Financial Mail - Investors Monthly
Clear policy direction needed
A struggling economy, weak business confidence and uncertain political and policy environment stall progress
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.