South Africa’s infrastructure on the verge of collapse

South Africa’s infrastructure is on the verge of collapse, and the country needs to spend at least R100 billion a year to restore it to an adequate grade. 

This deterioration has significantly hobbled economic growth through lost efficiency, increased inflation, and reduced business confidence. 

In effect, South Africa’s major economic crises are entirely its own fault, as they result from years of underinvestment in crucial infrastructure, from power plants to roads. 

This is feedback from Stanlib economist Kevin Lings, who outlined some of South Africa’s major challenges at the asset manager’s InPerspective Roadshow. 

Over the past decade, the South African economy has grown at an average of only 0.8% a year, while the country’s population has been growing at 1.5% a year.  This means that South Africans are getting poorer every year. 

This meagre economic growth has largely come from consumer spending, with minimal contributions from other sectors of the economy. 

According to Lings’ calculations, 138% of South Africa’s economic growth over the last 10 years has come from retail spending, much of it on imported items.

Conversely, once the backbone of South Africa’s economy, mining has had a net negative contribution to economic activity in the country. 

As mining output has fallen, so have the valuable foreign exchange earnings the sector provides, and employment in the sector has declined. 

Lings explained that an economy based on consumer spending is not necessarily a bad thing, as household expenditure can drive sustainable economic growth. 

However, in South Africa, much of this spending is propped up by social grants provided by the government, straining the state’s finances. 

Currently, 28 million people in South Africa rely on social grants, which Lings said is deeply concerning as the country only has 7.4 million personal income taxpayers. 

The outsized role of consumer spending in the South African economy, reflected in retail sales figures, can be seen in the graph below alongside mining’s net negative contribution. 

One way out of this is for the country to invest heavily in infrastructure, which generally makes the economy more productive and efficient.

Perhaps more crucially, it increases confidence in the local economy and has the potential to crowd in private-sector investment. 

Lings pointed out that infrastructure is not limited to roads, bridges, and buildings but ties into the structural constraints plaguing the South African economy, such as electricity through power plants and transmission lines and logistics. 

“South Africa’s infrastructure has practically imploded over the past decade. That is essentially what happened, dramatically affecting supply and making the economy less efficient,” Nedbank chief economist Nicky Weimar said. 

This has been most evident with load-shedding, and Transnet’s rail challenges are beginning to get more attention.

However, this is not an easy fix. It will require years of investment to return South Africa’s infrastructure to a satisfactory state that can drive economic growth. 

In a survey by civil engineers, South Africa’s infrastructure scored a D grade, indicating it is at risk of failure. Previously, when state-owned enterprises (SOEs) were building infrastructure, the grade was C- (adequate but fragile). 

Lings said South Africa needs to invest at least R100 billion a year more in infrastructure to return to a C grade. If that happens, higher growth is attainable, and it is achievable if the government partners with the private sector.

The government has to partner with the private sector as its debt burden has crossed 75% of GDP, with it spending over R1 billion a day on servicing its debt. 

Furthermore, significant constraints prevent SOEs from funding this infrastructure buildout.

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

To get investments back to peak levels, SOEs must 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.