Rob Morson, partner at specialist law firm Pinsent Masons, shares his team’s reflections on South Africa’s 2023 Budget announcement.
Delivering South Africa’s latest budget on Wednesday 22 February, Finance Minister Enoch Godongwana described infrastructure investment as “the foundation for inclusive and sustainable growth”.
The South African government has allocated an estimated R903 billion to infrastructure over the coming three years, with a clear focus on economic and network infrastructure.
Key takeaways
The priority areas for investment are:
- Transport and logistics (R351.1 billion)
- Energy (R157 billion – not including debt relief for Eskom, South Africa’s struggling power utility)
- Water and sanitation (R132 billion)
The fiscal allocation is a significant increase on the medium-term estimate presented last year and will hopefully turn around steadily declining investment in the country.
Public investment in infrastructure in South Africa fell as low as 3.8% of GDP in 2021.
The treasury aims to raise this figure to 10% by 2030 (totalling 30% when including private investment).
Leveraging private investment
Several initiatives aim to leverage private sector resources in public infrastructure delivery.
The Budget Review 2023 contains a comprehensive project pipeline list. This could present a steady—if modest—stream of work in the construction sector.
Water
Several such ‘shovel-ready’ projects are in the bulk water sector. Given that South Africa is one of the world’s most water-scarce nations, the R132 billion allocation is encouraging to see.
It does seem that significant allocations to the water sector will be the norm in future years. This could present a ready opportunity for private investment, but whether the government can address the extensive investment backlog remains to be seen.
Energy
After years of rolling blackouts in South Africa, the budget emphasises an intensifying national need for sustainable clean energy.
Tax measures in the budget encourage businesses and individuals to invest in renewable energy and increase electricity generation.
Incentives attracted criticism for being ‘elitist’, however, with the average solar panel being outside many households’ budgets.
Critics also said the measures were too short-term, with individuals and firms still recovering from Covid unlikely to be able to take advantage in time.
Nevertheless, these measures are a welcome indication of the government’s stance on renewable energy.
The government’s willingness to engage with the private sector as a catalyst to revive the South African economy is also encouraging—although details on these relationships remain scarce.
Background: infrastructure policy in South Africa
The need for decisive infrastructure policy in South Africa cannot be understated.
In 2022, the South African Institution of Civil Engineers (SAICE) described the condition of South Africa’s infrastructure as “below satisfactory and deteriorating”.
The worsening energy crisis makes this need even more acute.
South Africa experienced over 230 days of “loadshedding” (rolling blackouts) in 2022, compared to just over 70 days in 2021.
On 9 February, President Cyril Ramaphosa declared the crisis a ‘national state of disaster’.
These crippling power shortages pose an existential threat to the economy and economic development, with around R20 billion being lost per month.
The fiscal measures discussed will hopefully provide the stimulus needed.
But closer inspection shows an estimated decrease in infrastructure spend for both the 2022-23 and 2023-24 budget years, with only the third year (2024-25) seeing a boost.
These adjustments seem to be the result of the government attempting to juggle several competing factors.
A balancing act: short-term constraints vs. longer-term growth
The 2023-24 budget represents the first primary budget surplus since 2008-9 and a six-year low on overall deficit. Debt-to-GDP is also expected to stabilise by 2025-26.
Given the impacts of the pandemic and rising inflation, these are admirable achievements, albeit ones that contribute to a constrained budget in the short term.
On the other hand, economic resilience and better-than-expected growth in the latter part of 2022 have boosted private investment in infrastructure.
This has allowed for a more optimistic estimate across the medium term.
Despite these reasons for positivity, opinions on the minister’s budget remain split.
Among polarising factors are the controversial onboarding of Eskom’s debt and the scarcity of detailed plans to tackle organised crime in the South Africa’s construction sector.
Ongoing challenges
In general, this budget represents a continuation of the investment and reform programme that President Ramaphosa’s government has championed since 2019.
There were notable omissions, however—not least the lack of elaboration on the R1.5 billion renewable technology investment in the Just Energy Transition.
Energy outlook uncertain
Energy remains an area of policy inconsistency.
The decision to bail out Eskom’s debt is a departure from previous commitments to end the largess of state-owned enterprises.
It will divert more government funding from other causes and could indicate that the government is struggling to find an energy solution that will ‘stick’.
The budget also failed to provide concrete measures to tackle the ongoing energy crisis.
Of the five measures President Ramaphosa outlined in his July 2022 ‘energy action plan’, only one—rooftop solar—received meaningful attention.
Battling backlog
The municipal infrastructure backlog will also remain an issue while most non-metropolitan municipalities lack either the means to implement projects themselves, or the expertise to leverage private partnerships.
In many instances, we’ve seen willingness from the private sector. But institutional issues and a lack of bankability has dampened the enthusiasm for social infrastructure projects.
Systemic issues continue
Finally, perhaps the major perceived miss of the budget is its failure to directly tackle the recovery of the construction sector.
While the minister acknowledged various factors—low confidence and organised crime in particular—tangible mechanisms for addressing these are thin.
Despite the large allocation to infrastructure spending, if the government can’t address these systemic issues, the construction sector in South Africa will continue to suffer.
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