Municipal infrastructure in South Africa is under strain as the country continues to face the dual challenge of ageing systems and a growing population. We see this in every pothole, burst pipe and substation failure. This has left local governments grappling with essential service delivery, especially in energy, water and sanitation. Alastair Herbertson and Reabetswe Kungwane unpack pockets of opportunity for investors willing to navigate the complexities.
The need to invest in municipal infrastructure development has become increasingly evident with national government calling for greater private participation to help remedy the situation. While the outlook remains mixed, the good news is that there are pockets of opportunity for investors willing to navigate the complexities of local government, which has struggled with fiscal and operational difficulties.
The Auditor General’s latest report on municipal finances paints a sobering picture with only 13% of municipalities obtaining clean audits and several facing persistent budget deficits and governance challenges. This strain on financial resources, coupled with frequent disruptions in basic service delivery, has discouraged domestic and international investment.
However, the complex landscape presents compelling investment opportunities. If we take the City of Cape Town as an example, the metro offers a glimpse into how robust financial management can create a more stable environment for infrastructure investment. Cape Town’s disciplined financial management has led to the city delivering projects that generate consistent revenue streams and improved service delivery even as it tackles broader infrastructure requirements due to growing demand.
In practical terms, the city’s approach means its infrastructure projects, like the MyCiTi bus rapid transit system and water resilience initiatives, operate under a financially sustainable model that improves their attractiveness to potential investors.
The city also pioneered sustainable financing in the municipal sector with the issuance of South Africa’s first municipal green bond in 2017. The R1 billion bond met strong investor demand and raised funding specifically earmarked for climate-resilient infrastructure projects. For investors, opportunities like Cape Town’s green bond provide commercial returns with the added appeal of contributing to environmental sustainability.
National-level efforts to support municipal infrastructure
While the national municipal landscape continues to face challenges, the country is making headway. Programmes like National Treasury’s Infrastructure Fund and the Cities Support Programme aim to bridge the funding and technical gaps that plague many local governments. The Infrastructure Fund, backed by a R100 billion commitment over 10 years, is designed to encourage private-sector investment in public infrastructure projects. The Municipal Infrastructure Support Agent also provides technical assistance but widespread implementation challenges persist. For many municipalities, issues like governance instability and low economic growth, which translate to lower revenue generation, still pose barriers.
According to the latest National Treasury report, while municipalities on aggregate assume a collection rate of 83% of their budgeted revenue, they only collect 63%, which is below the National Treasury norm of 95% and insufficient to cover operational costs let alone finance capital expenditure.
Mitigating risks through public-private partnerships
Adoption of a structured public-private partnership (PPP) model that supports collaboration with the private sector will help mitigate financial risks and enhance project efficiency. The successful implementation of the Renewable Energy Independent Power Producer Procurement Programme has unlocked private-sector participation in infrastructure investments. Additionally, National Treasury plans to apply the lessons and framework across different sectors including water. This will help foster greater private investments. As stated in National Treasury’s Medium-Term Budget Policy Statement in October, “the Department of Water and Sanitation’s Water Partnerships Office has two priority programmes for non-revenue water (the revenue lost from leaking water infrastructure) and recycling wastewater for different uses”.
The private sector can, therefore, participate through performance-based contracts and PPPs. One prominent example of private-sector involvement in South Africa’s municipal infrastructure landscape is the Ninety One SA Infrastructure Credit Fund. Through its offering, Ninety One has been able to address critical gaps in infrastructure financing, leveraging private capital to support projects that generate economic and social returns. The fund has invested in renewable energy projects, such as the De Aar wind projects, which aim to supplement grid capacity and reduce reliance on coal-based power. Municipalities have warned that revenue generated from the sale of electricity is at risk due to load shedding. Therefore, investments like the De Aar wind projects directly contribute to energy security, benefiting municipalities by improving grid stability and providing more reliable electricity supply to residents while protecting municipal revenues.
Additionally, the underlying infrastructure projects align well with investor priorities for environmental, social and governance impact, making it a compelling option for those looking to make responsible investments in South Africa’s infrastructure.
