Can a spend­ing drive save SA?

The main ob­sta­cle isn’t lack of funds, but lack of trust

Financial Mail - - SPECIAL REPORT - Jurie Swart AIIM CEO

ý The cor­ner­stone of SA’S pro­posed eco­nomic re­cov­ery plan is a big in­vest­ment in in­fra­struc­ture.

While there is no ques­tion that this could stim­u­late the econ­omy if projects are de­liv­ered on time and on bud­get, the big ques­tion is where the money will come from to fund this drive, given the per­ilous state of the fis­cus.

The gov­ern­ment has long pinned its hopes on re­viv­ing growth through in­vest­ment in in­fra­struc­ture. How­ever, since

2017, in­fra­struc­ture spend­ing has been in de­cline, dam­aged by al­le­ga­tions of cor­rup­tion and mis­man­age­ment. Far from meet­ing the gov­ern­ment’s own goal of spend­ing 10% of GDP on in­fra­struc­ture, it has be­come the norm to un­der­spend on in­fra­struc­ture bud­gets by 25% or more.

A num­ber of ideas have been mooted in re­cent months, in­clud­ing a sug­ges­tion from cer­tain parts of the ANC and labour fed­er­a­tion Cosatu to in­tro­duce pre­scribed as­sets. Es­sen­tially, pre­scribed as­sets would force the sav­ings in­dus­try to buy gov­ern­ment stock and bonds is­sued by state-owned en­ter­prises (SOES) on be­half of in­vestors such as re­tire­ment funds.

The con­cept was in­tro­duced by the apartheid gov­ern­ment but failed to work. The As­so­ci­a­tion for Sav­ings & In­vest­ment SA

(Asisa) ar­gues that it would have a neg­a­tive ef­fect on the econ­omy and fur­ther dam­age the coun­try’s credit rat­ing.

As cus­to­di­ans of the sav­ings of or­di­nary South Africans, Asisa says it has op­posed the de­ploy­ment of sav­ings into en­ti­ties mired in state cap­ture and lack of de­liv­ery.

Fur­ther­more, it says the pre­scrip­tion of as­sets would in­ter­fere with the cap­i­tal al­lo­ca­tion func­tion of the cap­i­tal mar­kets,

Jurie Swart: Com­mit­ted to SA’S in­vestors

which should al­ways be ob­jec­tive and driven by per­for­mance. Forc­ing the mar­ket to in­vest in low-yield­ing or high-risk projects would re­move the in­cen­tive for th­ese projects to com­pete, as fund­ing would no longer be linked to per­for­mance and, se­condly, de­serv­ing projects could be de­prived of fund­ing.

An­other idea that has been mooted is the cre­ation of a listed project bond act­ing along the same lines as a real es­tate in­vest­ment trust (Reit) into which pen­sion funds and as­set man­agers can in­vest di­rectly.

Asisa CEO Leon Cam­pher sup­ports the idea of a listed in­stru­ment rather than pre­scribed as­sets. He has been work­ing closely with the in­fra­struc­ture of­fice in the pres­i­dency on how to grow in­vest­ment in in­fra­struc­ture.

A listed in­stru­ment, he ar­gues, would en­able fund trus­tees and as­set man­agers to eval­u­ate project man­agers with­out hav­ing to have in­fra­struc­ture de­vel­op­ment ex­per­tise. Funds will in­vest in vi­able and bank­able projects, he be­lieves.

Asisa has long main­tained that the prob­lem is not a lack of will­ing­ness of cap­i­tal mar­kets to in­vest, but rather the ab­sence of vi­able projects.

Jurie Swart, CEO of African In­fra­struc­ture In­vest­ment

Man­agers (AIIM), says the pri­vate sec­tor is keen to part­ner with the gov­ern­ment to drive its am­bi­tious in­fra­struc­ture pro­gramme, and that there have been en­gage­ments with the sav­ings in­dus­try where the gov­ern­ment’s plans for the rollout of in­fra­struc­ture have been shared at a high level. AIIM is arguably the

What it means: The pri­vate sec­tor has the money and de­sire to in­vest, but needs vi­able projects to in­vest in

most ex­pe­ri­enced pri­vate eq­uity in­vest­ment man­ager fo­cused ex­clu­sively on African in­fra­struc­ture. It man­ages about $2.1bn across seven funds.

