IN 2023 total investment in the country amounted to just over R1 trillion. Total GDP was just over R7 trillion, which means investment came to 15% of GDP.
It is below the 25% ambition of the National Development Plan but still an enormous number. It comes to R114 million per hour, every hour of each of the 365 days of the year!
(Just for fun, some context on numbers we use so glibly: If one counts at a rate of 1 digit every second, it will take 5 seconds to get to 5 and 10 seconds to get to 10, and so on. To get to 1 million will take 11,5 days; 1 billion 31,7 years; and 1 trillion 31 709 years! To get to R114 million will take 3,6 years.)
Traditionally, fixed investment in South Africa comprised about two-thirds from the private sector and one-third from the public sector. In recent years, the public sector share has declined, and the private sector share has increased. By 2023, the numbers came to 71% and 29%, respectively. The private sector is becoming ever more important.
Lees hierdie artikel in Afrikaans
Public sector
A total of R943,8 billion is budgeted for public-sector infrastructure spending over the three years from 2024 to 2027. It increased above the inflation rate and defied the oft-stated truism that capital expenditure is the first to be cut when budget austerity occurs. The increase reflects political priorities.
State-owned enterprises (SOEs) are the biggest players (40%), followed by municipalities (23%), provinces (20%), national departments and their agencies (16%), and public-private partnerships (PPPs) (2%). One can expect the SOE share to decline over the coming years and PPPs to increase.
Though public investment is increasing, the R943,8 billion is still only equal to about 4% of the expected GDP for the three years. Using more private-sector money is indispensable if we want to increase public investment.
Public–private partnerships
Although PPPs form only about 2% of the R943 billion budgeted for infrastructure, they punch above their weight when it comes to delivering good-quality outcomes. Toll roads are a good example – we all know the difference between driving on a toll road and driving on a provincial road.
Budget facility for infrastructure (BFI)
A step to ensure better quality spending was taken back in 2016 when the Treasury created the budget facility for infrastructure (BFI). It requires public sector projects to do rigorous planning and technical preparatory work before they will be considered for budget finance.
Apart from quality control, the BFI also increases access to funding by hooking up public projects with private funding where appropriate.
Some 14 projects totalling R66,9 billion are financed through the BFI, an increase of 7% from last year. (Again, these increases are telling in the context of budget austerity.)
Infrastructure Fund and Infrastructure SA
An important step change occurred in 2018 when Pres. Ramaphosa took office. He launched the Infrastructure Fund to blend public and private funds and increase the pot of money available for infrastructure. The fund became operational in 2020. (Things take time in the public sector).
To strengthen planning, budgeting and execution abilities, Infrastructure SA was created to work alongside the Infrastructure Fund on all projects of more than R1 billion. It is a one-stop shop for large infrastructure projects with a team of professionals to help unlock them.
Currently, there are 31 projects under preparation by Infrastructure SA, among them schools in the Northern Cape and Eastern Cape and four hospitals in Mpumalanga and the Free State.
Water and sanitation
Water is an ever more pressing worry for many South Africans. With regard to bulk supply, the government has prioritised 11 projects across seven provinces for about R139 billion (included in the numbers above for the public sector). Some examples:
However, water is not just about bulk supply. Municipalities distribute it, and that is where there is many a slip between the reservoir and the tap. Following the template developed for renewable energy, the government has set up the Water Partnership Office (WPO) in the Development Bank to help municipalities raise private sector finance to fix their creaking water systems.
Bringing private and public sectors together should instil some discipline and proper management in local water administration and ensure better quality. Last week, the Treasury agreed to withhold municipalities’ equitable share (their transfers from the budget) where they owe money to water boards. This will ruffle a few feathers.
Private sector
Private sector investment in the economy runs at about 10% of GDP, below the NDP target of 15%. Thus both the public and private sectors fall short of their NDP targets (public 4% to 10% and private 10% to 15%).
