Can a spending drive save SA?
The main obstacle isn’t lack of funds, but lack of trust
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