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The state of infrastructure investment in SA

It is not the spending itself that matters, but the economic and social impact of the spending.
BLSA's report identifies the complex regulatory framework for infrastructure procurement as a key reason for the declines in investment by the public sector, as well as SOEs' financial crisis. Image: Shutterstock

Last week BLSA released an important report on infrastructure in South Africa. We are failing to get infrastructure investment to play a critical role in driving the economy.

The facts on the ground are sobering: for the past five years infrastructure investment has been shrinking, driven primarily by a decline in investment by the public sector. The budget in February showed a dramatic 27% shortfall in infrastructure spending by the public sector in 2019/20 and downward revisions to budgets for the next three years. This despite years of rhetoric about boosting infrastructure investment.

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What is going on?

The report provides answers and an evidence base for how to turn the trend. The first thing to realise is the scale of the problem. To reach the National Development Plan target of spending 30% of GDP on infrastructure, we need to scale up investment massively. That target would require R4.1 billion/day of investment when we’re currently investing just R2.5 billion.

The 64% increase required is enough to fund a new university or a new renewable energy plant to power 20 000 homes every day.

Think about the scale of that challenge – adding the equivalent of 365 new universities per year. This requires macro solutions that free up both the public and private sectors to invest, rather than piecemeal interventions.

The report makes it clear, though, that it is not the spending itself that matters, but the economic and social impact of the spending. We must make sure that we look at infrastructure over its lifetime to assess the costs (including maintenance) and the benefits to decide what to prioritise.

There have been too many cases of infrastructure being ‘run to failure’ and then repaired – a far more expensive approach, but one that means the real costs are hidden when decisions are made about what to invest in. That must stop.

However, the report identifies the complex regulatory framework for infrastructure procurement as a key reason for the declines in investment by the public sector, as well as the financial crisis facing state-owned entities (SOEs).

Because of fiascos of corruption and mismanagement in some procurement (like the Prasa trains that were too big for SA’s rails or the massive cost overruns of the Medupi and Kusile power stations) the rules on procurement have been made more stringent. The core public sector received a new framework for infrastructure procurement in 2019 that imposes strict controls. This is admirable in the sense that it limits graft and wasteful expenditure, but the unintended consequence has been that municipalities and other parts of the public sector have seen infrastructure procurement collapse as they struggle with the complexity of the framework. This has been exacerbated by a skills exodus from the public sector over the past decade, particularly the engineering and project management skills that are vital to infrastructure investment.

We have seen the spending shortfalls at municipalities most acutely, with a 33% shortfall in spending against budget in 2019/20. SOEs, though, have been the most dramatic underspenders. In their case the dominant reason has been their weak balance sheet, which makes it difficult for them to raise the debt needed to fund infrastructure investment.

What to do?

The report makes it clear there is no silver bullet. There is a wide range of detailed work needed to get each of the major channels of infrastructure investment working properly. But a key message is that the private sector must be a core part of the solution. With the capacity constraints and balance sheet problems in the public sector, there really is no alternative.

The private sector can bring skills and funding to resolve constraints. But regulatory reform is essential to make that happen.

Structural reforms such as allowing companies to generate 50MW of energy without a licence for own use would immediately trigger huge volumes of investment. Resolving long-outstanding mining policy uncertainty would restart investment in exploration (as would clearing the backlog of licence applications at the Department of Mineral Resources and Energy). Completing the spectrum auction would trigger investment in 5G and broadband networks. These are all ‘for free’ from a public budgeting perspective.

The real opportunity, though, lies in reforms to improve the functioning of public-private partnerships. PPPs are the ideal mechanism to maximise the value of infrastructure projects to the public, combining the skills and capabilities of the public and private sectors. SA has a good PPP framework but it has proved highly cumbersome, particularly for smaller projects. National Treasury is now reviewing the framework and I hope this will lead to something more fit for purpose that can trigger far more joint projects.

In the meantime, organised business is working to support government particularly on capacity constraints through programmes such as Tamdev, which seconds highly experienced retirees to support particular government departments.

BLSA is going to be driving wider conversations about the infrastructure challenge and what can be done to address it. I look forward to working with all our members and counterparts in government and civil society in taking it forward.

You can access the report and related documents here.

Busi Mavuso is CEO of Business Leadership South Africa

COMMENTS   14

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This socialist government is faced with precisely the same conundrum that confronts each and every socialist government. What infrastructure do you need and when will you need it? What should you prioritise, universities or hospitals? If you build hospitals first, where will you get the doctors and nurses if you did not build the universities first? If you decide to do the universities first, how will you explain the lack of medical services during the next wave? How much should you spend on it? How large should it be? how long should it last?

Thousands of questions and problems without any way to come to a rational conclusion. Central planning of the economy is impossible because it lacks the market mechanism of the free market where risk-taking individuals use their own capital to allocate resources according to the price signal from consumers. Central Planning brought us Kusile and Medupi. It delivered RDP houses that last less than 12 months. It delivered the Life Esidimeni and the Estina dairy projects. It directs the failure of municipal services, and it bankrupts the state.

Either you have an economic system that revolves around the needs of the consumer and is directed by that consumer, or you have an economic system that revolves around the needs of the political elite and is managed by that political elite.

The ANC cannot build — It is a specialist terror organisation trained in destroying things !!!

Not in their wildest dreams would they have foreseen such success in destroying South African infrastructure. The ANC has proven itself a very capable machine of destruction.

