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Building|Cutting|Industrial|Innovation|Petrochemicals|Ports|Projects|rail|Steel|Sustainable|Infrastructure
building|cutting|industrial|innovation|petrochemicals|ports|projects|rail|steel|sustainable|infrastructure

Opinion: Boosting industrialisation, trade competitiveness requires an alternative to SOEs

16th November 2021

     

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In this opinion article, Nelson Mandela University Infrastructure Development & Engagement Unit associate Bongani Mankewu writes that establishing a sector-focused public-private partnership (PPP) regulatory framework can enable infrastructure roll-out to create value chains and foster private participation.

The Medium Term Budget Policy Statement 2021 appreciates that building a prosperous society requires much higher levels of economic growth, supported by structural reforms, improved State capacity and sustainable public finances. The aim of structural reforms is to boost an economy's competitiveness, growth potential and ability to adjust.

This is consistent with President Cyril Ramaphosa's emphasis: “We are determined not merely to return our economy to where it was before the coronavirus, but to forge a new economy in a new global reality.”

Accordingly, the Economic Reconstruction and Recovery Plan (ERRP) identified eight key areas of priority, including infrastructure roll-out and localisation through industrialisation, as well as directing pension funds through development finance institutions (DFIs), preparing projects for bankability and unlocking funding for high-impact capital projects and long-term infrastructure projects.

Phase two of the recovery plan calls for State-owned enterprises (SOEs) to boost industrialisation and trade competitiveness, with private sector investment to be bolstered by appropriately structured PPPs.

On the contrary, the fiscal framework offers no support to SOEs over the medium term, as they remain a large contingent liability risk.

In addition, the government will not commit to new spending despite temporary revenue windfalls.

In addition to other instruments, SOEs and State-owned development bank the Industrial Development Corporation played a critical role in post-World War Two industrialisation. The Apartheid State introduced various industries, including electricity, rail, ports, telecommunications, steel, petrochemicals and aluminum, primarily through the introduction of SOEs.

In spite of the debilitated state of SOEs, constraining them without offering alternative instruments runs contrary to the ERRP, which seeks to stimulate industrialisation and trade competitiveness. This, therefore, raises concerns about the certainty of these strategic assets and whether they should be controlled by the public or private sector.

However, the ERRP calls for a review of PPP regulations that can foster innovation in infrastructure delivery, thus stimulating industrialisation and trade competitiveness. The preparation of bankable projects requires an impeccable level of independence and robustness. Universities dovetailing with industry bodies are perhaps best placed for the task.

By establishing a sector-focused PPP regulatory framework, it will be possible to structure special purpose vehicles (SPVs), like the Gautrain rapid-rail link, that effectively eliminate political interference, and agency problems when executing these bankable projects.

However, short-term liquidity threatens private investors because of the high leverage of these SPVs, with a debt-to-equity ratio of about 80:20 to be sustained by ex-ante cash flows. According to the ERRP, pension funds through DFIs must guarantee liquidity with a thorough risk allocation.

As a result of these SPVs, the industrialisation and trade competitiveness objectives of the ERRP can be achieved through the creation of value chains that enhance localisation.

Therefore, this might be cutting the Gordian Knot (third way) for the benefit of the noble objectives of the ERRP – stimulating industrialisation and trade competitiveness.

Edited by Creamer Media Reporter

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