Three things South Africa must get right to fix its crumbling infrastructure

South Africa is increasingly turning to the private sector to invest in maintaining its infrastructure, which has deteriorated significantly over the past decade. 

While there is sufficient domestic capital and interest in infrastructure projects, many of them are not investable due to regulatory hurdles and a lack of government commitment. 

Another issue with these projects is that the return is often unclear from the outset, with very little attention paid to how the initial investment flows into the real economy, driving growth and employment. 

These issues with infrastructure projects are common across the African continent, with a typical problem being the high cost of capital and the difficulty in which private capital can be invested. 

This is feedback from Standard Bank CEO Sim Tshabalala, who outlined three of his key focus areas as chair of the finance and infrastructure task force of B20, which runs in parallel to the G20. 

At the bank’s Financing Africa Forward event, Tshabalala focused on how private sector investment in infrastructure can be boosted, alongside reducing the cost of capital for countries. 

Tshabalala’s key focus is making infrastructure projects investable for the private sector by reducing the risk tied to them, resulting in a lower cost of capital. 

He explained that currently, infrastructure projects are classified as relatively high-risk investments for banks, and regulations demand that additional capital be kept as security for lending and investment in this area. 

This makes them unattractive to banks and other financial institutions, as these projects require additional capital and are thus less efficient than lending in other areas. 

Without regulatory changes for banks and retirement funds, which are capped in how much they can invest in infrastructure, private capital will remain on the sidelines. 

One way to reduce the risk associated with infrastructure projects for the private sector is to develop partnerships with the public sector to crowd in additional investors and spread the risk. 

This will not only improve access to capital for these projects, but reduce the cost of capital by spreading the risk across multiple sources. 

Finally, Tshabalala said there needs to be more attention paid to the returns these investments provide, with more clarity given as to how private investors can benefit from investing in infrastructure. 

A way to do this is to enhance follow-through from these investments, with money and services going beyond the initial project to businesses involved in construction, maintenance, and operation. 

These businesses are potential clients for banks and can drive positive externalities far beyond the initial project for financial institutions. 

Here again, Tshabalala pointed to increased partnerships with the government as public companies or departments are likely to manage and operate the infrastructure in to which private institutions have invested. 

Creating the right incentives

While Tshabalala has managed to ensure the B20 taskforce he chairs agrees on these three principles, very little in the way of action has happened in South Africa to implment them. 

South Africa’s private sector has over R1.4 trillion sitting in cash in the bank, which is waiting to be deployed in the local economy. 

However, there is a lack of investable infrastructure projects, little incentive for the private sector to invest in this area, and a high cost of capital. 

This is coupled with a stagnant economy, which makes it difficult to see where a potential return on investment that justifies the risk will come from.

The Public Investment Corporation chair, David Masondo, recently outlined the reasons for the lack of investment from asset managers and the private sector in infrastructure. 

Masondo, who is also Deputy Finance Minister, explained that there is a lack of incentive for the private sector to invest in infrastructure projects in South Africa. 

The African Development Bank (AfDB) recently estimated that South Africa needs to invest R5.8 trillion in the years leading up to 2030 to arrest the deterioration of its infrastructure and improve the country’s poor service delivery.

This equates to around R725 billion a year, of which most will have to come from the private sector due to the government’s poor financial health.

Masondo explained that, although there is a significant amount of money in South Africa, the right incentives are not yet in place for the private sector to deploy its capital in government-run projects.

“The key question for us as government is, what are the incentive structures we are putting in place for investors to direct that money towards that particular infrastructure?” he said.

Masondo said a key incentive is ensuring that government departments and public companies have the right skills in place to ensure projects are properly managed. 

“Because if you’ve got capital, you are investing in something, you must see cash flows,” he said.

“Where will cash come from for me to get my money back? In fact, even more than what I’ve initially invested because if you don’t do that, you’re going to have this bottom investment performance.”