One of the reasons why South African growth prospects are so dismal is our pitiful level of new investment.
Investment in South Africa is a fraction of what it should be for sustained growth. Deep changes in the way the government does things will be needed to boost both public and private investment.
The fundamental problem is that the project investment cycle, from inception to completion, is severely hampered at every stage.
All the signs are that the government wants a “developmental state” that will only allow the private sector into critical sectors when there is a crisis and then, only on a limited basis.
There is a shortage of skills in the government and at public enterprises to prepare and package projects and present them to investors. Then there is a problem with the entire system of hiring and procurement. Cadre deployment and empowerment regulations push up costs and work against delivery. Despite a skills shortage, contractors and state-owned enterprises have to adhere to empowerment regulations. Procurement often becomes the nexus of corruption. Implementation can be hampered by the construction mafia and labour problems. In short, it is difficult to get things going and complete a project on time and within budget.
The solution is to bring in the required skills where needed, scrap cadre deployment and hiring on a racial basis, prosecute corruption and the mafias, open up all bids and procurement records, and ensure that schedules and budgets are met. And protection of existing infrastructure against the gangs that pillage copper cables and take out rails for scrap is also needed.
But all that appears politically impossible.
At an annual rate of around 14 percent of GDP in South Africa, investment, called Gross Capital Formation in the National Accounts, is extremely low by international standards. Much of the reason behind China’s extraordinarily high economic growth rate is rapid investment, which despite a levelling off, is around 43 percent of GDP. To build the power stations, repair the rail lines, and invest in ports, we will probably require a minimum sustained annual investment rate of about 25 percent of GDP.
Over the five years to 2021, investment by the central government dropped by eight percent and that by public corporations fell by 33 percent. One problem is that salaries, debt service, and bailouts for state owned corporations is increasingly crowding out public investment. Private sector investment, which is more than double that by the state and its agencies, only rose by seven percent over the past five years. This is all a recipe for long-term decline.
It is possible to grow rapidly with lower investment rates if there are fast rises in productivity, but that requires a good standard of education and a good technical training system, and skilled managers. Ultimately what is required is a magic mix of well-chosen and executed investment projects and good management.
Gross fixed capital formation does not include depreciation, which would make our net level of investment a lot lower. Infrastructure depreciates over its useful life of about 25 years. Much of our public infrastructure is well past its useful life. Potholes in roads, water treatment works that break down, power cuts, railways that are ripped up, bottlenecks on the rail system and at ports, and neglected municipal infrastructure show we are now in the crumbling stage.
The government says it sees the problem. Two years ago, President Cyril Ramaphosa spoke of the central importance of infrastructure investment and the need for “extraordinary measures to return us to a path of sustainable growth.
“Central to this effort is infrastructure construction and maintenance, which is the flywheel for economic growth and large-scale job creation.,” the President said.
In his Chairman’s Report in the FirstRand Group Annual Report, Roger Jardine did some plain speaking about the discrepancy between the big talk on investment and the lack of action.
Over the past two years, “it is hard to identify one government-led infrastructure project of any significance that has actually been executed. Progress, in other words, has been to date, glacial,” Jardine wrote in his most recent Chairman’s report.
The reason for the disconnect between the President’s goals and the lack of delivery in raising investment levels, “is the historical unwillingness to crowd in the private sector.” writes Jardine.
There are caps on what the private sector and independent power producers are able to contribute to the power grid, and the number of projects in which business can invest on the rail network are limited.
A shift in policy to allow a greater role for the private sector only came about with the near-collapse of the electricity grid. But Eskom still needs to be fixed, and aspects of regulation need to be changed to encourage a greater private sector role. The private sector has a large role to play in rail, yet only 16 rail slots are available to the private sector to run and invest in, well short of what is required for an overhaul of the transport infrastructure.
Jardine suggests that the government and the private sector agree on infrastructure priorities and a plan. But would the government be prepared to see the private sector take on a far bigger role? That would mean the government might lose control of procurement and hiring. That is where political costs might come in. The trade-off here would be less empowerment and cadre deployment, but at least a chance at reducing hours of load shedding and fewer bottlenecks at ports.
Are changes on the way?
The Cabinet recently approved a document to ensure appointments on the basis of merit rather than by cadre deployment. And the DA is taking government to court to end cadre deployment. Under the ANC, the end to cadre deployment will be very difficult to achieve and monitor.
Progress on the reforms to give infrastructure spending a boost will depend largely on whether Ramaphosa believes he has the political space to undertake changes in policy.
Having woken up to the idea of private sector involvement in a few sectors of the developmental state, the government might now go the next step and clear the way for a greater private sector involvement with regulatory and other changes.
What is important is that there are now voices for change that simply cannot be ignored. Jardine’s is certainly one, as is that of the new Eskom board member, Mteto Nyati, who has had a wealth of private sector experience. He is quoted in last weekend’s Sunday Times as saying that empowerment regulations on hiring and procurement will have to go, if costs are to be reduced.
After less than a month on the board, he has dropped a bombshell by challenging ANC tenets on procurement from empowered suppliers and hiring on racial grounds.
Nyati says he will be looking into rigid procurement rules pushing up costs. “When the supplier of equipment is an international company … you have to use middlemen to satisfy the localisation rule. There is no place for those kinds of practices now. We need to remove costs from the equation.”
“Internal corruption is largely at the back of empowerment policies that promote local small business,” he said.
This sort of talk certainly sets the standards for reform.
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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