South Africa’s infrastructure is decaying through poor maintenance, vandalism and insufficient investment.
Last week Business Leadership South Africa, which represents the biggest corporates in the country, and whose CEO, Busi Mavuso, is increasingly outspoken about bad policies, released a report on Infrastructure for South Africa: An assessment of the obstacles and solutions to greater infrastructure investment.
The bottom line of the report by economics consultants Intelllidex is that to stimulate investment in infrastructure, greater use should be made of public-private partnerships and concessions. These would allow the services presently managed by state-owned enterprises to be far better run. The state must also boost investment and reduce consumption spending in its own budget. And above all, it says, a recommitment by the government to private property rights is required to assure investors.
This is an important report with proposals to boost investment, but with the government yet to implement key reforms, it is doubtful Pretoria will absorb the lessons. The hope has to be that, now that we are deep into a crisis, government just might listen.
Infrastructure investment is key to productivity and economic growth. That is why well-chosen and managed infrastructure projects are so important to the country. Poor choice of projects, bad implementation, corruption and shoddy maintenance mean that the country does not get the return on its capital investment that it should.
Much of Eskom’s fleet of coal-fired power stations has been poorly maintained and many are approaching the end of their lifespan. There has been inadequate investment in rail, lines are increasingly ripped up by gangs wanting to sell the steel, and a number of stations have been torched in recent months. The country’s highways are now ageing and potholes on many roads are multiplying. Many municipal waste-water treatment plants are poorly run and inadequate to the needs of growing populations in urban areas.
South Africa’s cellular infrastructure is regularly targeted by vandals who wish to steal batteries. Traffic lights are frequently out of order in large cities as gangs try and steal the cellphone SIM cards which link them to a network. Delays by the regulator in allocating new broadband spectrum mean the network operators still do not have the go-ahead to invest in setting up 5G networks.
Fast-growing emerging markets invest massively in gross fixed capital formation, which includes infrastructure and other fixed assets net of depreciation. In the National Development Plan released in 2013, the goal was for gross fixed capital formation, the total asset base of the country, to reach 30 percent of GDP by 2030. China’s gross fixed capital formation was 40 percent of GDP in 2018, India’s was about 30 percent, but South Africa’s was only 24 percent.
Spending on infrastructure in South Africa has lagged other emerging markets since the 1980s, ‘missing a generation of capital investment in roads, rail, ports, electricity, water, sanitation, public transport and housing’, says the report.
Fallen sharply
Infrastructure investment in South Africa has fallen sharply over the past few years. Lack of capacity in project preparation, and a government budget skewed to the payment of salaries and debt service, as well as the massive bail-outs of state-owned companies, means that there is little room for capital spending. And private companies are put off by low economic growth and the uncertainty over property rights.
In the past, state-owned companies like Eskom were major drivers of capital investment. But today many of the state owned enterprises are in financial distress and need bailouts from the state to pay salaries. Municipal investment has also been an important source of new infrastructure, but today there are only a few local governments that are not in distress.
While infrastructure projects are often in budgets, there is often an underspending on investment, says Intellidex, because of the shortage of well-prepared and bankable projects due to a skills shortage in the public service.
Much public infrastructure investment has delivered poor value for money due to bad project selection, design, and implementation. Kusile and Medupi, Eskom’s massive flagship coal-fired power stations, were meant to have been generating sufficient power to avoid load-shedding long ago, but they are not producing revenue and remain a drag on Eskom and the economy. Public investment that does not work properly or for which it has overpaid is a drag on productivity and growth.
While private investment has averaged about 13 percent of GDP since 1994, and has been relatively strong over the past five years, it is still low by international standards. The big uncertainty in the minds of investors is the pending passage of an act that would allow expropriation without compensation. As Intellidex states, investor confidence will have to be restored with a recommitment by the government to property rights.
South Africa is no longer able to attract massive investment into the mining sector. The Minerals and Petroleum Resources Development Act is being reviewed with a view to extracting higher royalties for the government. It is also likely that the mining charter will be changed to ensure greater Black Economic Empowerment stakes. This creates uncertainty about changing goalposts and points to a lowering of rates of return to investors in the sector. In 2018, South Africa was able to attract only R387 million in investment in mining exploration. By contrast, R23 billion went into exploration in Australia in 2018, despite the country’s mining prospects not being as good as those in South Africa.
The largest contributor to private fixed capital formation is machinery and equipment, but not all of this is growth-enhancing. Eskom should provide low-cost reliable power, but fails to do so, forcing the private sector to make up for its failure with the purchase of generators.
Recommended
Key policy changes that can stimulate large-scale investment at no cost to the state are recommended. Allowing private companies to build new generating plants of over one Megawatt and to sell the power on the market is one key change. The long-promised, but yet to happen, licensing of new spectrum to the network operators so they can build a 5G service is another.
To ensure more effective use of state assets, permitting state-owned enterprises to offer concessions to private firms to run ports and rail operations is suggested.
Private operators would have the incentives to manage services such as ports and railways in a far more efficient manner than at present.
Various forms of public-private partnerships would open new opportunities to turn around many of the activities of state-owned enterprises, without going through the political troubles that would encounter privatisation.
Concessions to the private sector and public-private partnerships might also give new managers an incentive to ensure proper maintenance and to act against vandalism.
Without policy changes to stimulate large amounts of investment in well-run infrastructure, the country’s growth prospects can only deteriorate.
[Image: Manuel Sechi from Pixabay]
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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