Power cuts and uncertainty stall capital projects

Capital projects, a key element for growth and job creation in the economy, fell in 2019 as SA faced difficult conditions including power cuts, depressed local and global demand and a poor policy environment.

“The combination of these factors kept business confidence at record lows and investors wary of committing to large expansion plans,” Nedbank said in its latest capital-expenditure project listing report released on Wednesday.

According to the report, the value of projects in 2019 was R123bn, down from R128bn in 2018, while the number of projects announced was 58, down from the previous 59, the lowest level since 2017.

As unemployment remains stuck at record levels of 29.1%, President Cyril Ramaphosa has made attracting fixed investment to the value of R1.2-trillion by 2023 a goal of his administration. Investment in the economy is an important enabler of job creation.

But cash-strapped power utility Eskom’s load-shedding has weighed on economic activity and uncertainty about policies, such as on mining and expropriation without compensation has left investors leery.

At the second SA Investment Conference in 2019, Ramaphosa announced that about R363bn in investment pledges had been secured from local and international investors.

According to Nedbank economist Johannes Khosa, Nedbank’s report captures only projects that are going ahead or have begun, not projects promised but still awaiting approval. The report also does not capture projects valued at less than R20m and records only projects of an expansionary nature, not those that are maintenance or investments purely to replace worn-out capital goods.

The private sector accounted for most of the investment in 2019 at 63% of the total projects, while the public sector accounted for 29%. Electricity supply had to improve for fixed investment to pick up, said Khosa. “If we see a reduction in load-shedding we are likely to see a pick-up in confidence.”

If the global economy and local demand improved “chances are that companies will commit to expanding capacity”, he said.

“But overall, the general picture is very weak.”

Nedbank forecasts fixed investment to grow only 0.9% in 2020. “There are still significant concerns about the unresolved policy issues such as on land expropriation without compensation and the unfavourable policy framework for mining,” the report said. “Investors are likely to remain cautious [about] committing to large capital spending in the short term.”

During 2019, the manufacturing sector had the largest falls in investments, given subdued demand and domestic operating challenges, with projects valued at R14bn after 2018’s R49bn.

The value of projects in the sector for 2018 was, however, probably boosted by the first investment conference and the projects announced there and which started to come on stream, Nedbank said. These included the Mercedes-Benz SA plan to spend R10bn expanding its East London plant and paper giant Sappi’s R5bn spend on plant improvements.

The transport, storage and communications sector had the largest projects, valued at R44.5bn in 2019, its highest level of investment since 2012.

The value was pushed up by the second phase of the Dube Tradeport special economic zone, and the expansion of the Cape Town International Airport and OR Tambo International Airports by Airports Company SA.

THERE ARE SIGNIFICANT CONCERNS ABOUT ... UNRESOLVED POLICY ISSUES SUCH AS ON LAND EXPROPRIATION AND ... MINING