The fallout of the coronavirus pandemic and the government’s lockdown may threaten President Cyril Ramaphosa’s investment drive, with companies such as Sappi and Growthpoint reviewing spending plans that formed part of R360bn worth of investment commitments made in 2019.
This is a bad sign for Ramaphosa’s goal of achieving his target of $100bn (about R1.7-trillion) in investment over five years, which was announced to much fanfare in 2018.
Fixed investment in SA, particularly in infrastructure, has been a rallying point for Ramaphosa’s administration and is looked at as the linchpin for recovery plans to get SA out of its economic hole.
Global paper and packaging maker Sappi, which announced R14bn worth of expansion projects in the coming six years at last year’s investment conference, told Business Day that the pandemic has interrupted these plans.
“The negative impact of the pandemic, as well as government lockdown decisions in domestic and global markets, means we have had to pull back on capex projects at least until 2022,” CEO Steve Binnie said in response to questions. The company is busy reviewing all capex plans and will only be in a position to determine which projects will proceed once the “recovery from the pandemic at a domestic and global level becomes clearer”.
Instead, the group’s focus is now on preserving liquidity and increasing cash flow, so there has been a reduction in current and planned capital expenditure.
Property giant Growthpoint, which has completed about R4.8bn in projects over the course of the last two to three years, has postponed about R2.4bn worth of other projects, some of which will likely be scrapped, its SA CEO Estienne de Klerk said. Multiple projects are being re-examined with consideration being given to the extent to which a project may be exposed to a particularly hard hit sector, such as tourism, he said.
Growthpoint is also reviewing certain projects — along with its clients. “In some cases this isn’t a unilateral decision, it’s a bilateral one between a client and ourselves, to postpone the development because there is so much uncertainty,” he told Business Day.
Some of the projects, though not all, fall under the investment pledges Growthpoint made at last year’s investment conference, said De Klerk. The company still has R1bn under construction, but he said that projects worth about R230m have been reduced in scope.
De Klerk said the biggest factors for Growthpoint in making these decisions have been the economic conditions and the impact on demand. But the circumstances are compounded by pre-existing challenges, such as ever-rising municipal rates and taxes that make developments less feasible.
For Growthpoint to return to its pre-coronavirus investment plans, “we need to start seeing growth in demand”, he said. Instead, vacancies have continued to climb across its industrial, office and retail portfolios. “In this environment you shouldn’t be building anything new, you should rather be filling the existing vacancies you have,” he said.
The alcohol ban, which was reintroduced in mid-July, costing the government billions in lost revenues and feeding a thriving black market, forced global brewing giant AB InBev’s SAB to halt R5bn in planned investment in SA.
Its peer Heineken said it is also reassessing investment plans, including the possible establishment of a KwaZulu-Natal brewery, due to the ban. The spillover also hit bottle manufacturer Consol Glass, which suspended the construction of a R1.5bn plant in Ekurhuleni
But it is not just private companies that are faced with re-evaluating investment plans.
Airports Company SA (Acsa) has been hammered by the halt to tourism and travel, with its airports all but empty as local airlines barely operate and one of its largest customers, SAA, grounded during its fraught business rescue process. At last year’s conference, Acsa outlined R12.8bn in investments across a range of projects with various completion dates to 2025.
Acsa did not respond to questions but a recent note from RMB Global Markets Research noted that Acsa’s capex spend is going to be limited to less than R1bn a year for the next five to six years.
Transnet — which pledged spending of about R22bn across various expansion projects — said it will continue with its capex drive, but “at slightly reduced levels”. Actual capital expenditure in the 2020/2021 financial year is expected to be at least R5bn less than planned, it said.
Despite the government’s stated commitments to infrastructure investment, the latest of which was the gazetting of 51 “strategic infrastructure projects”, under current constraints a “grand and ambitious, Chinese-style infrastructure drive” is unrealistic, said Nedbank chief economist Nicky Weimar.
There is no denying that SA needs reliable economic infrastructure, but the state should begin with a reliable, cost-effective electricity supply, without which fixed investment is either “not possible or too costly to be feasible”, said Weimar.
The state has also yet to address important questions about its plans and how they will be financed and implemented, she said. The state has no record of delivery and despite lack of capacity and corruption repeatedly identified as key obstacles, “what has changed?” said Weimar.
Public private partnerships (PPPs) are touted as a win-win solution for these seemingly intractable issues, but the lockdown has placed enormous strain on companies’ cash flows, forcing even large firms to cut costs dramatically and secure some form of bridging finance, Weimar said. “The appetite for embarking on PPPs under the current circumstances will therefore be understandably limited.”
Weimar does not believe the $100bn target will be met within five years. Firms will focus on restoring profitability and strengthening balance sheets in the years to come. Cutting capex is the quickest way to reduce costs to prop up cash flows and restore earnings growth, she said.
The slowdown has already begun. Foreign direct investment into SA declined 15% during 2019, according to UN data. Meanwhile, in the first quarter of 2020, gross fixed capital formation, an indication of investment, plummeted by 20.5% even before the Covid-19 crisis hit SA.
Nedbank’s recent capital expenditure project listing, which tracks investment projects, showed that the first half of 2020 recorded the lowest number of projects since the listing started in 1993, and the lowest value since 2001.
And its likely to remain weak, said Weimar, with a slow recovery only expected from 2022 onwards “if economic growth comes through”.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.