South Africa plans to rapidly expand a new credit guarantee mechanism to support infrastructure projects valued at billions of dollars, ranging from the expansion of the electricity grid and water supply systems to ports and rail freight transport.
The program—an unprecedented initiative in the country—is designed to mobilize private capital while limiting pressure on the state, which was previously forced to provide sovereign guarantees to public companies involved in scandals. These contingent liabilities currently total around $40 billion.
“It will be a big injection in a very short time,” said Mpho Mokwele, executive director of the group for coverage at the Development Bank of Southern Africa (DBSA), the institution that will oversee the program. “We now have the fiscal space to issue more guarantees and support our infrastructure projects and programs,” he said.
President Cyril Ramaphosa’s government plans to significantly increase investment in infrastructure in Africa’s largest economy, with a budget of $64 billion over the next three fiscal years. The credit guarantee facility is expected to complement this effort. According to Mokwele, it is expected to mobilize up to four times the initial capital of $500 million, with this multiplier increasing as the fund obtains credit ratings and gains acceptance in the market.
The fund has already secured $350 million from the International Bank for Reconstruction and Development, an arm of the World Bank. The DBSA, the International Finance Corporation, the German bank KfW, and the Industrial Development Corporation of South Africa have also expressed interest in contributing, according to Mokwele.
A local commercial bank is also interested, although Mokwele declined to reveal its name before a final agreement is reached. “When one of them enters the process, others tend to follow,” he said, referring to commercial banks. “It’s about sending a positive signal to the market that they are interested in participating and supporting the government’s efforts to unlock infrastructure investments,” he added.
The National Treasury also plans to contribute funds and may hold up to 20% of the mechanism’s capital. South African public companies, including the DBSA, may increase this stake to around 30%.
The planned expansion of the national electricity grid by 14,000 kilometers to harness some of the enormous renewable energy potential in the western half of the country is expected to cost around $26.4 billion alone. Improvements to ports and freight rail lines are expected to require an additional $19.8 billion.
“The first program we are looking at unlocking is the independent transmission program,” Mokwele said, noting: “In fact, it is intended for infrastructure projects and programs more broadly,” adding that it could even include hospitals and student residences.
The Trans-Caledon Tunnel Authority, responsible for some of South Africa’s largest large-scale water supply projects, is also expected to benefit from the initiative. Mokwele also said that the Development Bank of Southern Africa will manage a public sector participation unit to attract investment to the South African logistics sector.
Source: Bloomberg