In 2023, six of the nine economic sectors measured by SARB data invested less than they did in 2019 (measured in constant rands). First, Covid (2020) and then load-shedding (2021/22) knocked the stuffing out of the economy and investment.
Even the biggest sector in the economy, finance, insurance, real estate and business services, invested 11% less in 2023 than in 2019. Financial institutions now play the societal role that big mining companies once played.
Mining itself invested 2,2% less in 2023 than in 2019. In fact, it invested 9% less than ten years earlier in 2014. The country is really undergoing a big change from mining to other sectors. Perhaps gas discoveries will turn that around, but so far, the mining decline is both persistent and substantial.
The construction sector, critical to turning the country into a big construction site, invested 3,5% less in 2023 than in 2019. A bigger pipeline in both the public and private sectors is needed.
Energy
Like mining was a hundred years ago, energy is now the investment frontier in South Africa. It is not showing up in the official numbers yet, but it is happening. I count it all as part of “private sector", because even the public procurement projects in electricity (bid windows) are all built with private capital, although with a public sector guarantee.
Generation
Six bid windows have been run to date, resulting in agreements for 8 000 MW of new generation capacity (all renewable) for a total investment of R270 billion. Bid Window 7 for 5 000 MW is currently in the market. Investors are clearly keen: Bids for 8 526 MW have been received; a final decision on the winning bids should be made by the end of November. Also in the market is a bid window for another 615 MW of battery storage and 2 000 MW of gas-to-power. These projects are estimated to involve R180 billion investment between 2026 and 2029.
However, the bigger action is outside the bid windows. An important shift away from public procurement has occurred since Ramaphosa opened up the market in 2022. A whole new energy system is now being developed, all of it with private capital (without government guarantees).
More and more companies are making their own arrangements for power: Some are building their own facilities, some are concluding power purchase agreements with renewable facilities, some deal with energy traders who buy and sell power, some contract with energy aggregators who buy power from different generators and sell it to a range of customers, and so on.
According to Operation Vulindlela data, 22 500 MW of private sector projects are in the pipeline, with an estimated investment of R390 billion. Even if we assume that not all of it will come to fruition, it is still a healthy dose of investment.
An oft-forgotten fact is that even with recent postponements granted to some Eskom power stations, eight of the 14 Eskom coal-fired power stations are going to close down over the next decade. Simply replacing that capacity will require significant investment.
Transmission
As is generally known, the transmission grid is a constraint and needs to be upgraded. The numbers required vary between R200 billion and R390 billion, depending on the time frames used by the forecaster.
The National Transmission Company of SA (NCTSA) has R112 billion earmarked over the next five years to build transmission capacity. To unlock further funds, the government has authorised the Independent Power Producers Office (IPP Office) to run a pilot programme to procure SA’s first independent transmission project.
The overall trend on energy is clear: Over the next five to six years, R1.5 trillion is needed for the energy transition, and in the 10 years after that, a further R3 trillion.
So what?
- The trick for making SA one big construction site is that investment in both the public and private sectors must increase from 4% to 10% of GDP to 10% and 15%, respectively.
- One of the consequences of state capture is that SOEs, once perceived as the engine of public investment, have suffered a severe decline. This necessitates the use of more private funds for public infrastructure.
- Since 2018, the political climate on public-private partnerships and using private capital in the public space has changed significantly. There is a greater willingness to blend public and private money for infrastructure.
- For this blend, one needs a pipeline of credible projects. The institutional architecture to plan and execute the projects is getting stronger and the pipelines are getting bigger.
- More stringent project requirements and the use of more private capital will simultaneously improve the quality of spend and increase the pot of money.
- Using private money will also maximise the public sector’s role. It is really a no-brainer.
- Ironically, load shedding and water shedding are driving these changes ever more forcefully.
- Read the original article here.
♦ VWB ♦
BE PART OF THE CONVERSATION: Go to the bottom of this page to share your opinion. We look forward to hearing from you.
To comment on this article, register (it's fast and free) or log in.
First read Vrye Weekblad's Comment Policy before commenting.