable, long-term returns and suits patient investors.” 

Marnewick explained that revised Regulation 28 limits and blended finance models make it possible for retirement funds to participate meaningfully in infrastructure projects without sacrificing returns or governance standards. 

This opens up a significant pool of capital to invest in local infrastructure projects, enabling the country to ensure a larger share of its development is domestically funded. 

Investment in infrastructure has historically been seen as too risky and illiquid for investors to participate, with it requiring a long-term horizon and tight agreements to ensure investors get a return. 

This ignores the fact that structured solutions and private credit strategies are already mitigating these concerns, Marnewick said.

“By their nature, infrastructure investments are intended to provide long-term value enhancement that is most often unlocked at the expense of easy liquidity,” he said. 

“However, illiquidity is partly mitigated by investing in structured funds with sufficient scale and a mix of assets that are in different life stages.”

The more mature assets in the fund will already be generating a steady dividend flow, while new projects in the pipeline or under construction will take a few years to achieve those same outcomes.

Pure equity investors typically take an active, long-term governance role, while credit provides the scale of funding required to make projects viable. 

In many renewable energy projects, equity may account for only 10% to 20% of the capital stack. Debt provides by far the larger portion. 

With meaningful reform and essential, clear frameworks for private participation, water infrastructure may be the next viable investment opportunity. 

“By directing capital into real assets that provide essential services to the economy, infrastructure investment becomes far more significant than a financial exercise – it becomes tangible nation-building,” Marnewick said.