Infrastructure Development in South Africa, Stephen Labson slEconomics


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Budgeted public sector infrastructure spending of roughly R845 billion is planned for from 2012/13 to 2014/15 of which R300 billion is targeted to the energy sector and R262 billion in transport.

While funding would appear to be sufficient to support South Africa’s infrastructure investment requirements, there are some challenges to address. We examine some of the key issues ahead in our Overview.

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Infrastructure Development in South Africa, Stephen Labson slEconomics

  1. 1. slEconomicsEconomics Consulting in Utilities and InfrastructureInfrastructure Development in South AfricaOverviewIn the state of the nation address for 2012 President Jacob Zuma highlighted the importance ofinfrastructure development to South Africa’s economic growth, and which has been a focal point for theGovernment’s three planning period to 2014/15, and beyond.Macroeconomics drivers Public sector infrastructure investmentAgainst the backdrop of the global economic Budgeted public sector infrastructure spending ofdownturn, the South African economy has roughly R845 billion is planned for from 2012/13averaged about 3 per cent growth a year to 2014/15 of which R300 billion is targeted to thesince 2009.* energy sector and R262 billion in transport.• GDP growth was roughly 2.7 per cent in To 2020 R3.2 trillion is expected to be invested in 2011/12. 43 large scale projects in areas such as:**• There was a modest recovery in job creation during 2011/12 but the • Adding 11,719 MW of power generation unemployment rate remains high at 23.9 capacity and 6596 km of high voltage per cent. transmission lines.• The national government’s budget deficit • Replacing 6405 km of rail freight, coal and ore for 2011/12 was 5,2 per cent of GDP and lines increasing rail network capacity by 149.7 public sector borrowing requirements at million tons, and procuring 1317 new 7.1% GDP. locomotives and 25,000 new wagons.• Total (gross) loan debt was R1.1 trillion as • A R100 billion port expansion at Durban. at 31 December 2011, equivalent to • Refurbishment and strengthening of 13,125 38.6% of GDP. km of fibre optic cable.*Source: Quarterly Bulletin March 2012, South African ** Source: Minister Malusi Gigaba - Public Enterprises BudgetReserve Bank. (NB 1 Rand = AUD$ 8.41 as of 19/06/12) Vote Speech 16 May 2012, and other material. 1
  2. 2. South Africa’s approach to funding public sector infrastructureSouth Africa’s public sector infrastructure programme is expected to be funded from a range of sources:• A combination of internally generated surpluses and borrowings from capital markets by public enterprises such as Eskom, Transnet, South African National Roads Agency (SANRAL), and Airports Company South Africa (ACSA).• Direct private sector investment such as the Department of Energy’s 3,625MW renewables Independent Power Producer Procurement Programme currently underway.• Mixed shareholding, such as that for Telkom South Africa (listed – with Government retaining 38% shareholding) and Airports Company South Africa (non-listed shareholding of roughly 75% retained by Government).• Direct government contributions for entities such as Passenger Rail Agency South Africa (PRASA) in providing services to low income communities.In regard to sourcing external capital markets, public enterprises have relied on local corporate debtmarkets, as well as domestic and multi-literal Development Finance Institutions. E.g.• Enterprises such as Eskom, Transnet, SANRAL, and ACSA have made use of corporate bond markets and short term commercial paper facilities.• Multi-lateral institutions such as the African Development Bank; Development Bank of Southern Africa; the World Bank; and the French Development Agency have provided loans to South African public enterprises recently.• Local institutions such as the Industrial Development Corporation and Public Investment Corporation similarly invest in a range of public sector projects.While the source of funds would appear to be of sufficient depth to support South Africa’s infrastructureinvestment requirements, there are some challenges to address.The regulatory environmentPublic enterprises’ ability to generate surpluses and re-invest earnings is fundamental to theGovernment’s approach to funding infrastructure development. Earnings growth is needed to enhancethe balance sheets of key public enterprises, otherwise sovereign guarantees will be required to obtainloans.However, the regulatory environment in which pricing is determined for many of these enterprises isstill developing and has not generally supported a strong profile of earnings for regulated publicenterprises. Indeed regulatory decisions have contributed to loss making years for entities such as 2
  3. 3. Eskom (2009) and ACSA (20011). In Eskom’s case allowed tariffs have not been sufficient to maintain astand-alone investment grade credit rating in light of its capital programme, and Government hastherefore needed to provide some R350 billion in explicit government guarantees in funding Eskom’smedium term capacity expansion.Moreover, while Government policy is to apply user pays principles across a range of sectors –implementation is sometimes uncertain. As a recent example, on a complaint brought before the HighCourt by constituents an interdict was provided stopping the implementation of tolling on SANRAL’sGauteng Freeway Improvement Project (subject to legal review). Moodys Investor Services hassubsequently downgraded SANRAL’s credit rating to Baa2 with a negative outlook, with further actionspotentially leading to default on loan covenants and potentially requiring government to step in to makepayment on SANRAL’s borrowings.In one commentator’s view, “the court order has put the states ability to implement its policy of "theuser-pays" as a preferred model for infrastructure development under the microscope and has raisedquestions in the minds of investors about its ability to execute and implement policy in other criticalinfrastructure”.1Skills and capacity to build - a precondition for successWith the proper policy and regulatory settings put into place one might be reasonably confident in theGovernment’s ability to achieve its investment plans. Certainly South Africa’s overwhelming success indeveloping infrastructure needed for hosting the FIFA 2010 World Cup provides clear evidence of thecounty’s capabilities. Nevertheless, as pointed out by the Minister for Finance in his 2012 budgetspeech: “We are aware of several weaknesses in the state’s infrastructure capacity. In the past, spending has lagged behind plans. Our estimate is that in 2010/11, R178 billion was spent out of a planned R260 billion, or just 68 per cent. We have to do better than that – state enterprises, municipalities and government departments all need to improve their planning and management of capital projects.”This would seem to suggest a role for the private sector – both local and global - in assisting withcapacity building across the range of entities highlighted above by Minister Gordhan. This might be inthe form of advisory, engineering, procurement and construction contracts; long term serviceagreements; joint ventures; or concession arrangements.There is also the potential for leveraging these types of opportunities across the continent. South Africais well placed as a hub for economic development in a variety of sectors, and indeed cross-borderinitiatives are currently a focal point for both government and the private sector.While the physical landscape of South Africa is rather similar to Australia’s, those with an understandingof the broader commercial and policy landscape may very well find a range of areas in which tocontribute to the development of infrastructure in South Africa and the surrounding region as a whole.1 Nicky Smith I-net Bridge 12 June 2012. 3
  4. 4. slEconomics Economics Consulting in Utilities and InfrastructureslEconomics is a boutique economics consulting firm providing specialised advice togovernments, regulators and corporate clients in the area of utilities and infrastructure. Weare based in Sydney Australia and have an international network of associates to bring globalexperience to local initiatives.ASABA lunch address – 20 June 2012Contact detailsDr Stephen LabsonLevel 32, 101 Miller StreetNorth Sydney NSW 4