“Or­gan­i­sa­tions such as AIIM are the cus­to­di­ans of SA’S sav­ings. It makes sense that th­ese sav­ings are only com­mit­ted to projects that im­prove the eco­nomic well­be­ing of the savers,” says Swart.

“Our role is to en­sure that such fund­ing is pro­vided to sus­tain­able projects that of­fer ap­pro­pri­ate riskad­justed re­turns.”

Pri­vate in­vest­ment in public in­fra­struc­ture projects in SA has, to date, not had sig­nif­i­cant trac­tion, pri­mar­ily as a re­sult of a lack of trust in gover­nance pro­ce­dures.

How­ever, while the likes of Transnet and Eskom’s re­cent cap­i­tal projects have been poorly man­aged and rid­dled with al­le­ga­tions of wrong­do­ing, Swart says it is im­por­tant to high­light other public-pri­vate part­ner­ship (PPP) pro­grammes run by the gov­ern­ment over the past 25 years that have been largely suc­cess­ful.

Th­ese in­clude the re­new­able en­ergy in­de­pen­dent power pro­ducer pro­cure­ment (REIPPP) pro­gramme, var­i­ous gov­ern­ment ac­com­mo­da­tion PPPS, and the long-dis­tance toll road pro­gramme im­ple­mented in the late 1990s.

“AIIM has been a sig­nif­i­cant par­tic­i­pant in projects is­sued un­der th­ese pro­grammes, and they have pro­vided good re­turns for SA’S savers and pen­sion funds,” he says, adding that the com­pany has eq­uity in­vest­ments in 26 REIPPP projects and more than R7bn in­vested to date.

More than R190bn has al­ready been in­vested in the REIPPP pro­gramme, pri­mar­ily through com­mer­cial banks.

The big draw­card of th­ese projects has been their clear rev­enue streams and that they are trans­par­ently pack­aged.

To suc­cess­fully part­ner with the pri­vate sec­tor on in­fra­struc­ture de­liv­ery, Swart says that the gov­ern­ment needs to: main­tain the cur­rent strengths of the lo­cal in­fra­struc­ture sec­tor, which in­clude ro­bust and in­de­pen­dent reg­u­la­tors; main­tain good PPP leg­is­la­tion that en­cour­ages com­pe­ti­tion and trans­parency; make use of the well-reg­u­lated fi­nan­cial sec­tor; repli­cate pock­ets of high com­pe­tence, such as the

IPP of­fice and road agency San­ral; en­sure it is well ad­vised by en­gag­ing strong tech­ni­cal, le­gal and fi­nan­cial ex­perts; im­ple­ment ro­bust en­vi­ron­men­tal and so­cial project ap­proval pro­cesses; and en­sure con­ti­nu­ity and mo­men­tum from suc­cess­ful in­fra­struc­ture roll­outs.

New project de­vel­op­ment pro­cesses need to be en­hanced through large pro­gram­matic roll­outs, as op­posed to piece­meal pro­cure­ment, where bid­ders have a num­ber of op­por­tu­ni­ties to win con­tracts and in­ter­est is main­tained in the mar­ket.

In ad­di­tion, he says, the sec­tors where the pri­vate sec­tor can get in­volved need to be di­ver­si­fied, and the gov­ern­ment needs to main­tain an open dia­logue with pri­vate sec­tor in­vestors while speak­ing with a sin­gle voice on pri­vate-sec­tor in­vest­ment in in­fra­struc­ture.

At the same time there needs to be a proper de­lin­eation be­tween projects that will be pur­sued by the gov­ern­ment and those that will be pur­sued through pri­vate sec­tor PPPS.

Lastly, says Swart, leg­is­la­tion that will al­low fur­ther pen­sion fund in­vest­ment in un­listed in­fra­struc­ture projects needs to be ac­cel­er­ated — but with­out adding un­due risk to savers.

