Government’s timidity is odd given that it has to rely on private sector for growth
There was some irony to trade unions’ lastminute intervention this week to halt Eskom’s longawaited signing of agreements with new independent power producers (IPPs).
The signings with the 27 IPPs, which were projected to bring in R56bn of investment and create 61 ,000 jobs over the next two to three years, have now been put on hold (again) by Energy Minister Jeff Radebe.
And while it’s rather late in the day for the National Union of Metalworkers of SA and Cosatu to start demanding guarantees on jobs, in a sense they cannot entirely be faulted.
SA should long ago have had a proper debate about renewable energy and its trade-offs, because while the new wind and solar plants may create jobs, it’s highly unlikely they will create jobs for coal miners, who over the long term stand to lose jobs as SA’s generation mix shifts to cleaner energy.
The irony, however, is that SA’s renewable energy IPP programme has been just about the only thing that has kept private sector investment going in recent years and labour’s attack comes just at a moment in which the government urgently needs to put more of these kinds of public-private partnerships in place to build infrastructure.
There are at least two reasons for the urgency.
The first is growth. The Ramaphoria about SA’s prospects continues, but it surely won’t be too long before there’s a reality check when market players realise that the country’s economic problems are profoundly structural and that damage done to the economy in recent years won’t be easily or quickly fixed.
Confidence alone won’t pull SA out of its sluggish growth trajectory. The new administration will have to do something tangible to make business feel wanted and it doesn’t have too many tools at its disposal in the near term. Even with policy certainty in areas such as mining, it will take time for companies to be confident enough to embark on or invest in meaningful expansions to capacity, as opposed to just maintaining existing capacity, though even that would help given that private sector investment has fallen by 12% over the past three years, rising only in the latest quarter.
And while even President Cyril Ramaphosa still talks the language of using state-owned enterprises, for example, to drive growth and investment, where’s the money?
Says Stanlib economist Kevin Lings: “It can’t drive the economy using state-owned enterprise balance sheets; it can’t drive the economy using the government’s balance sheet; it can’t drive the economy using household balance sheets. So the only balance sheet it can use is the private sector’s.”
Lings, like others in business and the public sector, is calling for the government to kick-start investment and growth by bringing the private sector into finance and build infrastructure. The renewable IPP programme has shown it can be done rapidly and effectively. There is no reason the government shouldn’t also concession out upgrading, building and operating municipal water treatment plants or sanitation or roads or social infrastructure such as hospitals.
Lings’s argument is such projects would enhance private sector participation and confidence while giving the government some victories to claim on the service delivery front.
That touches on the second reason for the urgency, which is fiscal. The tax increases in February’s budget got much of the airtime, but it was an austerity budget.
It was as much if not more on the spending side, particularly the capital spending side. Almost R40bn of the R85bn of expenditure cuts over the next three years is to capital spending, which is already a pitifully small proportion of the budget.
Much of the cutting is to conditional grants to provinces and municipalities and that hits investment in social and economic infrastructure, with deep cuts to budgets for bulk water infrastructure, for example, as well as public transport or electrification. “Serious stuff,” as one Treasury official put it.
Also cut are allocations to infrastructure-related public entities such as the South African National Roads Agency, the Passenger Rail Agency and four water boards.
The Treasury tried to target budgets that were consistently underspent anyway, of which there were many. It has launched a Municipal Fund for Infrastructure to try to make the financing and the project delivery more efficient. Ramaphosa has promised to assemble a team to speed up implementation of new water, health and road maintenance projects.
There is mention of bringing in the private sector. But it’s all rather timid at this stage. That’s odd given how constrained is the ability of the government and state-owned enterprises to finance new infrastructure investment, and how poor their record is.
Lings says investment by state-owned enterprises has essentially been flat since 2010 while their use of debt and guarantee facilities has risen. So where’s the money gone? There has to be plenty of upside in inviting in the private sector.