In his 2025 Budget Speech, South Africa’s Finance Minister, Enoch Godongwana, identified infrastructure as a key pillar for the country’s growth strategy. He announced that over R1 trillion will be allocated to infrastructure spending over the next three years, emphasising the need for greater private sector participation and alternative financing solutions to accelerate delivery and improve effectiveness.

During a thought-provoking panel discussion at the recent Southern African Venture Capital and Private Equity Association (SAVCA) Private Equity (PE) Conference, industry experts explored the current state of infrastructure in South Africa. The panel, moderated by Lungile Mashele, Sector Specialist in Energy and Infrastructure at the Public Investment Corporation (PIC), discussed issues ranging from demand and supply imbalances, funding gaps and project challenges, to suitable funding models and collaboration structures for public and private sector investors.

Challenges facing project development

There are several challenges that South Africa faces from an infrastructure development and investment perspective, notes Mameetse Masemola, Acting Head and Deputy Director-General of Infrastructure Investment Planning and Oversight at Infrastructure South Africa (ISA).

“Key to this is the lack of focus and allocation of resources towards project preparation and planning, which results in an inadequate investment-grade infrastructure project pipeline.”

ISA plays a crucial role in assisting project owners – ranging from state-owned enterprises to water and energy authorities – with preparation and deal packaging to make projects viable for investment.

“For National Treasury to consider these projects, baseline information needs to be in place, and we work closely with sponsors to ensure that happens,” Masemola added.

Budget constraints are another major challenge that Masemola raises. “While the ministry allocates capital over a three-year cycle, we have a R1.6 trillion infrastructure investment gap – this is the gap between the current project pipeline and the funding available.”

Innovative financing models for infrastructure

Blended finance has emerged as a critical tool in making “un-bankable” projects more attractive to investors. Refilwe Mokanse, an Infrastructure Finance Specialist at Infrastructure Finance, highlighted that their organisation currently has 26 blended finance projects in different stages of development.

“Some are in advanced stages, going through due diligence, while for others, we are still engaging with the market to gauge interest,” Mokanse said.

“Our mandate is to identify projects that are initially un-bankable, assess their feasibility, and structure them in a way that reduces risk and attracts financing.”

Expanding on the blended finance approach, Mokanse explained, “A blended finance model includes various sources of funding, such as grant funding from the government and viability capital from the Infrastructure Fund, which can take the form of a grant, a concessionary loan, equity or debt, depending on what is required to de-risk a particular project.

“The aim is to create an environment where the private sector can step in with the relevant funding. This could take the form of commercial finance, development finance institution (DFI) funding, multilateral development finance, and ideally, increased engagement with institutional investors to secure their participation in these projects,” he added.

To this point, public-private partnerships (PPPs) were identified as a critical mechanism for infrastructure investment, “PPPs create a strong opportunity for asset managers to provide funding either through the project SPVs or companies responding to the bids,” Mokanse noted. “We look at successful global models and assess their applicability to the South African market.”

In the energy sector, decentralisation has been a growing trend in recent years. From an investor’s perspective, Mosa Molebatsi, Senior Investment Associate at Mergence Investment Managers, explained that there are two buckets of projects in this regard.

“On one end, larger off-takers like a mining company or manufacturing plant are looking to set up decentralised energy solutions to meet their energy demands off-grid. On the other hand, for the smaller portfolio players, we typically invest in aggregators that are driving projects in the sub-1MW space.”

The latter model works as there is competition from international developers. The 3rd model, which is within the Residential space, has been lagging as the risk – return dynamics here are quite different.

Water infrastructure: A critical risk to business continuity

While energy has been a primary focus for South Africa, panellists stressed that water infrastructure is an equally pressing concern.

“For the longest time, we’ve seen significant attention given to electricity, but water has often been neglected, especially at a corporate and industrial level,” said Mike Smith, Principal at The Water Fund and Director at Talbot.

“This needs to change at a government, municipal and corporate level, because water is the single biggest risk to business continuity in South Africa. Without water, industry simply stops.”

The biggest funding gap, according to Smith, exists at the Critical National Infrastructure (CNI) level.

“The CNI projects in the water space are extremely complex. Consequently, the transaction and due diligence costs that are required for those projects are difficult and expensive. This is compounded by the fact that at a CNI level, the projects are relatively small – often less than R100 million. We believe that project finance is the best approach here as it puts the vested interests and risks in the right hands – those of water service providers.”

Collaboration is key

Despite their varying viewpoints, panellists were all in agreement that greater collaboration between the public and private sectors is crucial for scaling up infrastructure investment.

“We need to ensure projects get the buy-in they need from both sides to be bankable,” Masemola concluded.