Infrastructure impact to be muted until supportive conditions created for private investment

8th March 2013

By: Terence Creamer

Creamer Media Editor

  

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Constant assurances from senior govern- ment leaders, including President Jacob Zuma, that public-sector infrastructure spending is gaining momentum have done little to dispel the notion that the multibillion-rand investment drive is failing – as with so much else in South Africa – on implementation.

Notwithstanding a tedious listing of progress on a range of megaproject developments during his State of the Nation address, opposition parties and business leaders alike remained unimpressed by Zuma’s infrastructure pledges and the pace of deployment.

Detailed follow-up presentations by Public Enterprises Minister Malusi Gigaba and Economic Development Minister Ebrahim Patel, who both outlined delivery and local-isation progress on a range of water, transport and energy projects, also fell flat.

In his presentation, Gigaba was unable to disguise his frustration at the opposition’s ‘where-is-the-delivery’ mantra, saying: “When you implement the vision, they turn around again and ask: “Why is there no new vision?”

Even official statistics showing a rising expenditure trend have done little to build credibility.

For instance, the South African Reserve Bank’s (SARB’s) December Quarterly Bulletin speaks of an acceleration of real fixed capital expenditure as the pace of capital spending by public corporations such as Eskom and Transnet picked up.

“General government maintained a brisk pace of increase in capital expenditure, with provincial governments stepping up spending on roadworks and local government focusing on water infrastructure, the upgrading of informal settlements and the provision of social housing,” the bank added.

By contrast, private enterprises increased their capital expenditure at a “comparatively slow pace, consistent with the surplus capacity experienced in many parts of the economy”.

Therein lies the rub.

Economists concur that there has been a rise in investment as a percentage of gross domestic product, and expect the trend to continue at a yearly rate of between 5% and 6%. But, while gross fixed-capital formation by the public sector expanded at an annual rate of 11% during the first nine months of 2012, weak business confidence has resulted in a sideways movement in private investment.

Muted Impact
The SARB shows that quarterly private fixed capital formation peaked at over R260-billion in 2008, but has battled to recover from the sharp decline to around R220-billion experienced during the peak of the 2009 recession.

In other words, the effect of the rise in public investments has been muted, because private investment, which typically provides the baseload demand for suppliers and contractors, is anaemic.

In addition, in a context of weak domestic and international growth, hostile industrial relations and scepticism over the public sector’s delivery capacity, few are anticipating a major increase in private investment rates during 2013.

It is also arguably fair to say that the killing of security guards and miners at Marikana in August last year, coupled with violent strike action in the transport and agricultural sectors, hints of yet more taxes on already- underperforming resources companies, surging administered prices and a seeming inability to rein in government corruption have further undermined investor confidence and with it the future pipeline of private- sector projects.

ArcelorMittal South Africa CEO Nonkululeko Nyembezi-Heita recently offered insight into just how limited the effect of higher public investment has been on the steel group – a company that is highly exposed to the construction sector, as well as key private fixed investment sectors, such as mining.

Domestic steel consumption, Nyembezi-Heita reports, slumped to 4.9-million tons last year, with the construction sector comprising 2.8-million tons, or only 57% of that demand – the lowest level in ten years.

By contrast, in 2008, when miners were still investing ahead of the global financial crisis and South Africa was preparing for the 2010 FIFA World Cup, overall steel consumption rose to 5.9-million tons, with the construction sector accounting for 4-million tons, or 67% of that overall demand.

“The building and construction industry remains our largest customer and when this sector experiences challenging demand conditions, that effect comes straight through to us,” she lamented.

A similar message has been offered by various construction companies, which are not overly bullish about their near-term prospects, despite agreeing that the worst of the recent downturn is over.

For instance, Group Five CEO Mike Upton told investors recently that conditions in the South African market remained weak, despite a “maturing” of government’s infrastructure plans. He added that the funding and timing of some public-sector projects remained uncertain, while there was “very little mining and industrial activity”.

Then there are the areas of the economy that are being heavily constrained by material infrastructure gaps, primarily those arising from South Africa’s serious misjudgment over investments into new power generation and transmission capacity.

It is no longer simply gaining access to a new connection that worries private investors, but whether South Africa’s fast-rising electricity prices will erode the competitiveness of the greenfield or brownfield investment under consideration.

On top of that, Eskom’s programme of buying back power from smelters, mostly in the ferrochrome sector, may be in line with the goal of ‘keeping the lights on’, but is at odds with the country aspiration to increase mineral beneficiation and foreign-exchange-earning exports.

