The recent tragic blaze that took place in Marshalltown, Johannesburg on August 31, 2023, resulting in the loss of 74 lives, drew attention to the state of South Africa’s infrastructure. Once considered a thriving and dynamic economy, South Africa is currently grappling with a severe decline in its infrastructure. This deterioration has emerged as a significant source of concern for both local and international investors, as it poses significant challenges to economic growth and development.
According to the most recent Infrastructure Report Card issued by the South African Institution of Civil Engineering, South Africa’s overall infrastructure condition has declined from a ‘B’ (Fit for the future) rating to a ‘D’ (at risk of failure) rating. This downgrade is impeding the effort to boost investment in the country, as President Cyril Ramaphosa articulated during the 2023 SA Investment Conference that the country aims to raise R1.2 trillion worth of investments over the next 5 years. Thus, infrastructure development plays a key role in attracting investors, thus ensuring fast economic growth and alleviating poverty in South Africa.
A Closer Look at the Situation
South Africa’s infrastructure woes are multifaceted. From unreliable power supply, and crumbling roads to a lack of access to clean water and efficient public transportation, the country faces a daunting task in addressing these critical issues. Let’s delve into these problems individually.
One of the most significant issues plaguing South Africa’s infrastructure is its unreliable power supply. The country’s state-owned entity Eskom, has been struggling to meet the country’s electricity demands, resulting in frequent rolling blackouts known as load shedding. These blackouts have had a detrimental impact on businesses, disrupting operations and hindering productivity.
According to RMB’s Head of Market Research, Isaah Mhlanga, there exists a strong correlation between the manufacturing sector’s performance and the severity of load shedding. In simpler terms, more pronounced stages of load shedding generally lead to decreased manufacturing output. Furthermore, the South African Reserve Bank approximates that the recurring power outages, or so-called stage 3 and stage 6 outages, detract between R204 million and R899 million from the South African economy daily. The ongoing struggle in power supply has also led to a loss of investor confidence, as a stable and consistent power supply is essential for sustainable economic growth.
Another important aspect of South Africa’s infrastructure decline is the state of its transportation networks. The railway system, once a symbol of progress and efficiency, has fallen into disrepair. Overhead power lines have been stolen and sold as scrap, rendering the trains immobile and disrupting the movement of goods and people. According to Transnet, roads now move more than 70% of SA’s industrial cargo, because of the collapse of the rail system. This decline in transportation infrastructure has negatively affected trade and commerce, making it increasingly challenging for businesses to operate efficiently.
Moving forward, South Africa is also grappling with water and sanitation challenges, particularly in its major cities. Drinking water and wastewater management have become pressing issues, with three-quarters of the country’s metros facing difficulties in providing adequate services. A study by the University of the Witwatersrand reveals that out of the 824 water treatment plants across the country, only 60 release clean water. Furthermore, the study finds that more than 60% of the country’s sewage and wastewater treatment works have been classified as in a poor or critical state. The government has allocated funds to address these challenges, but the allocated amounts fall short of the actual requirements. This lack of investment in water infrastructure further exacerbates South Africa’s infrastructure decline.
Impact on Economic Growth and Development
The deterioration of South Africa’s infrastructure has had extensive repercussions on its economy. The devastating shortcomings mentioned above have impeded business operations and discouraged investment. For instance, companies are grappling with rising costs attributed to power interruptions, transportation bottlenecks, and the necessity to invest in alternative solutions to counteract infrastructure deficiencies. Consequently, this adversely impacts productivity and competitiveness, rendering it challenging for South Africa to allure and retain investors. This is of particular significance because South Africa’s investment accounted for 17.0% of its Nominal GDP in June 2023, which is relatively low compared to other developing countries.
Furthermore, considering that the tourism industry constitutes around 3.7% of the nation’s Gross Domestic Product, it becomes evident that South Africa relies significantly on tourism. Consequently, subpar infrastructure can dissuade potential tourists from choosing the country as their destination. This has the potential to lead to a reduction in revenue and employment opportunities within the tourism sector.
