Increasing infrastructure investment would boost South Africa’s potential growth, OECD survey asserts

31st July 2020 By: Terence Creamer - Creamer Media Editor

Increasing infrastructure investment would boost South Africa’s potential growth, OECD survey asserts

OECD says tourism sector has big jobs potential, but will need support until the middle of 2021

Higher levels of infrastructure investment are needed to increase South Africa’s potential growth, the Organisation for Economic Cooperation and Development’s (OECD’s) latest survey of South Africa asserts.

Released on July 31, the report warns that the South African economy could contract by as much as 8.2% in 2020 and that both domestic risks, such as ongoing electricity load-shedding, and external risks, such as new Covid-19 outbreaks that affect South Africa and its trading partners, could weigh on the country’s economic prospects.

It argues that a sound growth strategy – which includes reforming product markets and State-owned enterprises, boosting investment, developing public infrastructure and pursuing trade policies that augment the benefits from participation in global value chains – could deliver “quick wins” in terms of job creation and increased potential growth.

Should such a growth strategy be pursued in its entirety, the OECD’s model indicates that South Africa’s potential gross domestic product (GDP) could be 1.5% higher in 2025 relative to that which would prevail in the absence of policy reforms and 5.7% higher by 2030.

The model suggests that improved product market regulation policies, which encourage more competition, better pricing of services and incentivising investment, would make the largest contribution to increasing South Africa’s potential growth over the period.

Director of Country Studies Alvaro Pereira said that, given South Africa’s fiscal pressures and rising debt, reforms that did not rely on fiscal resources should be prioritised.

“We’ve been arguing for labour reforms in South Africa for a while, but perhaps this is not the time, perhaps a bit later. But it is a good time to reduce barriers to entrepreneurship. It is a good time to open sectors to competition. It is a good time to reduce bureaucracy,” Pereira said during a virtual launch of the survey, which warns that higher Budget deficits and increasing debt levels threaten the country’s fiscal sustainability

“This does not cost any rands, but could lead to substantial improvement in terms of jobs and in terms of growth.”

National Treasury director-general Dondo Mogajane underlined the importance of structural reforms to boost growth while pursuing fiscal sustainability.

“Low levels of productivity and competitiveness are inhibiting job creation and investment, which is why government is focused on implementing structural reforms to raise growth while embarking on a path of debt stabilisation,” Mogajane said.

On public infrastructure, the OECD argues that the decline in investment in this area in recent years had contributed to lower growth in a context of declining private investment.

It warns that the quality of infrastructure is deteriorating, that maintenance and project preparation is inadequate, while the speed, quality and efficiency of public investment projects also needs to improve.

Government, in notes, plans to spend R526-billion on infrastructure investment over the next three years and establish an infrastructure fund to support blended-finance projects and attract private financing.

“Developing well-structured public-private partnerships could boost infrastructure investment and, in particular, participation of private capital in ports and rail. Increasing public investment from 3.6% to 5% of GDP would boost potential growth.”

The report has been published ahead of the finalisation of government’s economic recovery and reconstruction plan, in which increased infrastructure investment is expected to be a core feature.

President Cyril Ramaphosa has repeatedly described infrastructure as the “flywheel of economic growth” and had welcomed the emerging consensus of the social partners that the country’s recovery should be led by infrastructure development and maintenance.

Separately, Public Works and Infrastructure Minister Patricia De Lille published a Gazette notice that included 50 Strategic Integrated Projects and 12 Special Projects that would be given priority attention by government.

The list included 15 transport projects valued at R47-billion, 11 water and sanitation projects valued at R106-billion, 18 human settlements developments valued at R138-billion, two agricultural and agroprocessing projects valued at R7-billion, three energy projects valued at R58-billion and a digital infrastructure initiative valued at R4-billion.


The report also argues that tourism will need support up until the middle of 2021 to ensure it is in a position to support growth and job creation thereafter, while pursuing a green energy policy would also help improve the country’s growth outlook.

“The tourism sector was hit hard by the pandemic and resulting containment measures, yet it has good potential to contribute to the economy and future employment growth,” the survey states.

“Implementation of electronic visa programmes for emerging target markets and increasing the number of countries falling under the visa-waiver agreement will boost arrivals, while a reduction of red tape and regulatory burden for entrepreneurs and small enterprises will improve market access. Investments in transport and tourism infrastructure have to be aligned to connect tourists to places.”

Greener energy policy, the report adds, can also bolster growth and lower South Africa’s carbon intensity.

The report notes that South Africa is one of the top-20 greenhouse gas emitters in the world and that, while the economy’s carbon-intensity has fallen slightly since 2000, coal still accounts for 75% of electricity generation.

“South Africa’s introduction of a carbon tax in June 2019 is a welcome step forward,” the report states, but highlights that its price of between €0.40/t and €3.40/t, is well below the low-end estimate of the climate cost of carbon of €30/t.

“South Africa should envisage a more ambitious approach to carbon taxes. Carbon tax revenues would provide ample opportunity to compensate low-income households, for example with lump-sum transfers, and equipping them with more energy-efficient housing and appliances.”

The OECD report also states that, owing to the growing competitiveness of renewable energy, costs for consumers could be reduced by diversifying the power mix.

“Early anticipation and preparation of the transition is vital to minimise adverse social effects in the coal mining locations. Replacing coal-fired power plants with renewables could increase energy security as well as reduce the costs of water stress.”

It also recommends that the restructuring of Eskom be used to increase the share of renewables as a source of energy.

“These investments would contribute to greener growth and reduce the environmental footprint of the economy.”