Private Acceptance
The net effect is that government is fighting a losing battle in trying to convince citizens that the infrastructure programme is having positive economic spin-offs. And it will continue to do so unless and until these investments are supported by private fixed investment projects.

There are signs, however, that government, which has hitherto emphasised the need for a greater economic role for the public sector, is slowly coming around to this reality.

In his February 14 address, Zuma acknowledged that “certain obstacles” to business would have to be removed to meet the National Development Plan’s (NDP’s) goal of creating 11-million jobs by 2030 – a goal premised on a threefold increase in the size of the economy.

“We will engage business, labour and other social partners in pursuit of solutions. No single force acting individually can achieve the objectives we have set for ourselves,” Zuma averred.

Finance Minister Pravin Gordhan con-tinued the theme during his 2013 Budget speech, while still emphasising the vital role that the public infrastructure programme has to play in laying the foundations for growth, job creation and development.

Besides stressing the importance of the infrastructure programme, on which a further R827-billion would be invested in the coming three years, he emphasised the role of the private sector, which had shown investment reticence since the 2009 recession.

Government “recognised” the key role that private companies play in the economy and Gordhan highlighted his engagements with several business leaders on the country’s investment and development challenges in the lead-up to the Budget.

He even elaborated on a range of private- sector-led investment plans in sectors as diverse as mining, hospitality, telecom- munications, transport and retail, which he argued, signalled “growing confidence in the business outlook, despite difficult conditions”.

On public infrastructure investment, the National Development Plan 2030 position that “South Africa needs to invest in a strong network of economic infrastructure designed to support the country’s medium- and long-term economic and social objectives” was underscored.

The fiscus, Gordhan reported, had allocated nearly R430-billion for schools, hospitals, clinics, dams, water and electricity distri- bution, the electrification of one-million homes and sanitation schemes, as well as for building more courtrooms and prisons and improving bus, commuter rail and road links. Most of this spending would fall under provinces and municipalities.

The R400-billion balance of the nearly R830-billion earmarked for capital projects would be invested by Eskom, Transnet and other State-owned companies, financed through own resources, additional borrowings and supported by National Treasury guarantees.

Gordhan also acknowledged that parts of government were struggling to spend their full infrastructure budgets and that government’s ability to spend was also not improving “fast enough”.

Corruption Crackdown
Also addressed was another key NDP issue that is worrying the private sector: ensuring greater government efficiencies through a more professional public service, while also combating corruption.

Besides announcing plans to cut spending by R10.4-billion over the coming three years in light of increased budget deficits and a weak growth and revenue-collection outlook, Gordhan said the drive to increase value for money remained an ongoing endeavour.

“Let me be frank. This is a difficult task with too many points of resistance,” he lamented.

Procurement transactions were taking place at too many localities and contracts were short term, resulting in poor visibility. “While our ablest civil servants have had great difficulty in optimising procurement, it has yielded rich pickings for those who seek to exploit it,” he said, adding that there were also too many people who had a stake in maintaining the current system.

The solutions that had been pursued to date had also not matched the size and complexity of the challenge and would require a special effort “from all of us in government, assisted by people in business and broader society”.

But Gordhan said he was determined to make progress, highlighting, too, that the process for establishing and staffing a chief procurement office in the National Treasury had begun and the identity of the chief procurement officer would be released soon.

A project team seconded from State agencies and the private sector had identified four main streams of work, namely immediate remedial actions, improving the current system, standardising the procurement of critical items across all government entities and the long-term modernisation of the entire system.

Gordhan also backed Public Service and Administration Minister Lindiwe Sisulu’s call for curbs on government officials doing business with government. “I will complement her initiative by aligning the Public Finance Management Act with the provisions of the Public Service Act,” he promised.

Gordhan’s message has been widely praised. But South Africans have also become increasingly jaded by the gap that seems to persist between sensible statements from the National Treasury and the reality of poor delivery from most departments.

Visible delivery on the infrastructure programme will only go so far in closing that credibility gap. South Africa now also needs to make real space for the private sector, whose capital, skills, innovation and energy are going to be critical to dealing with the triple curse of poverty, unemployment and inequality.

Arguably, Gordhan summed up the challenge well when he said that some of the foundations for faster growth were in place, including strong capital investment by the public sector.

“But this is not enough. Much more is needed. In particular, a significant increase in private-sector investment and competitiveness is needed in the wider economy: agriculture, manufacturing, tourism, communications – every sector has to play its part in expanding trade, investment and job creation.”

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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