Lastly, poor infrastructure can hinder economic growth and development by reducing productivity, increasing operational costs, limiting market access, and discouraging investment. It can also have broader societal and environmental implications.
Factors Contributing to the Infrastructure Decline
Lack of policy coordination across various government ministries: This lack of coordination has resulted in inefficiencies, delays, and a lack of strategic planning in infrastructure development. Additionally, “Corruption” has plagued the country, diverting funds meant for infrastructure development and hindering progress. According to the National Treasury, “State Capture” has been estimated to have cost the country up to R250 billion (US$ 17 billion) between 2014 and 2017 and reduced the country’s GDP growth rate by an estimated 4% a year. These systemic issues have hindered the effective implementation and maintenance of infrastructure projects in the country.
Inadequate maintenance and investment in infrastructure: South Africa is good at building but faces challenges when it comes to maintenance. This is apparent due to the current state of the infrastructure constructed for the 2010 FIFA World Cup, which is in critical condition due to insufficient maintenance. Thus, the country has struggled to allocate sufficient funds to infrastructure development and maintenance, resulting in the deterioration of existing assets. Insufficient investment has limited the country’s ability to keep up with growing demands and address infrastructure deficiencies effectively. This lack of financial commitment has perpetuated the decline, further deterring investors, and hindering economic growth.
Impact on Investment Climate
Investors consistently seek to optimise their returns, and as such, inadequate infrastructure is not aligned with their objectives. The decline of South African infrastructure has had a significant impact on the investment climate. This is evident as according to the United Nation, foreign direct investment inflows to South Africa decreased by approximately 15% to $4.6 billion in 2019, as investors are wary of committing their capital to a country with unreliable power supply, inadequate transportation networks, and water and sanitation challenges. Figure 1 below shows the FDI inflow from July 2020 to Jan 2023.
Figure 1: South Africa’s Foreign Direct Investment
Source: CEIC Data.
The lack of superior infrastructure hampers business operations increases costs and reduces the overall competitiveness of South Africa as an investment destination. This decline in investor confidence stifles economic growth, job creation, and the country’s ability to attract foreign direct investment.
Let me put it, South Africa’s poor infrastructure deters foreign investors from entering the market. International and domestic investors often consider the state of a country’s infrastructure when deciding where to invest, as modern and efficient infrastructure is crucial for conducting business operations. Superior infrastructure is closely associated with greater investment returns.
Potential Solutions and the Way Forward
Enhance Investment in Infrastructure: Simple, put your money where your mouth is. One of the crucial steps to address South Africa’s infrastructure decline is to increase investment in infrastructure development and maintenance. The government must allocate sufficient funds to address the existing deficiencies and invest in new projects to meet future demands.
Improve Policy Coordination and Governance: Improving policy coordination and governance is essential to overcome the challenges facing South Africa’s infrastructure. The government should establish clear mechanisms for coordination among ministries to ensure effective implementation and maintenance of infrastructure projects. Addressing corruption and ensuring transparency in procurement processes will enhance accountability and facilitate efficient infrastructure delivery.
Public-Private Partnerships: Participating in public-private partnerships (PPPs) can be instrumental in addressing South Africa’s infrastructure challenges. PPPs can leverage private sector expertise, funding, and efficiencies to accelerate infrastructure development and maintenance. These partnerships can foster innovation, enhance competition, improve project delivery, and ensure the long-term sustainability of infrastructure assets.
Conclusion
In summary, the decline of South African infrastructure can deter both domestic and foreign investment. Investors are more likely to favour locations with reliable, efficient, and well-maintained infrastructure, as it reduces operational risks, lowers costs, and enhances the overall business environment. To overcome these challenges and achieve the R1.2 trillion investment target, South Africa must prioritize increased investment in infrastructure, enhance policy coordination and governance, and engage in public-private partnerships. By addressing these issues, South Africa can restore investor confidence, stimulate economic growth, and create a sustainable and resilient infrastructure system for the future.
