Rich in potential and lofty aspirations, South Africa’s government has struggled to come to terms with the fact that its ambitious plans for infrastructure investment have not materialised. With many praiseworthy statements, the critical component of implementation remains a recurring roadblock.
In Treasury’s recent Medium Term Budget Policy Statement (MTBPS), reference was made to government working on a new mechanism to crowd in financing from the private sector and institutional investors for large infrastructure projects, and exploring the creation of alternative financing instruments for priority projects.
Although the details will likely only be unpacked and thoroughly understood after the Budget presentation in February 2024, it is crucial to remember that access to capital has never been the barrier to moving South Africa forward in terms of infrastructure investment.
To put this in context:
The Retirement Fund Industry is today worth more than R4.6 trillion and, given recent changes to Regulation 28 in terms of allowing a 45% allocation to infrastructure assets, retirement funds are looking for bankable infrastructure opportunities. Unfortunately, these are few and far between.
We also have a robust banking environment where, given low economic growth, corporate lending has waned, with banks having been the big supporters of bankable infrastructure initiatives in the past.
One needs to look at the success of the Renewable Energy Independent Power Producer Procurement Programme (REIPPP) where more than R256 billion was collectively deployed by the capital markets, with 123 projects being awarded.
The aim should be to create an environment that encourages the development of bankable opportunities that can attract both local and foreign investment.
The government's proposed MTBPS wording: "alternative financing instruments" highlights the potential of using financial channels other than the existing mechanisms. However, the success of these instruments will be contingent on the availability of projects with a favourable risk-return profile. The lack of such viable projects discourages capital flow into the infrastructure sector, since retirement funds and other large-scale investors seek investments that are ultimately bankable.
Words vs deeds
In the context of South Africa, the persistent challenge has been the gap between plans on paper and their effective implementation on the ground. Various structural constraints driven by a lack of streamlined processes, delays in project approvals, and bureaucratic inefficiencies have created an environment that is discouraging for both domestic and international investors. As a result, despite a multiplicity of infrastructure development plans and forums (Infrastructure SA, SIDSSA, The Infrastructure Fund, and so on), implementation has constantly fallen short, hindering the country's progress and potential economic growth.
Furthermore, South Africa has maintained a low level of investment in capital goods, which are the investments that fuel economic growth. This would normally include investments in rail infrastructure, electricity, harbours and ports, and other productive assets critical to increasing capacity and improving overall economic efficiency.
As illustrated below, when looking at Gross Fixed Capital Formation (GFCF) as a percentage of GDP, we are at 14% for 2022, which is far too low when compared to other developing market peers, and has a direct impact on our economic growth, which is now considerably below 2%. This, in turn, impacts our national accounts, where borrowing needs to constantly increase, given the inability to grow tax revenue. This has a spiralling impact on our Net Debt to GDP figures. It is estimated that about one fifth of tax revenue is used to service interest on borrowings alone.
Figure 1: GFCF as a % of GDP
Growing trend of under investment in capital goods. 14.05% for 2022!
Source: World Bank Economic Data
Even though efforts such as Operation Vulindlela have garnered substantial attention, as have initiatives such as the National Logistics Crisis Committee, one cannot help but notice how the private sector continues to be compelled to fulfil obligations that should sit squarely with the government.
It is critical to engage in upskilling the public sector (especially in project management and engineering capabilities) while also encouraging accountability and openness. Along with the concept of strong governance mechanisms, this approach not only speeds up project execution but also fosters investor trust, promoting a favourable climate for both domestic and foreign investment. While it is desirable to seek private and international capital for infrastructure projects, the government must emphasise building an environment conducive to nurturing bankable opportunities for long-term investment. The nation can harness its potential for comprehensive economic and social progress by enhancing competence, creating capacity and bridging the gap between planning and execution, thereby establishing itself as a global leader in infrastructure development.
Recognising the success of South Africa's recent World Cup Rugby victory, the government must adopt a similarly unified and strategic approach in its infrastructure investment approach. Just as the diverse talents and cohesive teamwork propelled the national rugby team to triumph, a concerted effort and comprehensive strategy in infrastructure development can lead South Africa to secure victories in economic growth and social advancement.
Like the teamwork and coordination displayed on the rugby field, a collective effort and well-coordinated plan – followed by actual execution - are essential to ensure a successful and sustainable infrastructure development journey for the nation.