South Africa's $405 million infrastructure deal puts SMEs in the supply chain

South Africa has signed $405 million in financing with the New Development Bank (NDB) for two infrastructure projects in Limpopo and North West. One loan of $200 million will help finance the Limpopo Central Hospital in Polokwane, while another $205 million will go towards the Magalies Bulk Water Supply Scheme. Neither loan is going directly to SMEs. The SME angle comes from what happens around the projects - the contractors that win the work, the companies they buy from and the services needed to build and operate the facilities. The agreements were signed on 28 August.

A 488-bed hospital means a long list of suppliers

The Limpopo project involves a 488-bed tertiary hospital. A project of this size will require far more than the company responsible for putting up the building. There are materials to supply, equipment to move, electrical and plumbing work to complete, sites to secure and a range of other services needed during construction. Some of that work will be handled by the main contractor. Some will be passed down to subcontractors and suppliers. That is where smaller businesses can potentially get involved. The size of the overall loan does not tell us how much will go to SMEs, however. That will depend on the contracts and procurement arrangements put in place for the project.

Water is a business issue too

The other half of the financing is going into the Magalies Bulk Water Supply Scheme. The project covers Bela-Bela, Modimolle-Mookgophong, Mogalakwena, Moretele, Moses Kotane and Rustenburg across Limpopo and North West. For businesses in these areas, the project matters for a different reason. Water interruptions can quickly become a business problem. A restaurant may have to close or reduce its service. A manufacturer may have to slow production. A guesthouse may need to find another source of water. Larger companies can put money into storage and backup systems. Smaller businesses often have fewer options. If the water project improves supply in the areas it covers, some of those businesses could have fewer disruptions. That benefit will only be clear once the infrastructure is operating, though.

Local companies need access to the work

There is a difference between building infrastructure in a province and using businesses from that province to build it. The first puts a project in the local economy. The second gives local companies a direct share of the spending. For SMEs, the second one matters. A small construction company may not be able to compete for the main hospital contract, but it could take on a smaller package of work. A local supplier could provide materials. A transport company could move equipment. A catering company could supply workers on site. Whether those businesses get the work will depend on the procurement decisions made by the companies delivering the projects.

There is also a longer-term opportunity

The hospital could create demand for local service providers after construction. A 488-bed facility needs cleaning, catering, security, maintenance, waste collection, transport and other services. Those contracts may not all go to SMEs, but they create another potential supply chain around the hospital. The water project is less about contracts after construction and more about the cost of doing business. If water supply becomes more reliable, businesses that currently spend money dealing with shortages may be able to reduce some of those costs. For a small business, avoiding even a few interruptions can matter.

The contracts will tell the real SME story

The NDB financing gives the two projects the money they need to move ahead. It does not, by itself, tell us how much business will go to SMEs. That will become clearer when the main contracts are awarded and the procurement arrangements are known. For now, there are two separate questions for small businesses. And once they are finished, will the new infrastructure make it easier for businesses in those areas to operate? The $405 million answers the first part of the infrastructure question — the projects have financing. The SME impact will depend on what happens after that.