Clear pol­icy di­rec­tion needed

A strug­gling econ­omy, weak busi­ness con­fi­dence and uncer­tain po­lit­i­cal and pol­icy en­vi­ron­ment stall progress

Financial Mail - Investors Monthly - - Special Report Infrastructure - Mohale Rak­gate: Pri­vate-public part­ner­ships could ease de­liv­ery back­log Joan Muller

Re­new­able En­ergy In­de­pen­dent Power Pro­ducer Pro­cure­ment (REIPPP) pro­gramme, widely re­garded as a hugely suc­cess­ful public-pri­vate part­ner­ship, has stalled on the back of man­age­ment is­sues and per­sonal po­lit­i­cal agendas that con­tinue to plague the na­tional power util­ity Eskom.

The REIPPP pro­gramme was launched by the Pres­i­den­tial In­fra­struc­ture Co-or­di­nat­ing Com- credit down­grades by in­ter­na­tional rat­ing agen­cies — could lead to some projects be­ing placed on the back burner.

Of par­tic­u­lar con­cern is the po­ten­tial for public-pri­vate part­ner­ships to come un­done. En­cour­ag­ing progress has been made in re­cent years to se­cure pri­vate sec­tor in­vest­ment in large-scale in­fra­struc­ture projects.

In­dus­try play­ers say the and cre­ate jobs. Eco­nomic in­fra­struc­ture projects in­clude the ex­pan­sion of SA’s power-gen­er­a­tion ca­pac­ity, road, rail and telecom­mu­ni­ca­tions net­works, as well as the up­grade and mod­erni­sa­tion of san­i­ta­tion and wa­ter ser­vices. How­ever, the worry is that on­go­ing po­lit­i­cal un­cer­tainty and lack of pol­icy di­rec­tion — fu­elled by Pres­i­dent Ja­cob Zuma’s re­cent cabi­net reshuf­fle and SA’s sub­se­quent

Govern­ment has al­lo­cated big bud­gets for in­fra­struc­ture spend­ing over the next three years but on­go­ing po­lit­i­cal in­sta­bil­ity could de­rail some projects.

Na­tional trea­sury’s 2017/2018 bud­get pri­ori­tises spend­ing on much needed in­fra­struc­ture pro­vi­sion in line with govern­ment’s Na­tional De­vel­op­ment Plan (NDP), with a hefty R947.2bn al­lo­cated for var­i­ous public sec­tor-led projects over the next three years.

In­creased spend­ing on so­cial in­fra­struc­ture such as ac­cess to run­ning wa­ter, elec­tric­ity, public trans­port, hous­ing, schools and hos­pi­tals will no doubt go some way to al­lay the grow­ing dis­sat­is­fac­tion in poorer com­mu­ni­ties where so­cial un­rest re­lat­ing to lack of mu­nic­i­pal ser­vice de­liv­ery has es­ca­lated sharply in re­cent months.

But in­dus­try play­ers say govern­ment also needs to speed up the de­liv­ery of large-scale eco­nomic in­fra­struc­ture projects to kick-start a lack­lus­tre econ­omy

in­fra­struc­ture projects, says na­tional trea­sury re­mains com­mit­ted to speed­ing up in­fra­struc­ture de­liv­ery via public-pri­vate part­ner­ships.

“We are work­ing with govern­ment to en­sure that public in­fra­struc­ture in­vest­ment is in­creased to 10% of GDP in line with the NDP ob­jec­tive to in­crease SA’s to­tal in­fra­struc­ture spend­ing to the global av­er­age of around 25% of GDP over the next few years.”

But Rak­gate ac­knowl­edges that the right plat­form needs to be cre­ated to en­sure pri­vate sec­tor par­tic­i­pa­tion. He be­lieves the IPP model is the way to go, as it can be suc­cess­fully repli­cated in other sec­tors such as health, rail trans­port, wa­ter and san­i­ta­tion.

“The IPP model has en­abled projects of suf­fi­cient scale, with just un­der R200bn in­vested by the pri­vate sec­tor in 64 ap­proved projects up to mid-2016. More­over, the IPP model re­lies on the ex­is­tence of a frame­work agree­ment with govern­ment, which pro­vides the ideal con­fi­dence to pri­vate sec- tor in­vestors for ef­fi­cient roll-out,” he says.

Rak­gate con­cedes that strong po­lit­i­cal sup­port and con­sis­tent mes­sages from all govern­ment play­ers are key to the pro­gramme's suc­cess, with­out which the pri­vate sec­tor will be loath to part­ner with govern­ment.

Since then five non-ex­ec­u­tive di­rec­tors have re­signed say­ing Al­lan Gray has made it im­pos­si­ble for them to do their jobs.

