With the economy slowing, South Africa must pay closer attention to how it finances infrastructure such as nuclear power stations, new dams, rail links and roads. Drawing in the private sector will be key. The National Development Plan (NDP) points out that rising rates of investment will be achieved initially through state spending on infrastructure, largely aimed at crowding in private sector investment. The government will have to run a tight ship if it wants to create viable infrastructure projects that will help grow the country.

Infrastructure projects

In May 2015 former President Jacob Zuma said the Presidential Infrastructure Coordinating Commission (PICC) – which is tasked with overseeing the coordination of projects – was monitoring more than 200 project clusters where construction was taking place. They employ about 220 000 workers.

These and other energy build projects are expected to add almost 11 000MW or an additional 25% of power to the constrained current electricity grid of about 43 500MW. Private sector investment will add a further 16% (including 1 500MW which is already feeding the grid). With the country having had a power crisis that was expected to shave about 10% off growth (according to estimates by economist Dawie Roodt), the energy projects were desperately needed.

Other infrastructure projects under way include the building or expansion of six dams over the next decade, road and port upgrades, new logistics hubs, new bus routes in large cities, the building of new clinics and schools, the rollout of broadband and the Square Kilometre Array (SKA) project.

South Africa’s spending on infrastructure has increased markedly since 2000, from under R50-billion a year to over R250-billion a year by 2013 as revealed by expenditure estimates drawn from The National Treasury’s Budget reviews between 2003 and 2013.

Government spend on infrastructure

According to the National Treasury, between the 2009/10 and 2013/14 financial years the public sector spent just over R1-trillion on infrastructure and will spend a further R813-billion over the next three years.

As a share of gross domestic product (GDP), public sector spending on economic infrastructure such as roads, bridges, dams, electricity and pipelines is now at its highest level in 25 years, reveals this year’s Budget Review. Over the four years from 2014/15 to 2017/18 this will amount to 6.2% of GDP, slightly down from 6.7% of GDP over the five years from 2009/10 to 2013/14, notes political analyst JP Landman.

He points to data by the McKinsey Institute which reveals that the average spending on infrastructure for developing countries varies between 2 and 4%. In China it amounts to 8.5% of GDP. Compare this to Brazil, where public investment in infrastructure came in at US$44-billion or 2.4% of GDP last year before its present economic crisis hit, according to consulting firm Inter.B. Brazil’s plan to concession US$65-billion in new infrastructure projects over the next two years, announced in June, will notch this up this to just 3.5% of GDP, according to estimates by the Financial Times.

South Africa’s spending on infrastructure is also becoming more effective, with the Financial and Fiscal Commission noting in June that spending performance had improved notably since 2010.

For instance, state-owned enterprises improved infrastructure spending markedly, from 60% of budgeted expenditure in 2010/11 to 98% in 2013/14.

The government is also taking other measures to improve efficiency, including the use of an incentive-based funding approach to promote more efficient delivery of infrastructure for schools and health facilities and the establishment of a unit to oversee school maintenance.

The Infrastructure Development Act, signed into law in 2014 by President Zuma, also aims to strengthen the capacity of government to roll out infrastructure. Among other things, it sets time frames for the approval of regulatory decisions affecting infrastructure projects and allows the PICC to expropriate land that is required, subject to the Constitution and relevant legislation.

However, investment in infrastructure is now beginning to slow. The three-year projection of spending on infrastructure had to be revised down by R34.2-billion, to R813-billion in the National Treasury’s 2014 forecast, mainly after Eskom and Transnet had to trim capital spending plans because of lower commodity prices and slower global growth or with projects nearing completion.

Stanlib chief economist, Kevin Lings, believes the government should invest in infrastructure in a way that will raise the confidence of the private sector to begin investing itself. Private investment, he says, is in a recession which he believes could last for some time. However, the government can’t sit and wait for the private sector to begin investing – the state has to take a leap of faith in order to lift business confidence. But rather than rolling out mega projects which take years to complete, the government should undertake a series of easy-to-do projects such as repairing of potholes or upgrading of public transport.

He says that while the country’s electricity supply remains a major constraint on investment and is expected to continue to do so for the next two years, the government should still go ahead with rolling out infrastructure projects, so that they will be ready when the energy crisis ends.

The government would then have to make difficult choices because it can’t build everything it needs. Given the choice from its long list of strategic infrastructure projects covering 18 areas, the country should invest in economic infrastructure, above social. This, he says, is because a rail or road link could do more than hospitals or schools, to catalyse private-sector investment.

Government should work closely with the private sector

Added to this, the government should work more closely with the private sector to address those issues that businesses say are holding them back from investing.

According to Nedbank chief economist Dennis Dykes, a big problem is that the public sector wants to go it alone in investing in infrastructure, whereas the funding and experience is in the private sector.

Dykes says the government’s main drive should be to draw in the private sector to invest in infrastructure by removing as many impediments to private investment as possible – such as fixing the electricity crisis and relaxing labour laws.

The government, he reckons, is placing too many requirements on its state-owned enterprises. He singles out the case of Eskom which he says has to meet requirements such as skills training, BEE and others, adding that, in the end, “the last requirement is getting electricity.”

He says the expectation that the country can create the skills it needs by using infrastructure projects to carry out on-the-job training on a wide scale, such as at Medupi, is not sustainable. He believes instead that training should be carried out gradually and describes the government’s plan (contained in the Medium-Term Strategic Framework 2014 to 2019) to procure at least 75% of its goods and services from local producers as an “extraordinary bad idea.”

