Government commits to improving infrastructure spending

24th February 2021 By: Tasneem Bulbulia - Creamer Media Reporter

The 2021 Budget, presented by Finance Minister Tito Mboweni on February 24, outlines that R93.1-billion has been earmarked for economic regulation and infrastructure, from consolidated government expenditure of R2.02-trillion each year over the medium term.

To boost infrastructure spending, government plans to partner with the private sector, multilateral development banks and development finance institutions to augment its skills, expertise and funding.

Mboweni said much of the country's infrastructure needs repair or replacement and that government has committed to a R791.2-billion infrastructure investment drive to this end. 

"We are already partnering with the private sector and other players to roll out infrastructure through initiatives such as the blended finance Infrastructure Fund. However, all these efforts to expand infrastructure will be wasted if the end-user does not pay a cost-reflective tariff for usage," he said. 

Further, the Infrastructure Fund will be used to enhance collaboration and attract private-sector investment.

Government is providing initial support of R18-billion to the fund over the medium-term expenditure framework (MTEF) period.

The Fund has begun work on three projects in student housing, digital infrastructure and water infrastructure.

However, the National Treasury mentions that fiscal resources are not sufficient and that bold reforms are vital to lift private-sector investment, as confidence and investment remain low.

In terms of investment, after contracting by 59.8% in the second quarter, gross fixed-capital formation rebounded by 26.5% in the third quarter, spurred by the resumption of residential, nonresidential and construction works.

Despite this, investment spending remains below the levels that preceded the pandemic, and 2020 will mark the third consecutive year of decline.

Persistent electricity interruptions, low confidence and low capital spending from public corporations are contributing to the expected decline in 2021.

While State-owned companies have attributed recent contractions in investment to Covid-19-related restrictions in the construction sector, long-standing project delays and credit rating downgrades are expected to significantly slow their capital expenditure programmes.

The implementation of outstanding policy initiatives, energy investments and a gradual improvement in confidence is, however, expected to boost investment in 2022 and 2023.

The focus of economic policy, therefore, is to remove structural constraints that obstruct faster growth.

Treasury notes that a key reform will be restructuring the electricity sector and ensuring sufficient supply.

Treasury and the Presidency, through Operation Vulindlela, are working to ensure the rapid rollout of these reforms, including speeding up the release of digital spectrum, expanding the electronic visa system and waivers to support tourism, improving the efficiency and competitiveness of South Africa’s ports and strengthening the monitoring of water quality, National Treasury director-general Dondo Mogajane says.

ECONOMIC DEVELOPMENT FUNCTION
The economic development function promotes faster and sustained inclusive economic growth to address unemployment, poverty and inequality.

As part of the economic development expenditure function, the 2020/21 revised estimate for economic regulation and infrastructure is R86.50-billion, with this divided into water resource and bulk infrastructure, road infrastructure and environmental programmes.

Road infrastructure is the largest spending programme in the economic development function.

Total expenditure is expected to grow at an average yearly growth rate of 8.2% from R86.5-billion in 2020/21 to R109.5-billion in 2023/24.

This is largely owing to underspending on capital expenditure programmes in 2020/21, which is expected to recover over the medium term.

Moreover, capital programmes are protected from budget reductions in line with government’s commitment to investing in infrastructure.

To fund new bulk water projects and maintain raw water infrastructure, spending on national water resource management is expected to grow from R28.6-billion in 2020/21 to R30-billion in 2023/24.

Planned expenditure over the medium term includes Phase 2 of the Lesotho Highlands Water Project and the Mokolo Crocodile Water Augmentation Project.

The Independent Communications Authority of South Africa will start auctioning high-demand spectrum this year. To unlock spectrum currently taken up by broadcasting for high-speed Internet, the Universal Services Access Agency of South Africa will issue vouchers to 2.8-million low-income households by March 31, 2022, to allow analogue televisions to receive digital signals.

INFRASTRUCTURE INVESTMENT
The economic recovery plan announced in October 2020 prioritises infrastructure spending to support the economy in the short term, as well as longer-term reforms to boost the potential growth rate.

Public-sector infrastructure spending over the MTEF period is estimated at R791.2-billion.

State-owned companies continue to be the largest contributor to capital investment, spending a projected R293.7-billion over the next three years.

Provinces are expected to spend R181.9-billion on infrastructure over the same period, while municipalities are forecast to spend R190.8-billion.

Public housing built through the human settlements development grant in provinces is expected to total R41.7-billion.

Spending on economic infrastructure, mainly by State-owned companies, accounts for 78.2% of the medium-term estimate. These funds are used to expand power-generation capacity, upgrade and expand the transport network, and improve sanitation and water services.

Social services infrastructure accounts for 18% of the total, of which health and education account for 5% and 7% respectively.