Be­hind the scenes, as big­ger con­struc­tion groups con­tinue to scurry off­shore, an­other dy­namic is tak­ing place. Seven ma­jor JSElisted con­struc­tion firms have struck a set­tle­ment agree­ment with govern­ment — called the Vol­un­tary Re­build­ing Pro­gramme.

They will sell off at least 40% of their do­mes­tic busi­nesses to black eco­nomic em­pow­er­ment in­ter­ests, or men­tor up to three emerg­ing black con­struc­tion com­pa­nies to a com­bined an­nual turnover of at least 25% of their an­nual turnover within seven years.

To this end, Mur­ray & Roberts has sold its en­tire South­ern African in­fra­struc­ture and build­ing busi­nesses to an em­pow­er­ment con­sor­tium led by the South­ern Palace Group for what seems to be a scant R314m. The group had made an at­trib­ut­able loss of R60m in the six months to De­cem­ber 2016, from a R376m profit in the pe­riod a year ear­lier.

Aveng, mean­while, is sell­ing 51% of eq­uity and 45% of its eco­nomic in­ter­est in Africa-fo­cused sub­sidiary Aveng Gri­naker-LTA to black women-owned en­tity Ku­tana Con­struc­tion and other emerg­ing con­struc­tion com­pa­nies.

WBHO, in turn, has cho­sen to men­tor three part­ner com­pa­nies – Fik­ile Con­struc­tion, Motheo Con­struc­tion and Ed­win Con­struc­tion.

The oth­ers in the set­tle­ment agree­ment, which fol­lows heavy com­pe­ti­tion author­ity penal­ties for col­lu­sive prac­tices and more than six years in which govern­ment has not spent on any large in­fra­struc­ture projects apart from roads, are Ste­fanutti Stocks, Raubex, Group Five and Basil Read.

Started in 2013, this ac­tion is meant to rem­edy the eco­nomic rav­ages of apartheid. But in the in­terim, eco­nomic growth has slowed to a crawl and SA’s in­vest­ment al­lure has be­come deeply tar­nished. Along with a deeply cor­rupted pa­tron­age econ­omy that has evolved in the public sec­tor, the state’s pol­icy of com­mand eco­nom­ics — led by the depart­ment of trade & in­dus­try and the depart­ment of eco­nomic de­vel­op­ment — is con­tra­dict­ing SA’s larger “nor­ma­tive” mar­ket econ­omy that is

driven by an in­creas­ingly in­ter­con­nected world.

The drive to­wards greater na­tion­al­ism in in­dus­trial and com­mer­cial pol­icy has led to many of SA’s ma­jor con­struc­tion com­pa­nies be­com­ing vir­tual penny stocks. A big part of this is that the state has not in­vested in large in­fra­struc­ture projects since the end of the 2010 soccer World Cup. Rather, it has boosted small and medium con­struc­tion en­ter­prises, mainly in ru­ral de­vel­op­ment.

This has been good and well, but it has starved the main repos­i­to­ries of en­gi­neer­ing and com­mer­cial skills in ad­vanc­ing a sec­ondary econ­omy at the ex­pense of the first.

Mean­while, state-owned en­ter­prises such as Eskom and SA Air­ways seem to be in­tent on be­com­ing black-owned en­ter­prises out­side of leg­isla­tive pro­cesses and main­stream mar­ket and gov­er­nance prac­tices.

The evolv­ing cri­sis in the SA econ­omy has left fund man­agers di­vided over the health of listed con­struc­tion groups. PSG dis­posed of all of its or­di­nary shares in Group Five ahead of the board fra­cas be­com­ing public.

Mean­while, Mish-al Emeran, an eq­uity an­a­lyst at Elec­tus Fund Man­agers, says: “We view Group Five and Aveng as low-qual­ity con­struc­tion com­pa­nies, and there­fore do not in­vest in them.”

But Corona­tion has been buy­ing up Group Five shares on be­half of its clients, hold­ing 14.49% of the com­pany. “We think there is sig­nif­i­cant value in the share given the re­cent share price de­clines,” its CEO Anton Pil­lay says.

In­dus­try as­so­ci­a­tion Con­sult­ing Engi­neers SA (Cesa), rep­re­sent­ing more than 500 com­pa­nies that em­ploy about 23,000 peo­ple, says the con­struc­tion and en­gi­neer­ing in­dus­try is wit­ness­ing cor­rup­tion, the ap­point­ment of con­sult­ing en­gi­neer­ing firms that have lit­tle or no track record of de­liv­ery, and “mafia-style crim­i­nal ac­tiv­ity” that has halted con­struc­tion work.

