STUART THEOBALD: Reasons behind gap between infrastructure talk and reality

There is a huge gap between talk and reality on infrastructure. The Ramaphosa presidency has persistently advocated for greater infrastructure investment. Yet gross fixed capital formation, particularly by the public sector, has remained on a firm downward trend that has been entrenched since 2016.

In the first quarter of 2018, when the president took office, general government investment was R33.6bn. Yet in the third quarter of 2021, it was R25.5bn, 24% lower. Investment by state-owned enterprises has similarly fallen, from R25.5bn to R18.1bn (-29%, all in 2015 constant prices) in the same period.

What is going on?

The president has not only talked up infrastructure investment but acted. He set up the infrastructure investment office (now Infrastructure SA) as part of the presidency. He drove hard for the creation of the Infrastructure Fund, now operating as part of the Development Bank of Southern Africa with R100bn of money earmarked for it. He added “and infrastructure” to the name of the department of public works giving it a co-ordinating function. Several investment conferences have been held with lots of talk about investment. But back at the ranch, the investment taps have been slowly closing.

There is a minor exception — before Covid-19, private sector investment did show some strength. But Covid-19 has knocked that with investment down 12% in the third quarter last year compared with the first quarter of 2018.

Unproductive investment

This makes the Ramaphosa effort look singularly unsuccessful. But I suspect some underlying issues can at least explain some of it.

Investment can be unproductive. A lot of the investment in the base years, particularly during the record spending by the public sector from about 2008 to 2016, involved very large numbers and very poor results. Think of the hundreds of billions poured into Medupi and Kusile, the Prasa trains that don’t fit the tracks and the Transnet 1,064 locomotive contract that included nearly R10bn in kickbacks to the Guptas. That there has been a decline in spending of this sort should be seen as a good thing. And far more vigilant procurement oversight is certainly one of the reasons that spending in the public sector has declined.

But it is not all good. The figures reveal that among all the categories of investment, construction works has been hardest hit. This is harder to explain in terms of the war on graft. Elsewhere you can see that: electricity, gas and water is a major area of decline, reflecting the tapering of Eskom new-build spending, with transport equipment also sharply down. But why have we been constructing so much less?

The answers come down to capacity problems, particularly in municipalities. In part this has been worsened by the war on graft — just as the civil service has faced a skills exodus, the skills requirements for the job, driven by compliance requirements, have increased. Municipalities are struggling to initiate and manage projects to the National Treasury’s exacting standards, even when well intentioned. This has led to calls for amendments to procurement rules to make it easier for skills-strapped municipalities. There may be something in this, but there is a delicate balance between enabling well-intentioned civil servants to spend easily and enabling those whose intentions are less honourable, which we probably have not yet got right.

Much frustration

Business has long held out hope for this promised avalanche of infrastructure investment. Banks, asset managers and others have long signalled appetite to invest in it. Changes to pension fund regulations have made it easier for pension funds to invest too. But they simply aren’t finding the opportunities.

Many other sectors of the economy, from beleaguered construction companies to raw material suppliers, have also been holding out hope, usually with much frustration.

The trend will bottom out. The capacity problem at local government level isn’t going away soon. Fundamentally that will only be fixed by deep political change and new leaders in councils who are able and willing to crack the whip. But there will be change at other levels of government. The Infrastructure Fund is building capacity and will start driving a pipeline of investment.

The electricity sector will also be the site of huge investment, both from the independent power producers’ programme and companies building plant within the 100MW exemption to the Electricity Regulation Act. Other investment will be triggered by the eventual auction of broadband capacity. Much of this will be captured as private sector investment, but that is because policy changes have shifted responsibility from the public to private sectors.

So, while the numbers look poor, there will be a change in trajectory, likely beginning this year. It will be hard — the problems at local government will remain the binding constraint. As the spending that does take place is likely to be much more productive, the returns on investment will be higher, improving the economic impact of the investment. Ultimately, there is reason for some cautious optimism.

Theobald is chair of research-led consulting house Intellidex. This article first appeared in Business Day.