South Africa’s R1.75 trillion SOE disaster

South Africa’s state-owned enterprises (SOEs) need to spend R1.75 trillion over the next five years to address the country’s infrastructure challenges. 

However, SOEs do not have the balance sheets to invest so heavily in South Africa, as many are unprofitable and have unsustainable debt loads. 

This means that the private sector will have to help SOEs finance these projects and commit the required skills to build the infrastructure. 

Stanlib economist Ndivhuho Netshitenze said this is because of lacklustre investment over the past decade and historical mismanagement at SOEs. 

Over the past decade, fixed investment in South Africa has fallen by an average of 1.3% per year. This is one of the main factors behind the country’s persistently weak economic growth of 0.8% per year during that period. 

SOEs are tasked with providing and maintaining the country’s economic infrastructure, while the government is responsible for social infrastructure.

This means that SOEs provide services that influence the production and distribution of goods and services. 

This includes investment in road and rail networks, ports, bridges, water and sanitation networks, and energy-generating plants.

Netshitenze said South Africa had a relatively good core national economic infrastructure network that has deteriorated significantly over the past decade, and new networks have not been adequately developed. 

Current investment levels are insufficient to address this problem, and maintenance programmes are lagging, most notably resulting in sporadic water outages in Gauteng. 

In its 2012 National Development Plan, the government sought to address the issue by setting a very ambitious target of increasing fixed investment spending to 30% of GDP by 2030.

Since then, fixed investment has averaged only 16.1% of GDP. In the third quarter of 2024, fixed investment in SA was a mere 14.8% of GDP, with the private sector making up the bulk of this investment at 10.6% of GDP and the public sector at 4.2%. 

This is below the policy target and low by historical standards. 

Netshitenze said that, in effect, South Africa has missed a generation of capital investment in roads, rail, ports, electricity, water, sanitation, public transport, and housing. 

This has limited economic growth, with South Africa jumping from crisis to crisis, from load-shedding to logistics and water shortages. 

Netshitenze explained that this creates a positive feedback loop whereby each crisis results in companies committing less capital to the country and, thus, less investment and slower economic growth. 

To ensure sustained economic growth and improved services, public sector infrastructure investment needs to increase significantly from its current levels. 

Given that SOEs provide economic infrastructure, at least half of this responsibility rests on companies like Eskom, Transnet, Trans Caledon Tunnel Authority (TCTA), and SANRAL.

Unfortunately, significant constraints hinder SOEs from achieving their target. Given current levels, the investment shortfall is simply too large and SOEs lack the capacity to meaningfully ramp up infrastructure spending. 

Since its peak in Q4 2013, fixed investment by SOEs has fallen by almost 50%. As a percentage of GDP, fixed investment by SOEs has deteriorated from 3.5% of GDP in 2013 to 1.6% of GDP in 2023. 

To get investments back to peak levels, SOEs need to increase their current investment spending by R134 billion (based on 2023 GDP levels). 

Even then, SOEs would still be well below the R240 billion increase required to reach the 5% of GDP target. 

This level of investment would have to be maintained for about five years to ensure sustainable economic growth. This means SOEs must spend R1.75 trillion over five years to address South Africa’s infrastructure problems.

Unfortunately, the balance sheets of the country’s important SOEs have deteriorated over time, and they continue to experience significant financial distress. 

Many are persistently unprofitable, giving rise to unsustainable debt accumulation followed by a need for significant and ongoing government bailouts.

Between 2012/13 and 2022/23, the debt levels for the 10 biggest SOEs increased by R313.6 billion. During this time, the government also bailed out these companies for R318.1 billion.

As a result, the government plans to scale up private sector participation in infrastructure investment, either by crowding in financing or by improving companies’ potential return on investment. 

This has translated into an increased uptake of PPPs in 2023/24, with 15 projects at the inception phase and 19 at the feasibility study phase. Six projects have completed feasibility studies, and 10 are ready to start the procurement process.

While this is a welcome statement of intent by the government, it is not enough to plug the investment shortfall.

Even though the government has pledged greater use of PPPs, they still account for only 2% of the total planned infrastructure spending over the medium term at R19.1 billion.