“That target would require R4.1 billion/day of investment when we’re currently investing just R2.5 billion.”

I do not think that R2.5 billion per day is correct, that means the annual budget is around R912.5 Billion… if that was true then the industry would have at an efficient rate of R500,000.00 per job per year over 1,825,000 employment opportunities.

Back in 2019 the number of employee persons in this sector was around 609,000 which would have required an investment of around R304 Billion whilst actual spending was around R276 Billion

https://www.southafricanmi.com/government-infrastructure-spending-24feb2019.html

Realistically if the government spent 30% of the annual budget which would be around R700 Billion then there would be 1.4 million jobs, just about creating the Million jobs promised every year since JZ was in power.

Overall SA needs investment of R12 Trillion to bring unemployment down to 5%, a formal entry sustainable job costs between R500,000 and R640,000

You beat me to it and with some hard numbers facts to back it up. However even without the numbers I cannot see spending on any scale here at the moment. I can say with certainty that it is not happening but this is in contradiction to all the talk and the numbers going to press, it makes me wonder why this is so.

@PurgeCoin. You’ve described (and analysed) the problem to the tee. Also beating me to it 😉

Public-Private Partnerships simply is fascism by another name. The socialist ruler calls it a “partnership” while he has the power to tax the project and to direct which company gets the contract, which political faction get the BEE contract, who should be employed, and what their privileges should be. A PPP is simply another form of extortion of the capitalist. It comes down to the expropriation of private property for the benefit of the socialist politician. This is the next step after socialism proved an illusion after the state ran out of other people’s money.

It is an attempt to prolong the lifespan of a failed state. Mussolini tried it and failed. Hitler tried and failed. Francisco Nguema’s in Equatorial Guinea, Mobutu Sese Seko in Zaire, Idi Amin in Uganda, Gnassingbé Eyadéma in Togo, and Mengistu Haile Mariam in Ethiopia all tried and failed. Now the ANC is trying.

When you have a partnership between a wolf and a sheep, you know in advance what the outcome will be.

“It is not the spending itself that matters, but the economic and social impact of the spending.”

And does “productive spending” fall into this category? Currently there are thousands of “job opportunities” which are essentially street sweeping and bush clearing. Necessary as they are, how do they REALLY grow the economy, compared to a software developer?

“The report makes it clear there is no silver bullet.” Actually, there is a “sliver bullet” – voting the ANC out of any decision-making process in the country, but no-one wants to bite the bullet, it seems, especially Dear Comrade Ace.

And finally, the ANC will not allow decisions in these processes to be made without their input because they know only too well, that it would be the thin edge of the wedge to sidelining them from opportunistic “commissions and introductions”.

The enemy of “infrastrucure development” will be the Expropriation Bill.

Who will be interested to invest in SA?

And with less SARS revenue collected (from emigration & farms that lay bare), Govt will have little funds for such development.

SA will be looking forward to economic growth….at a negative % rate.

To think of all the years wasted on struggle rhetoric, instead of building and maintaining for ‘ our people ‘

Another hopeful article, sure thing end of Q2 we’ll have another hopeful article all the while infrastructure decay will continue.

The focus is on Party Unity instead of actual Governance.

To be bitter, I think the reason it is taking so long to get the all pomp and ceremony infrastructure spend and projects going is that the methods used to steal by the political connected are so well known now, new or more updated methods needs to be devised first, before the projects can be started.
Oh yes SA is also near broke, there’s that as well.

I’m really starting to worry about / if Democracy works.
China makes plans, implements them and gets stronger daily while the West worries about the next or coming election, just so short sighted.

Until the anc has voluntarily disbanded forget!!

That’s the starting point. So until then don’t waste your breath.

Its time for BEE to now shift to a higher gear. Else maybe a bit more cadre employment. Hahahaaaa.

TSK!!! You people.

The state of infrastructure?

In short, it’s in a state.

Perhaps it would be wise to master the small stuff first. Learn how to fix potholes in the road fast and correct. Thereafter try your hand on traffic lights to ensure their functioning despite of rain. Once this is mastered ( how many generations ? ) maybe the re – surfacing of a small road could be the next step up challenge. It is totally futile to dream of mega cities with bullet trains and simultaneously prove to be to incompetent to do small and simple maintenance work.

@Pelz-ebub,
South Africa is blessed with many skilled people and companies that can easily delivery 1st world infrastructure, the real problem we are faced with in the awarding of tenders to competent businesses who are not corrupt. That is why our skills are well sought after in the rest of the world, one of my closest friends is a Professional Roads & Infrastructure Engineer with over 30 years of experience globally. He like me left SA because we are not even able to get on the tender list.

I witnessed how the Ellisras Municipality paid millions to corrupt businesses who employed woman with large stamping posts to fix potholes on the single dual lane road towards the 2 power stations and Grootegeluk Mine, ever 3 months they brought in and in the heat of the day they would put spade loads of sand and stamp it down. The Owners of the various companies all drove luxury vehicles because they got a tender based on 100% BEE ownership.

For the same amount of money paid a professional company could have been brought in built a proper functions 6 lane dual carriage road over a 2 week period which would have lasted at least 12 years.

Stefstock; WHO; M&R; BR, you name it the use to boast about employing 50,000 plus employees now they operate having only 5,000 to 7,000.

I am of the view that if you have a business and your profit margin is not at least 25% after before taxes then you are running a risky business. Retails Bonds are trading at +9% because the government is not trust worthy so the market is demanding a premium for their capital.

End of comments.

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