PETER ATTARD MONTALTO: Much-hyped infrastructure spending flatters to deceive

The public relations (PR) from the government on infrastructure has become profoundly unserious. The state of the nation address (Sona), in particular, was filled with too much hot air on the subject. A student housing project is done here, a motorway project there.

Infrastructure is proceeding, no doubt. Yet the budget documents told a separate story. Budgets are continually underspent — about 10% in this fiscal year versus the budget at the start of the year, but about 20% versus the estimates for the current year in the 2020 budget. Infrastructure budgets for the year ahead have been revised down 6% already given departments’ inability to convince the Treasury they actually have the preparedness to spend the money.

The latest GDP data doesn’t quite tell us what “infrastructure” spending is in real terms. But it does show that public and general government spending on fixed capital fell in the fourth quarter to 3.9% of GDP from 4.1% the previous quarter. This is one of the lowest shares yet — shares of output on public investment were last at these low levels at the start of 2002. Clearly not enough infrastructure is being built to fit the PR.

The picture is the same for the private sector. The cabinet statement last week glibly trumpets that of the investment conferences so far — some that attracted about 152 commitments — 45 projects have been completed and 57 are under construction. Overall it suggests that R314bn, or 40.6%, of total commitments have been expended. Amazing. But the data averaged only 10.5% of GDP in the fourth quarter of 2021 versus 11.4% pre-Covid. We have a vastly, crisis-screaming higher unemployment rate now than pre-Covid or at the start of the Ramaphosa administration and higher inequality to boot. All this, yet R314bn has been spent?

Some in government understand why this is so, though many — dare I say most — don’t. The problem is not an investment strike in either the public or the private sector. A total of R581.5bn was invested in the private sector in 2021 and there was R228.4bn of public and general government investment spending. It’s not that investments aren’t being made, it’s that it isn’t growing fast enough in real terms.

Inconsistent numbers

We need exponential growth in investment and infrastructure. Being able to point and count is not enough.

It is the same problem with the government’s infrastructure funding numbers being bandied about. The public and the private sector are indeed funding infrastructure, but the much-referenced numbers are inconsistent with a much faster-growing pipeline of infrastructure.

Much ink has been spilt in these pages to explain why neither public nor private investment spending is occurring. The reasons are well known. Yet most in the government have misunderstood, misdiagnosed and miscommunicated the issue. They also like to talk only about the jobs undertaken in constructing infrastructure as opposed to the catalytic effect in the long term of the job that the infrastructure is actually performing when complete — replete with talk of job opportunity years and other examples that murder statistical integrity.

We are still going around in circles. At the 2022 investment conference we are likely to see the usual dressing-up of operating expenditure as capital expenditure or brownfield investment plans local firms would have been doing anyway.

Exponential change is hard. We are seeing this now, of course, with actually trying to get wheeled and self-generation off the ground after 2021’s amendments for sub-100MW power  plants.

The signs are not good. In 2021, research & development (R&D) spending in the economy fell 5.1% in the private sector in real terms — there was less spending in real terms last year than in any year since 2011. Meanwhile, mining exploration fell 11.4% after a 18.3% decline. This was the lowest amount spent in real terms on mining exploration since the data set began in 1993.

Commodity cycles

How can this be? Can you call yourself a commodities or mining country if this is what the data is showing? Sure, there was a pickup in brownfield investment by mining companies. This year we will see increasing investment in own-generation projects. But it is saying something when at the start of the Just Energy Transition, with SA in a prime place on so many fronts including the availability of key mineral resources, that few are tapping it.

This is not new, alas. SA has “sat out” previous commodity cycles where you see tax, dividends and share prices move — but not volumes of output, number of people employed or number of mines. This is a nominal, not a real story. Investors are mulling this amid the illegal Russian invasion of Ukraine. There are benefits for commodity countries as people diversify away from Russia. Investors, however, are sceptical that SA will benefit in real (rather than nominal) terms. As the front page of this newspaper showed last week, Transnet is too stuck in the mud already to deal with existing export demands, let alone new ones.

Into this breach steps the National Infrastructure Plan 2050 (NIP2050), finalised by the cabinet last week — to much eye rolling. Yet this document is interesting — remembering it has been signed off by the cabinet. It raises the bar quite high in laying out what “will” happen (not what should happen). As the plan runs counter to the hot air on the subject from the government it is a test. Do cabinet ministers actually know the radical agenda they have signed off on?

Interesting then that the language and specificity of the document allows the government to be held to account in a far more specific way than is possible with much of the existing hand-waving on infrastructure.

Total investment spending in the fourth quarter of 2021 was 14.4% of GDP. This needs to be at least 23% to be in line with peers and closer to 30% to be a dynamic economy.

Ultimately the data is all that counts. It  shows us the reality as we cut through the rhetoric — and it will show what success there is in reaching the NIP2050 vision in future.

• Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.