Municipal infrastructure in South Africa is under significant strain as the country continues to face the dual challenge of ageing systems and a growing population. This has left local governments grappling with essential service delivery, particularly in water, energy, and sanitation. Although the outlook is mixed, there are pockets of opportunity for investors willing to navigate the complexities.
South Africa’s urban centres, which remain critical drivers of economic activity, have also been adversely impacted, making the need to restore and expand municipal infrastructure ever more urgent. The need to invest in municipal infrastructure development has, therefore, become increasingly evident, with the national government calling for greater private participation to help remedy the situation.
Current state of municipal infrastructure
South Africa’s municipalities form the backbone of essential public services, yet a significant part of local government 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 to basic service delivery, has discouraged domestic and international investment, compounding an already difficult situation.
The complex landscape, however, brings with it 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 because of growing demand. In practical terms, the city’s approach means that its infrastructure projects, such as the MyCiTi bus rapid transit system and water resilience initiatives, operate under a financially sustainable model that improves their attractiveness for 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 was met with strong investor demand and raised funding specifically earmarked for climate resilient infrastructure projects. For investors, opportunities such as Cape Town’s green bond provides commercial returns with the added appeal of contributing to environmental sustainability.
National-level efforts to support municipal infrastructure
Although the national municipal landscape continues to face challenges, headway is being made. The government has been proactive in working with municipalities to turn things around. Programmes such as 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 R100bn commitment over 10 years, is designed to encourage private sector investment in public infrastructure projects. The Municipal Infrastructure Support Agent (MISA) also provides technical assistance, but widespread implementation challenges persist.
For many municipalities, issues such as governance instability and low economic growth, which translates into lower revenue generation, still pose significant barriers. According to the latest National Treasury report, although municipalities on aggregate assume a collection rate of 83% of their budgeted revenue, they only collect 63%, which is below Treasury’s norm of 95% and insufficient to cover operational costs, let alone finance capital expenditure.
Mitigating risks through public-private partnerships
Public-private partnerships (PPPs) represent a viable option for bridging the financing gap. The adoption of a structured PPP model that supports collaboration with the private sector will help to 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, Treasury plans to apply the lessons and framework across different sectors, including water, will help to foster greater private investments.
As stated in the 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.
Performance-based contracts for the non-revenue water programme are being fast-tracked in a number of metros, including eThekwini, Tshwane, and Nelson Mandela Bay.
One example of private sector involvement in 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 both economic and social returns.
For example, in addition to direct municipal funding, the fund has invested in renewable energy projects, such as the De Aar Wind Project, which aims to supplement grid capacity and reduce reliance on coal-based power. Municipalities have previously flagged how revenue generated from the sale of electricity has been put at risk due to loadshedding. Therefore, investments such as the De Aar Wind Project directly contribute to energy security, benefiting municipalities by improving grid stability and providing a more reliable electricity supply to residents while at the same time protecting municipal revenues. Additionally, the underlying infrastructure projects align well with investor priorities for environmental, social, and governance (ESG) impact, making it a compelling option for those looking to make responsible investments in South Africa’s infrastructure.
Challenges and strategic opportunities
South African municipal infrastructure presents a mixed landscape. Although challenges are widespread, the country’s infrastructure needs are undeniable. Urban centres drive a significant portion of South Africa’s GDP, underscoring the economic importance of a functional municipal infrastructure network. Municipalities remain essential for social and economic stability, and national efforts, including those under the recently announced phase two of Operational Vulindlela, continue to address the governance and financial challenges impeding progress.
For investors willing to engage, South African municipal infrastructure offers opportunities to contribute to vital public services with the potential for long-term sustainable returns. The active involvement of asset managers across the spectrum of investable infrastructure opportunities illustrates how effective financial management and strong partnerships can create conditions conducive to private investment, and as national frameworks evolve, the pipeline of investable projects across municipalities will naturally increase.
For those seeking high-impact investments aligned with sustainable growth, South Africa’s infrastructure sector offers a path forward.
Alastair Herbertson is an infrastructure specialist within the Emerging Market Alternative Credit team at Ninety One and Reabetswe Kungwane is an investment specialist at the same company.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute financial planning or investment advice that is appropriate to every individual’s needs and circumstances.
