The budget would commit a lot of money to infrastructure, President Cyril Ramaphosa said at the recent launch of the second phase of Operation Vulindlela. “For the first time in many, many years, we are now going to be able to spend up to a trillion rand on infrastructure over the medium term,” he said. “It’s a budget that will make us look forward.”
It was a pointer to the way finance minister Enoch Godongwana’s Budget 3.0 might be framed today. Whatever the compromises that have gone into cobbling together the numbers, the narrative is likely to be one of reforms for growth and investment.
The Treasury has committed to shift the budget mix in favour of more capital spending, which is now hardly 5% of government spending. Recent budgets have shown it starting, slowly, to do that. In October’s medium-term budget policy statement it announced a series of reforms designed to fast-track the public sector’s pipeline of infrastructure projects and bring private sector players into them, as well as to enable more private financing, especially of priority infrastructure projects.
Then there are the Operation Vulindlela reforms themselves, which are all about opening SA’s electricity and logistics markets to competition and attracting private investment there as well as water and municipal infrastructure. There is plenty of private money waiting to go into public infrastructure. The issue is getting it in.
So does the president’s R1-trillion exist? Yes and no. It’s not in the budget itself but in a table at the back of the book, which shows only about a quarter of it is government spending, with the rest mainly state-owned enterprises, as well as other public entities and municipalities. It’s mainly public money, not the private money that could be crowded in. But at just over R1-trillion over the next three years it’s a jump of more than a third compared to the past three years.
It looks impressive, but in the overall scheme of things it’s less so. First, Nedbank economist Nicky Weimar has pointed out that the private sector alone does R1-trillion a year of capital investment. She believes, too, that new capex would need to double or triple to support higher economic growth. On the Treasury’s estimates, public and private capex would need to double to reach the National Development Plan’s aspiration of 30% of GDP.
Second, budgeting R1-trillion is not the same as spending it. Plans and projects are the same as cranes on the skyline or concrete mixers on the ground. Given the government’s long track record of poor delivery on infrastructure promises, the issue is whether it’s all going to happen this time. There aren’t a lot of cranes on the horizon (yet).
Still, there is an air of optimism. Investment has picked up after a long drought. The surge in private renewable energy investment enabled by the Operation Vulindlela reforms is the poster child for what can be done. There’s excitement at the prospect of private participation soon in SA’s rail and port networks, as well as in its electricity grid and water infrastructure.
“For the very first time in the past five years there’s a serious commitment by the government to focus on infrastructure, and an emphasis on private participation. That was never a topic allowed in the past because it meant ‘privatisation’. Now it is generally accepted even by lefties in government,” says one infrastructure veteran, though he emphasises that the capacity to implement is limited, at all levels of government.
Says Rand Merchant Bank head of infrastructure Judy Kobus: “We’ve seen more innovation in the last two years than we’d seen in the last 20 years in this industry”. And while Luvuyo Masinda, Standard Bank’s head of corporate and investment banking, says there is a long way yet to opening the door to the long-awaited infrastructure boom, “we are closer than we’ve ever been”.
Provinces and municipalities send back capital allocations each year because they can’t spend them. That’s the starkest illustration they don’t have the capacity to prepare projects, never mind build them, or take them to market to finance and build. But the dearth of expertise, and the risk of corruption, are problems across the public sector.
As long as the government keeps running up debt to levels that a stagnating economy cannot afford, there will be question marks over its ability to repay, and lenders will demand steep returns to compensate them for that risk.
The Treasury and Operation Vulindlela are driving reforms to open the way for intervention at public entities or municipalities that can’t implement. The Treasury has streamlined its budget facility for infrastructure. New private participation units have been set up in the Development Bank and the department of transport. But getting around the political pushback can be more difficult than sourcing the skills.
There’s another whole layer of constraints to the big projects that would drive economic growth, but need big sums of private money, as well as concessional lending from the likes of the World Bank. The government wrote more than R220bn of guarantees to attract private players into the early, successful rounds of its renewable energy independent power producer programme (REIPPP).
Its heavy debt burden means it can’t afford to provide more guarantees. Eskom can’t borrow, nor can the new National Transmission Company, which is supposedly independent but remains a subsidiary of Eskom, nor the National Ports Authority, also meant to be independent but still a subsidiary of Transnet. All of which makes it difficult to go to market for the mega-projects in electricity transmission or ports or railway lines that SA’s economy urgently needs. Most of the ailing metros can’t borrow either.
Investment bankers can financially engineer their way around a lot of these constraints. But those structures would often mean giving the private sector a high degree of control. It’s not at all clear how much control leaders in the government or state-owned enterprises are willing to relinquish in return for the private participation and money they are so keen to attract.
It’s also not clear how much of the risk government is willing to share, to back up private players in the event of default or expropriation by the public sector. Here, the devil is in the detail. The Treasury is establishing a credit guarantee scheme that will enable it to bring in the World Bank and other institutions to provide the capital to insure projects against risk instead of burdening government with more guarantees.
It will start with the crucial investment needed to strengthen SA’s national electricity grid, where the plan is to bring in independent transmission projects — like the REIPPPs — to invest in new lines. But the price of that insurance will be key to whether those projects are viable for private investment — and whether the scheme can be extended eventually to support priority infrastructure projects in other sectors.
Most of the details lies beyond the budget numbers. But the market will be watching the budget speech for progress on the government’s intentions. The budget framework itself matters greatly for infrastructure investment, particularly to the cost of the capital to finance it. As long as the government keeps running up debt to levels that a stagnating economy cannot afford, there will be question marks over its ability to repay, and lenders will demand steep returns to compensate them for that risk.
That will keep the cost of borrowing high, not just for government but for everyone. As it is, government is borrowing hundreds of billions of rand each year to pay for current expenses such as wages, grants, and to service its debt — not to invest in the future. To look forward, the budget must tackle that.
Joffe is editor-at-large.
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