In 2020/21, the public sector is estimated to spend R226.1-billion on infrastructure, an increase of 20.6% relative to 2019/20.

Treasury noted that government does not have sufficient financial resources to meet the growing infrastructure need, and the economic recovery plan emphasises collaboration with business, labour and civil society to bridge this gap.

The plan includes immediate measures to boost investor confidence and longer-term reforms to promote sustained economic growth, with higher and more effective infrastructure spending central to this plan.

The Infrastructure Fund will play a pivotal role in enhancing collaboration and attracting private-sector investment for infrastructure projects, said Treasury.

INFRASTRUCTURE FUND
The Infrastructure Fund aims to support projects in the energy, water, transport, information and communication technology and social sectors. Government has committed R100-billion to this fund over the next ten years.

As reported in the 2019 Budget Review, the Development Bank of South Africa (DBSA) was allocated R400-million to build capacity and strengthen the preparation and planning of major infrastructure projects. To date, the fund has begun work on three programmes: the Student Housing Infrastructure Programme, South Africa Connect and the Water Infrastructure Programme.

REFORMS AND PPP
Government is transforming its approach to the planning and implementation of capital projects, by bringing in private-sector skills and expertise, while increasing the resources available to fund infrastructure.

Moreover, it is reconfiguring its infrastructure value chain, involving the Department of Public Works and Infrastructure (DPWI), Infrastructure South Africa, the National Treasury and key infrastructure departments and institutions.

Through the Infrastructure Fund, government will collaborate with the private sector.

Treasury is also undertaking budget reforms to improve business confidence and the regulatory environment for public-private partnerships (PPPs) to promote private-sector participation.

To date, 34 PPP projects valued at R89.3-billion have been completed.

However, owing to challenges and declining PPPs, in September 2019, Treasury initiated a review of the PPP regulatory framework, with findings to be presented at a validation workshop in March to stakeholders and PPP practitioners before formally adopting the recommendations.

After the workshop, the approved recommendations will be published Treasury’s website and these recommendations will be implemented in 2021/22.

Covid-19 restrictions in March 2020 significantly affected revenues for several PPP projects. Presently, the effects on risks to the fiscus and contingent liabilities are considered manageable.

Operational PPPs such as the Gautrain Rapid Rail Link project, Sanral toll roads and Chapman’s Peak have lost revenue. Other operational concessions such as the Renewable Energy IPP Programme have not been affected by the pandemic and there is no risk that they may affect the fiscus.

The project terms of IPPs that are in the construction stage have been extended, while PPPs in the planning stage may face delays in reaching financial closure owing to the pandemic.

The 34 PPPs in operation account for 2% of the total public-sector infrastructure expenditure budget, and therefore do not pose significant risks to the fiscus.

Over the medium term, it is anticipated that this share will increase as projects are developed in partnership with the private sector through the Infrastructure Fund.

PENSION FUNDS
The Standing and Select Committees on Finance on the 2020 Revised Fiscal Framework has reiterated the view expressed in its special adjustment budget report that: “Government should engage with all stakeholders, including the private sector on how to unlock domestic investment through impact investments and Regulation 28 of the Pension Funds Act [1956].”

Alongside the 2020 Medium Term Budget Policy Statement, Treasury released an explanatory note on financial sector updates including the review of Regulation 28 – to allow retirement funds to invest more in infrastructure – and, under certain conditions, early access to retirement savings.

Mboweni said Treasury would this week publish draft amendments to Regulation 28 for public comment. The proposed amendments to Regulation 28 seek to make it easier for retirement funds to increase investment in infrastructure. 

The proposed amendments refer to infrastructure investment already permitted through various asset classes and suggest delinking the asset category related to “hedge funds, private equity funds and other assets not referred to in this schedule”. Delinking this asset category will make private equity a separate asset class with a higher investment limit.

PROVINCIAL BREAKDOWN
In terms of revenue and spending by provinces and municipalities, the Infrastructure Delivery Management System is said to have helped provinces to build infrastructure units with qualified staff and institutionalise best practices.

This system will be rolled out to municipalities to build capacity, reduce the reporting burden and standardise the system across government spheres.

This year, Treasury will review provincial infrastructure sector funding policies and propose how grants, incentives and other funding can best be structured to coordinate planning and budgeting, in line with the Cabinet-approved District Development Model.

Government will also this year expand the scope of the municipal infrastructure grant to allow municipalities to use up to 5% of their allocation to develop infrastructure asset management plans, to addresses poor asset management in municipalities.

In 2020, the integrated city development grant was repurposed to assist cities to build internal capacity or obtain technical support to prepare and package key infrastructure projects. This will continue in 2021 and private sector participation will be encouraged in these projects.

Moreover, the eThekwini metropolitan municipality is piloting a programmatic city-wide informal settlement upgrading project.

