A focus on labour-intensive practices, increased partnership between the public and private sectors and rechannelled funding methods for infrastructure roll-out in South Africa are required to help reduce unemployment, build the economy and improve local skills, according to a panel of experts who spoke during the Infrastructure for Economic Reconstruction and Recovery webinar.
Hosted for the Development Bank of Southern Africa (DBSA) by Creamer Media Contract Publishing on February 4, the webinar featured insights from Transnet CEO Portia Derby; Construction Alliance South Africa chairperson John Matthews, who was the moderator; Rand Merchant Bank infrastructure finance cohead Judy Kobus; DBSA chief economist Zeph Nhleko; and DBSA infrastructure finance head Khetha Rantao.
The average growth rate in the construction sector from 2010 to 2019 was only one-third of the rate of the prior nine-year period, and the volume of growth was even smaller when considering disruptions during the past two years amid Covid-19, Nhleko noted.
Therefore, from a capital-formation perspective, South Africa’s infrastructure development sector had returned to levels last observed in the 1940s, he said.
Considering construction industry performance over the years, Nhleko said an interplay between economic and social infrastructure development could be observed, as was the case between large and small contractors.
“In 2012, for example, small and medium- sized contractors contributed 39% to the construction sector, but by 2019 they were contributing [about] 58%.”
As such, he said the DBSA’s experience suggested that there were still a lot of skills and talent in the small and medium-sized contractor category, and this needed to be unlocked to a greater extent – a process that would spur employment and develop critical skills.
Shovel-Ready Projects
Rantao said that, with an abundance of literature and commentary on government’s strategy to use infrastructure investment as a lever to kick-start the recovery of South Africa’s economy, government needed to ramp up its roll-out of public infrastructure.
“There is about R1-trillion worth of projects across various public organs that needs to be rolled out; however, the fiscus is constrained and government alone is not going to be able to fund these projects.”
To unlock a greater portion of this pent-up infrastructure demand, partnership with the private sector was essential in ensuring projects materialised, and, in this instance, the Infrastructure Fund played a critical role, Rantao said.
The fund was essentially meant to act as a bridge between the public and private sectors, helping State departments to bring their various projects to bankability – a measure that would make them “palatable” to the private sector, she added.
A ramp-up in delivering infrastructure projects would mean an increased need for labour.
Various policies already prioritised labour, such as the National Development Plan Vision 2030 and the Economic Reconstruction and Recovery Plan, which spoke to using labour- intensive methods in the delivery of infrastructure, Rantao said.
“Unemployment is at a critical level now; it is actually a crisis. It was at critical levels prior to Covid-19, and government is looking to match its response to the level of the crisis over the coming years, [there will be] more labour-intensive delivery,” she said.
Private-Sector Participation
In terms of getting the private sector involved where there was a legacy of public- sector-only projects, Kobus said simply because of the scale of infrastructure delivery in South Africa, it was important that both sectors worked together: “It is not just the responsibility of the public sector to deliver infrastructure.”
Nonetheless, she added that the private sector was playing a more prominent role before the projects even came to market “because we have a fiscally constrained government and there is a requirement for innovation in terms of the structures we put in [place] to fund infrastructure”.
In the past, infrastructure projects were typically funded by structures that relied heavily on government guarantees. However, Rantao noted that this was now a thing of the past and, therefore, government and State departments are encouraged to work with development finance institutions in terms of finding blended financing models to deliver infrastructure.
Another factor that might catalyse infrastructure development was associated regulations, which she said “play[ed] a critical role in the delivery of infrastructure”.
As an example of how regulations can assist in getting the energy sector to transform quicker, Rantao cited the increased threshold to 100 MW for the self-generation of electricity, consequently enabling the private sector to deliver embedded generation.
“We can already see the very increased levels of activity around that, led in particular by intensive energy users looking to have their own generation capacity.”
She said the regulations guiding the infrastructure sector needed more attention: “In terms of Treasury Regulation 16 – which governs how public–private partnerships, in particular, are delivered – a lot of work . . . needs to be done there in terms of simplifying that regulation. We have a capacity problem in delivering infrastructure, so the simpler we make the regulations, the more we actually increase the number of projects we can deliver at any time.”
Challenges
Nhleko highlighted four main issues that had to be addressed to support the rebuilding process in the construction and infrastructure development sector.
The first reform is the way in which infrastructure projects are approved.
“You cannot have a single point of approval for the whole [process]. We need to increase the frequency of approvals,” he said.
Further, the project pipeline in South Africa needs to be developed on a continuous basis and, from a preparation perspective, it needs support.
Nhleko noted that “the funding flow for project preparation needs to be visible”.
The third issue is that small and medium- sized contractors have to be supported financially and otherwise to ensure that they participate in the sector and have opportunities, consequently creating jobs and upskilling people.
The fourth and most important issue, according to Nhleko, is the requirement for capable State entities to be used as agents for achieving government development goals.
“Government must use these entities for what they were created for – to help government deliver on some of these things. You cannot have the situation where allocations and transfers are done and reversed.”
Meanwhile, Rantao said that some practices from the private sector – such as the increased use of machinery and the latest technology to roll out projects faster and more cost effectively – needed to be transferred to the public sector.
However, Kobus pointed out that many smaller companies were often disqualified from competing, as a result of their not being able to float the cost of large infrastructure projects, which saw projects awarded to one of the few large developers in South Africa because of their inherently large balance sheets.
“With procuring infrastructure, the procuring documents basically choose a preferred bidder largely based on the price they bid,” she said.
To overcome this, bidding credentials on procurement jobs could be changed to be weighted less on lowest cost and more towards local empowerment, thereby enabling smaller construction companies to bid successfully.
“Therefore, in terms of considering bankability, we would also look then to the large entities.
“It is important that the procurement jobs compel the private sector to not only include smaller organisations but also help to develop them. Enterprise development, in particular, should be a bigger component in awarding projects,” added Kobus.
Another challenge is that public-sector processes are not practical enough to facilitate infrastructure development, with Nhleko adding that “you have to allow the infrastructure development process to happen; [there] needs to be reforms at process level”.
For infrastructure development to lead South Africa’s economic recovery, he said projects needed to be prepared “in vast quantities”, and funding needed to be channelled into the project preparation process.
“You need to fund the right entities that can do projects properly, at a national scale.”
In addition, infrastructure projects need to be brought up for approval, with such approval occurring at a higher frequency.
“The use of capable State entities to support government is also essential. Funds cannot continue to be allocated and then not use[d].
“There are a lot of skills and expertise in State-owned entities that can be tapped into to facilitate this. Let’s make sure we understand the role of infrastructure development, and that we drive that role,” he concluded.