South African infrastructure collapse

South Africa’s infrastructure has rapidly deteriorated over the past decade due to consistent underinvestment, mismanagement, and a lack of state capacity. 

This is feedback from Nedbank chief economist Nicky Weimar, who outlined the biggest constraints on the South African economy in a presentation in collaboration with SA REIT. 

Weimar explained that amid global uncertainty, one thing is clear for South Africa: It needs to focus on what is holding its economy back. 

“We need to forget a little bit about the drama playing out in the rest of the world and rather focus on what is holding back South Africa’s economy. We all know what that is,” Weimar said. 

“There is no mystery here. The key is for us to press ahead with structural reforms.” 

These structural reforms, particularly in the electricity and logistics sectors, intend to increase private sector participation in infrastructure development and maintenance.

Many have been warning for years about South Africa’s dire infrastructure situation, with the Reserve Bank consistently saying it is one of the major drivers of inflation. 

Poor infrastructure significantly increases the cost of doing business, prevents products from reaching the market, and pushes prices up. 

In November last year, the Reserve Bank’s warnings became more severe, warning that crumbling infrastructure threatens the stability of the financial system. 

“The sustained deterioration in critical infrastructure poses direct operational risks that could disrupt the functioning of the financial system,” it said in its latest Financial Stability Review. 

“While electricity availability appears to be gradually returning to historical trends, other critical infrastructure such as the supply and quality of water and transport infrastructure – especially rail, port and road networks – continues to degrade.”

Weimar said this is the symptom of a decades-long lack of investment in developing and maintaining infrastructure. 

 “What has essentially happened in South Africa is that we have had almost 15 years of underinvestment. Our general economic infrastructure has imploded,” Weimar said. 

“And so, our general supply curve is at a very low level. Even if demand accelerates, the moment it starts to strain supply, prices go up, interest rates go up, demand slows again.”

This is the low-growth trap South Africa is stuck in, and the only way out is to create excess space on the supply side to absorb increased economic activity. 

The graphs below, courtesy of Weimar and Nedbank, show the deterioration of South Africa’s key economic infrastructure, particularly in electricity and logistics. 

Weimar said progress is being made, particularly in the electricity sector, which has received much of the government’s attention. 

After years of declining energy availability factor (EAF), Eskom seems to have turned things around, and the private sector has invested heavily in renewable energy. 

Greater private electricity generation is ultimately the future of South Africa’s energy market, Weimar said, as it will prove cheaper and more efficient. 

However, significant grid capacity constraints limit the potential buildout of new renewable energy projects in South Africa. 

The government has announced a considerable grid expansion project that will cost hundreds of billions of rands and build over 14,000km of transmission lines and hundreds of new substations. 

This buildout presents a big challenge as many of the best areas for renewable energy generation in South Africa are located far from demand centres and existing coal power plants. 

South Africa’s electricity grid was designed to transfer energy created from coal-fired power plants in the northeastern parts of the country to the major demand centre of Gauteng. 

Now, with renewable energy, the main demand centre remains Gauteng, but the areas where electricity is generated will be the Northern Cape, Western Cape, and Eastern Cape. In effect, the country’s electricity grid will have to be flipped. 

Furthermore, Weimar explained that even with these improvements, load-shedding would most likely return to cap economic growth at 1.5% to 2%. 

“We may not have load-shedding right now, but that is in an economy that is growing by 0.5%. We want to grow at over 2%, and if we do, load-shedding will probably come back.” 

Weimar said there have also been improvements at Trasnent, but these are so small that one has to use a magnifying glass to see them. 

Crucially, though, the utility has managed to stop the decline in performance of its ports and railway infrastructure.