DPWI PROJECTS
The DPWI is working with the Infrastructure and Investment Office in the Presidency to build a pipeline of infrastructure projects.

Infrastructure South Africa, housed within the DPWI, is primarily responsible for coordinating the development, management and monitoring of a comprehensive infrastructure pipeline, as well as the promotion of infrastructure investment.

A total of 50 Strategic Integrated Projects (Sips) were gazetted in 2020 in terms of the Infrastructure Development Act (2014), with an estimated combined capital investment value of R340-billion.

The DPWI has also gazetted 12 special projects that aim to create jobs and develop skills, particularly in network industries that have significant multiplier effects across the economy. These projects are in the water and sanitation, energy, transport, digital infrastructure, agriculture and agro-processing, and human settlements sectors.

SECTOR BREAKDOWN
To achieve water security, South Africa needs to close an estimated capital funding gap of about R33-billion yearly for the next ten years through cost-reflective tariffs. In the water sector, 11 strategic projects with an estimated value of R105-billion have been prioritised.

Three energy projects have been gazetted: the Emergency/Risk Mitigation Power Purchase Procurement Programme, the Small Independent Power Producer Programme and the Embedded Generation Investment Programme.

The projects will create an estimated 2 569 MW of electricity generating capacity. Total investments to be funded by the private sector amount to R52.4-billion.

The transport sector has a total of 15 gazetted projects to the value of R47-billion.

Sanral is improving the capacity of several routes on toll and non-toll networks. Thirteen projects with a combined value of about R19-billion have been prioritised.

The digital sector includes the Space Infrastructure Hub, the digitisation of government records and SA Connect Phase 1. Treasury said that a significant amount of work is required to advance these projects, as many of them are still in the prefeasibility and feasibility stages of development.

The special projects in agriculture and agro-processing fall under Sip 23. The marine tilapia project in the Eastern Cape’s Mbhashe municipal district was gazetted as project 23a under the sponsorship of the Eastern Cape Rural Development Agency.

The initiative aims to establish a new, sustainable and inclusive green growth aquaculture industry along the east coast, producing low-cost whitefish protein. The rollout will begin with an incubator on the Mbhashe coastline.

The total investment required is about R5.3-billion, raised from the public and private sectors.

Human settlements projects include six Integrated Residential Development Programmes, ten social housing projects and two large-scale privately led developments.

The 18 projects gazetted under the Sip 24 portfolio have a total investment value of R129-billion and will provide housing for over 170 000 people.

To fund the large-scale bulk infrastructure required, government is exploring alternative blended finance models to reduce pressure on the fiscus and provide additional support to municipalities.

DBSA is developing an implementation and financing structure that will help municipalities unlock private investment.

Beyond this, Treasury said there is a need to achieve greater scale in delivery and improved conditions for private-sector investment in social housing.

In response to rapid urban migration and an increase in the number of informal settlements around the country, from 2021/22, informal settlements projects will be funded from the newly created informal settlements upgrading partnership grants for provinces and municipalities.

These grants are expected to be used to upgrade and formalise 400 settlements each year over the medium term and deliver 180 000 serviced sites.

Meanwhile, to improve access to other African markets, the country's six busiest border posts will be upgraded and expanded. "These will be significant infrastructure interventions using the PPP model. Starting with Beitbridge, which was built in 1929 and last upgraded in 1995, these One-Stop-Border-Posts will harmonise the crossing of borders by people and goods, eliminating the dreadful scenes we witnessed recently," Mboweni said in his speech. 

BUDGET REFORMS  
The Budget Facility for Infrastructure (BFI) supports the execution of national priority projects by establishing specialised structures, procedures and criteria for committing fiscal resources to public infrastructure.

With the establishment of the Infrastructure Fund, the BFI will play a key role in evaluating and recommending State support for blended finance projects. Infrastructure Fund blended finance projects that need fiscal support are linked to the budget process through the BFI.

The budget process will ensure the selection of projects that balance the much-needed boost to economic development and job creation with the country’s present debt-constrained fiscal position.

Financing arrangements with the private sector will be done in such a way that they do not lead to further public debt escalation, Treasury said.

Following a review of existing practices with public- and private-sector stakeholders, Treasury has developed a Framework for Infrastructure Delivery and Procurement Management that applies to national and provincial departments, public entities and municipalities.

As part of establishing the BFI and enhancing procurement, Treasury is developing a government-wide project planning and appraisal guideline.

The draft Public Procurement Bill was gazetted for public comment in February 2020. The Bill addresses fragmentation in procurement legislation and will include regulatory aspects related to the procurement of PPPs and infrastructure.

The Office of the Chief Procurement Officer is currently working through the public comments received on the Bill.

The Cities Support Programme is working with the eight metropolitan municipalities to enhance their capability to respond to climate impacts.