Cesa CEO Chris Camp­bell says al­le­ga­tions of com­pro­mised good gov­er­nance, a lack of con­sul­ta­tion by govern­ment, and the “ques­tion­able in­tegrity of ap­point­ments un­der the guise of trans­for­ma­tion” are af­fect­ing the en­gi­neer­ing pro­fes­sion both lo­cally and in­ter­na­tion­ally.

“This not only puts lives at risk, but also af­fects job se­cu­rity in a sec­tor where lim­ited em­ploy­ment op­por­tu­ni­ties ex­ist due to the al­ready low lev­els of cap­i­tal in­vest­ment in in­fra­struc­ture,” he says.

To this end, key play­ers in the en­gi­neer­ing in­dus­try are tak­ing le­gal ac­tion against the depart­ment of public works and the state­man­dated En­gi­neer­ing Coun­cil of SA (Ecsa), al­leg­ing the ap­point­ment of the new Ecsa coun­cil is un­law­ful.

The SA In­sti­tu­tion of Civil En­gi­neer­ing (Saice) says Ecsa is vi­tal to en­sur­ing the qual­ity of in­fra­struc­ture ser­vices. It reg­is­ters en­gi­neer­ing prac­ti­tion­ers and reg­u­lates their prac­tice; it also ac­cred­its ed­u­ca­tion and train­ing pro­grammes in var­i­ous fields of en­gi­neer­ing to high stan­dards and global recog­ni­tion.

But Saice says the former min­is­ter of public works, Thu­las Nx­esi, flouted the con­sul­ta­tion process ac­cord­ing to the En­gi­neer­ing Pro­fes­sion Act 2000 in ap­point­ing Ecsa’s board.

“By un­der­min­ing the qual­ity of over­sight of en­gi­neer­ing prac­ti­tion­ers in SA, the en­tire pipe­line of en­gi­neer­ing in­fra­struc­ture ser­vices, man­u­fac­tur­ing and pro­duc­tion will be at risk,” Saice CEO Man­glin Pil­lay says.

Mean­while, the min­is­ter of wa­ter & san­i­ta­tion, Nomvula Mokonyane, con­tin­ues to em­ploy 31 Cuban engi­neers, re­cently dou­bling their salaries. They ar­rived in SA in Fe­bru­ary 2015, and Mokonyane has told par­lia­ment their to­tal ba­sic salaries in­creased from R10.4m to R19.1m, along with an­nual trans­port and hous­ing costs.

She re­cently told par­lia­ment that big “white-owned” con­struc­tion com­pa­nies such as Group Five con­tin­ued to ben­e­fit from con­tracts for the con­struc­tion of dams and other wa­ter projects, at the ex­pense of black con­trac­tors.

Camp­bell, mean­while, says the Le­sotho High­lands wa­ter scheme is about five years be­hind sched­ule. “This im­plies [in fu­ture] . . . Gaut­eng runs the real risk of wa­ter short­ages, not only for do­mes­tic con­sump­tion but also for in­dus­trial con­sump­tion,” he says.

He also says Cesa has been in­un­dated with com­plaints re­gard­ing pro­cure­ment of pro­fes­sional ser­vices by the wa­ter depart­ment, a lack of trans­parency, and of­ten “ques­tion­able ap­point­ments” to some of the larger crit­i­cal in­fra­struc­ture projects. SA’s public ser­vice reg­u­la­tions were amended in Au­gust 2016 to try to curb cor­rup­tion in the public ser­vice. But re­cent me­dia re­ports in­di­cate that about 9,000 public ser­vants are still al­lowed to do busi­ness with the state.

Mean­while, SA’s ma­jor con­struc­tion com­pa­nies are wait­ing for govern­ment to start spend­ing on large in­fra­struc­ture projects. It has been nearly seven years since the 2010 World Cup ended, and nearly five more since govern­ment launched its much-vaunted na­tional and cross-bor­der in­fra­struc­ture plans. This has meant their do­mes­tic busi­nesses have not per­formed well, amid the usual prob­lems as­so­ci­ated with build­ing large in­fra­struc­ture projects.

Aveng, one of the largest among them, has in­di­cated that for the year ended June 2017, earn­ings will be “sub­stan­tially more than 20% lower than they were in the pre­vi­ous year”. This fol­lows con­tin­ued weak mar­ket con­di­tions for the SA busi­nesses, op­er­a­tional un­der­per­for­mance and ac­cel­er­ated claims set­tle­ments.

Go­ing up: Jo­han­nes­burg’s Sand­ton CBD sky­line is con­tin­u­ously evolv­ing


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