Municipal infrastructure: A complex landscape with emerging opportunities

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. While the outlook for municipal infrastructure remains somewhat mixed, the good news is that there are pockets of opportunity for investors willing to navigate the complexities.

The 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 (AG’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 both 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 due to growing demand. In practical terms, the City’s approach means that its infrastructure projects, like 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 like Cape Town’s green bond provides 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, headway is being made. The National government has been proactive in working with municipalities to turn things around. Programmes like the 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 (MISA) also provides technical assistance, but widespread implementation challenges persist.

For many municipalities, issues like governance instability and low economic growth, which translates to lower revenue generation, still pose significant 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 (PPPs)

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 mitigate financial risks and enhance project efficiency.

The successful implementation of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) has unlocked private sector participation in infrastructure investments. Additionally, National Treasury plans to apply the lessons and framework across different sectors, including water, will help foster greater private investments. As stated in the National Treasury’s Medium-Term Budget Policy Statement (MTBPS) 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 currently being fast-tracked in a number of metros, including eThekwini, Tshwane and Nelson Mandela Bay.

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 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 Projects, which aim 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 load shedding. Therefore, investments like 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.

Conclusion: A market of both challenges and strategic opportunities

South African municipal infrastructure presents a mixed landscape. While 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 like Ninety One 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 & Reabetswe Kungwane, Ninety One.