Lack of trust in gov­ern­ment

With the ex­cep­tion of the re­new­able en­ergy pro­gramme, the pri­vate sec­tor has re­cently been hes­i­tant to in­vest in large-scale gov­ern­ment-ini­ti­ated in­fra­struc­ture projects, hav­ing lost con­fi­dence in their abil­ity to de­liver.

Un­like the UK, where 50% of in­fra­struc­ture projects are fi­nanced by the pri­vate sec­tor, in SA this fig­ure is closer to 2%.

The gov­ern­ment’s track record when it comes to projects has been less than stel­lar: Eskom’s Medupi and Kusile projects, bud­geted to cost R163bn and planned to be com­pleted by 2015, have both ex­pe­ri­enced cost over­runs com­ing in at a fi­nal fig­ure of R460bn and late de­liv­ery. Other mega projects, in­clud­ing the In­gula Pumped Stor­age Scheme and Gaut­eng Free­way Im­prove­ment Project, have had sim­i­lar prob­lems.

By its own ad­mis­sion, the state no longer has the ca­pac­ity or the ex­per­tise to man­age large-scale in­fra­struc­ture projects, made even worse by a crit­i­cal short­age of built-en­vi­ron­ment ex­per­tise.

That’s not to say that all public sec­tor projects have been fail­ures: Kim­ber­ley’s Sol Plaatje Univer­sity and the Univer­sity of Mpumalanga were both de­liv­ered on time and within bud­get. The crit­i­cal dif­fer­ence here was how the projects were man­aged. In both cases the cam­pus de­vel­op­ment and plan­ning unit at Wits led the project man­age­ment team.

Ac­cord­ing to a re­port re­leased ear­lier this year by the Na­tional Plan­ning Com­mis­sion on the state’s fail­ure to de­liver in­fra­struc­ture ef­fi­ciently, the prob­lem is not a lack of money in the pri­vate sec­tor to in­vest, but rather a dearth of prop­erly pre­pared and bank­able projects, as well as a lack of trans­par­ent and ef­fi­cient pro­cesses for bring­ing projects to the mar­ket.

The pro­cure­ment process is overly bu­reau­cra­tised, em­pha­sises com­pli­ance by box-tick­ing, and is prone to fraud, said the re­port.

It also pro­vided a num­ber of rec­om­men­da­tions. It said the gov­ern­ment needs to strengthen its ca­pac­ity around procur­ing and man­ag­ing large-scale con­struc­tion projects while sim­pli­fy­ing the reg­u­la­tory red tape that in­hibits in­fra­struc­ture in­vest­ment.

In ad­di­tion it pro­posed that in­fra­struc­ture pro­cure­ment be treated dif­fer­ently to gen­eral pro­cure­ment, that public-pri­vate reg­u­la­tions be re­viewed to en­sure they are less bur­den­some and that, in the longer term, gov­ern­ment’s de­liv­ery man­agers cer­tify their ca­pa­bil­i­ties. The gov­ern­ment’s in­ten­tion to re­build an econ­omy left rav­aged by re­cent events by in­vest­ing in in­fra­struc­ture will suc­ceed only if it changes how it part­ners with the pri­vate sec­tor. If the state of SOES is any­thing to go by, it has al­ready proved how woe­fully in­ad­e­quate it is when it comes to run­ning com­pa­nies.

While in­vest­ment sym­po­siums are all well and good, the re­al­ity is that when it comes to gover­nance, ap­pro­pri­ate de­ci­sion­mak­ing re­gard­ing the plan­ning, con­tract­ing and procur­ing of projects, as well as ac­count­abil­ity and ac­tual de­liv­ery, the gov­ern­ment tends to fall spec­tac­u­larly short.

For an in­fra­struc­ture in­vest­ment drive to suc­ceed, the gov­ern­ment will need to put vested in­ter­ests and in­grained ide­ol­ogy aside, and en­sure pol­icy cer­tainty.

The big draw­card of REIPPP projects has been their trans­parency and clear rev­enue streams

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