While he concedes that it could work in certain sectors, he says to have a blanket target across all sectors would be wrong, as it would lead to higher input costs and lower the country’s competitiveness. He points to the 60% local procurement requirement on Medupi, which he says has resulted in delays and cost escalations. In addition, using local production to create an industry in South Africa, he believes, will only work if the country has an unrrivalled comparative advantage in a respective sector. What would be better, he says, would be to gradually ramp up local input values – as is being done with the procurement of locomotives by Transnet.

Some might say that with Africa’s vamping up of infrastructure, nurturing a local rail industry might be of strategic importance for South Africa. However, Dykes says that there’s no guarantee that because the country is in Africa that other countries on the continent will buy from South Africa. Key will be to ensure that the country is sufficiently competitive in manufacturing train sets, particularly with South Africa’s skills challenges.

Electricity challenges

When it comes to addressing the country’s electricity challenges he believes an independent buyer of electricity could help solve the country’s energy crisis in two to three years and would take the bias away from purchasing decisions, as Eskom presently acts as both the generator and retailer of electricity. The independent power producer (IPP) model currently being used by the government for Eskom to buy electricity from private producers is the way to go, he believes; but some in the government remain unhappy that the private sector had entered the energy sector out of what he calls “false ideological reasons”.

However, previous Energy Minister Tina Joemat-Pettersson told Parliament in June 2015 that the planned procurement of nuclear power stations could be carried out using the IPP model. Despite this, there are increasing concerns that the government’s plan to spend up to R1-trillion on six or eight nuclear power stations will prove too costly for the country. Other critics say that wind and solar are safer and cleaner forms of energy.

Costs and the overruns

In February 2015 Anton Eberhard at the University of Cape Town’s Energy Research Centre warned that international experience showed that nuclear projects are prone to cost and time overruns. Modelling undertaken in 2013 by the Centre revealed that South Africa could secure more energy without investing in nuclear power. In addition, other forms of power like solar, liquefied gas and wind would be more affordable. The assumptions are driven mainly by the fall in renewable energy prices in recent years. There are also concerns that with South Africa’s current low economic growth, electricity prices would have to be radically increased to fund nuclear power stations. Then there’s the question over whether some infrastructure investments have been miscalculated.

Take government’s argument that more freight should be shifted from the country’s overstressed roads to rail. The Passenger Rail Agency of SA (PRASA) plans to spend R51-billion on new rolling stock over the next five years, while Transnet is expected to spend an almost equal amount on buying new locomotives. Not all are convinced that big investments in rail is the way to go.

Transport economist, Andrew Marsay, questions whether there are not more economic ways of obtaining similar benefits by putting in place safer and better maintained roads, separate truck roads and better regulated engines on trucks. “Rail for freight only makes good economic sense in (relatively) small countries like ours if it is used to carry multi-millions of tons of bulk materials,” he says.

He points out that Transnet’s container service between Durban and Gauteng, though improving, cannot presently cover its costs with the current tariff and is effectively having to buy market share – and run the risk of creating infrastructure that will cost far more to maintain than it can earn in revenue.

Early in 2015 Luke Jordan, a former private sector development specialist at the World Bank, told a conference in Cape Town that data from an Oxford University research group on projects from around the world reveals that nine out of 10 infrastructure projects experience cost overruns – with overruns of up to 50% or more being common. In addition, he says that once the infrastructure is built, demand forecasts used to scope them are almost always wrong. He said South Africa’s R1-trillion infrastructure programme is a classic example, severely behind schedule and with low disbursement levels. Indeed the cost of building Eskom’s Medupi and Kusile coal-fired power stations has jumped by more than 60% from the initial estimates when construction began in 2007.

Can infrastructure spending transform the economy?

Given the probable high cost overruns, can infrastructure spending transform the economy?

In a 2005 study, statistician Peter Perkins and colleagues, found that public sector investment in economic infrastructure had a positive effect on GDP growth. He found GDP growth to have a positive effect on railway lines, rail coaching stock, rail passengers, cargo handled at ports, SAA passengers and fixed phone lines.

Over the long term, between 1960 and 2009, public sector investment in economic infrastructure averaged about 4% of South Africa’s GDP. Perkins found that the relationship between economic infrastructure and economic growth appears to run in both directions. Economic growth provides both the need for, and the resources to fund, various types of infrastructure. Provided that infrastructure projects take place in response to appropriate cost-benefit analyses, they are more likely to promote GDP growth than hinder it and the failure to provide appropriate infrastructure services may impact it.

“The objective for policy makers across all levels of government must be to plan for and provide economic infrastructure that is not too much, not too little, but just the right amount, just the right type, at just the right time and just the right price. It is a difficult challenge indeed,” noted Perkins.

Who will pick up the tab for the running cost of some of these projects – like new roads, rail, power stations and dams? A mix of taxes and getting users to pay for what they use is the most likely way to ensure that these are properly maintained once completed. The government is trying to instil the principle of user-pay, but at the same time cushioning poorer consumers against major costs – such as exempting minibus taxis and buses in Gauteng’s e-tolls.

In May, then Deputy President Cyril Ramaphosa spoke of a new dispensation for e-tolls, which included a 50% reduction on the monthly cap for tolls, which was welcomed by critics of the tolls, such as Wayne Duvenage of the Urban Tolling Alliance.

This is in line with the NDP’s suggestion that some form of subsidy must be available to ensure that people can access basic services. This can be provided in the form of a grant to households or municipalities to provide free services that meet people’s basic needs. South Africans cannot expect to rely on the government to simply roll out free infrastructure and must not simply assume that any spending on infrastructure is better than none at all.

The best kind of infrastructure will be the kind that doesn’t end up indebting future South Africans and which continues to generate payoffs in the way of jobs and economic growth in decades to come.

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