Positioning South Africa for economic prosperity

Panel summary:

While economic growth has recovered to pre-pandemic levels, South Africa’s economy remains in a precarious situation. Infrastructure development, through both private and public sector participation, will be key in addressing this significant challenge.

At Ninety One’s inaugural ‘In Perspective Infrastructure Forum 2023, Ninety One Chief Sustainability Officer Nazmeera Moola and Development Bank of Southern Africa (DBSA) Chief Executive Officer Boitumelo Mosako, provided an overview of the infrastructure space; as well as a specific view on how the DBSA is approaching some of the challenges in the area and the critical role it can play in helping unblock some of these areas.

Here is an edited summary of their conversation.

Electricity generation

Boitumelo Mosako (BM): We are dealing with loadshedding at its worst. Between small business and big business, everybody is struggling. We have a plan around getting renewables onto the grid and creating additional capacity. However, there are challenges around the grid taking on that additional capacity. While we have solutions to these challenges, South Africa’s current inadequate infrastructure does not enable the implementation of those solutions.

We are seeing a lot of embedded generation transactions coming through the DBSA. We are engaging through the DBSA’s Infrastructure Fund within our Project Preparation Division, around what we need to do to strengthen the transmission grid and what sort of financial instruments we would require to enable that. However, because of the inequality we have in our country, ideally electricity transmission should remain with the government, ensuring that everybody has equal access.

The speed with which we engage with the current Minister of Electricity to come up with proposals on how we can support him to start seeing progress in this space will be critical.

Nazmeera Moola (NM): In terms of generation, we are seeing a whole lot of new projects come through the Renewable Independent Power Producer Programme (REIPPP) but much more coming from the companies themselves. We are starting to see self-build or the conclusion of contracts between private sector offtake and renewable energy specialists and, as that comes to market and is financed, there is a significant role for asset owners and asset managers to play.

Transmission is increasingly becoming the bottleneck. We look at the Northern Cape, which has some of the best renewable energy resources in the world. The combination of wind and solar in the province is a very strong base from which to build but the grid connection from the Northern Cape to Mpumalanga was built when power was generated in Mpumalanga and sent out to the Northern Cape. It was never built to take power from the Northern Cape. While I am very sensitive to the issues of equity and access, we have proven in the toll road space that a build-operate-transfer model can be successful for government. There is an opportunity for us to think about this model on that transmission line.

The good news is that corporate South Africa has come to realise that we need to figure out a plan and take that forward, as has been done in electricity generation.

Transnet challenges and opportunities

NM: We have electricity generation challenges on the one hand, and then challenges facing the commodities sector on the other. In particular, getting these commodities out of the country. We had the fourth quarter GDP numbers for 2022 released recently, which showed an unexpected contraction in exports. This is not surprising once you think about the issues we have seen on the coal rail line. Last year we exported only 50 million tons when that line has a capacity of 90 million tons.

Transnet has experienced many challenges over the last few years. Initially, it was corruption but now we seem to have a situation where management is unable to run the entity, which we are seeing manifest in the performance of the coal and iron ore lines. Last year, the Chamber of Mines wrote a letter to the board where they made it very clear that the performance was woefully inadequate and deteriorating fast.

On the positive side, there is good progress in turning this situation around. Transnet has developed a 20-year operate-transfer proposal for a private sector participation agreement on the goods lines and goods terminals.

BM: The issues at Transnet have now been externalised because trade is not happening as expected. The inadequacy we see in road and rail, and the challenges we have with loadshedding and transmission, require urgency in terms of private sector and public sector collaboration to provide solutions. The message is clear – privatisation is on the cards because the government cannot do it alone.

Progress worth noting includes the collaboration between Transnet and the private sector in terms of enhancing security along the rail line. They have also released an RFP around the privatisation of some of the lines . Interestingly, the DBSA is looking at project preparation with the Industrial Development Corporation in terms of assisting them in supporting the automotive Original Equipment Manufacturer (OEMs), to enable them to transport cars out of Pretoria to Gqeberha.

Water infrastructure

BM: Water is another looming challenge. And if we don’t address it now, we are going to find ourselves in the same situation as loadshedding, and the same situation in which Transnet finds itself. The DBSA is looking to address this challenge in a number of ways. We have a programme within our Project Preparation Division that targets water projects. Within the Infrastructure Fund, there are water projects that have been approved through the government Budget Facility for Infrastructure (BFI) process. The Infrastructure Fund will use those funds to blend for participation from institutional investors.

The DBSA is working in collaboration with ASISA where we are creating a market-making platform where ASISA participants will have the opportunity to participate in various sectors that will contribute to South Africa’s economic growth. As part of this, we are looking at the water value chain, how it works and which instruments we use at which point. We will then assess how the private sector can play a role in building water infrastructure.

NM: For a lot of people in Johannesburg, the water challenges became acute at the back end of last year. The private sector is starting to make inroads into addressing this issue. For example, the Lebalelo Project on the Olifants River which entailed the private sector building the water transmission system to serve the local communities and miners in the area. And that seems like exactly where we should be going – projects to the value of R25 billion that will require private sector financing and be privately run with clear KPIs that require them to supply the communities as well as the mines.

Road infrastructure

NM: SANRAL was a very well-functioning institution for a long time but then it just disappeared for a while. Now they have a CEO that again seems very front-footed, investing in the space.

BM: Another challenge with infrastructure is maintenance. This is not necessarily a traditional service that is provided by a development finance institution but, because of the need, we decided to form this division so that we then play along the value chain. This allows us to make sure that the infrastructure we build, and the infrastructure that has been built already, is maintained. In terms of SANRAL, we will be seeing a lot more happening in that space, so I have high expectations there.

Progress on road infrastructure appears to be addressing national roads. Municipalities remain a challenge. One of the things that we are doing as DBSA is to support municipalities with planning, project preparation, and infrastructure implementation.

Closing remarks

NM: We are starting to see a pipeline in specific sectors, driven mainly by the private sector, and, therefore, those three dimensions of risk, return and impact are our critical focus as well. We are increasingly seeing a desire by asset owners to participate and allocate more to this space. We need to figure out how to make that possible.