A senior official at National Treasury has admitted that it is experiencing problems increasing the level of gross fixed capital formation (GFCF) from about 15% to about 30% of GDP – despite the country’s plans to spend more than R1 trillion over the next three years on infrastructure.
In fact, the percentage has contracted in the past two years, says Boitumelo Mashilo, chief director for infrastructure regulation and assessment in the budget office.
Read: SA fixed investment almost halves, after public sector projects slump
Mashilo, speaking at the National Transport Conference this week, said more than 40% of the R1 trillion planned expenditure in the next three years is dedicated to transport and logistics, including Transnet, the South African National Roads Agency (Sanral), the Passenger Rail Agency of South Africa (Prasa) and the Provincial Roads Maintenance Grant (PRMG).
He said the private sector is responsible for two-thirds of GFCF and is investing more in the economy than the government.
“When we talk about private sector participation, we are often talking about the private sector coming in to help us with our one-third.”
He admitted that “we also have to do something from a regulatory, policy and certainty perspective to ensure the capital that is earmarked for investment can actually be unlocked because if you don’t have the right policies, if you don’t certainty, and so forth, that capital will not necessarily flow to private sector projects”.
Read: Structural reforms lay the foundation, but investment confidence remains the missing link
Mashilo noted that public-private partnerships (PPPs), a tried and tested mechanism for bringing in the private sector, account for only 2.4% of GFCF.
Pressure
He said government, in wanting the private sector to assist, is acknowledging that the capacity and capability of the state to do what it is supposed to do has been eroded.
Mashilo stressed that South Africa cannot afford to build the infrastructure required only once government has built that capacity and capability, and has the skills and expertise.
Read: South Africa stopped growing in 2009
He said another reason the government needs the private sector’s assistance is because its fiscal environment is constrained and the balance sheets of many public entities involved in the infrastructure space are constrained.
Read: SA private investment plans triple as reforms progress
“We really want the private sector to come in and bring in the private capital that comes from banks, DFIs [development finance institutions], philanthropic enterprises and from institutional investors and so on,” he said.
Mashilo said government also needs the private sector for innovation, including project management discipline.
He added that it is clear from the composition of GFCF that the government and public sector for the most part is not in competition with the private sector and invest in different aspects of the economy.
Mashilo said the government has been doing a lot of work around reforms, including on the credit guarantee vehicle (CGV) with the World Bank, and from a financing, project preparation, and policy and regulatory perspective.
Read: SA private investment plans triple as reforms progress
“We have done a lot of the heavy lifting and are waiting for the private sector to fully come to the party … to help you achieve the aspirations that you have,” he said.
Private sector wants ‘fair allocation of risk’
Standard Bank executive vice-president for energy and infrastructure Rentse Tembo said the lack of a fair allocation of risk is one of the biggest reasons infrastructure projects do not get off the ground.
Government cannot be expected to take demand risk or banks to be taking risk that they are not best suited to handle.
She said the operations and maintenance risk needs to be allocated to an original equipment (OEM) provider, and risk associated with the construction of a road or rail to an engineering, procurement and construction (EPC) contractor.
Read: Operation Vulindlela’s wins are real, but implementation momentum is slowing
“We need allocation of risk that is fair, transparent and is actually put on the person or parties best placed to deal with those risks,” she said.
Tembo said once potential financiers have a combination of these things, they can discuss them and mitigate the risk.
There is a backlog of projects and a lot needs to be done because only about 10% of projects make it through as bankable and ready for execution, she added.
Tembo said a few things need to be done to ensure projects move from concept to executable bankable projects.
These include:
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Being able to see that the project will make money by seeing predictability of revenues for a toll road, an airport in terms of passenger volumes, cargo throughput for a port, or freight commitments for a railway.
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The need for stable, predictable regulation and policies because these projects are long-dated in nature, possibly 30 or 40 years out, and multiple government changes take place in this time.
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Stable, predictable regulation and policies to have confidence that contracts can be enforced.
Development Bank of South Africa (DBSA) acting head of transport logistics Bothwell Manikai stressed the need for alignment of the regulatory frameworks because of how this affects integration within the region.
Manikai said there is a need to harmonise regulatory frameworks because the funding of transport in the region is done on the basis of transport corridors involving various jurisdictions and doing it one jurisdiction at a time leads to it becoming “a start-stop” process.
Resolutions
The conference adopted a number of resolutions following President Cyril Ramaphosa’s challenge to reduce the enormous cost to the country of logistics inefficiencies, implement inclusive transport, support cross-sector collaboration, and establish a permanent transport council.
It resolved to:
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Establish a Transport Forum to guide dialogue, collaboration, and strategic coordination in the sector;
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Host a National Transport Conference every two years;
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Build regional and international collaboration to strengthen cooperation of transport corridor development and facilitate trade;
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Pursue evidence-based policy and innovation, and promote data-driven decision-making, research collaboration and innovation; and
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Support infrastructure investment by mobilising new investment and innovative financing mechanisms to support transport infrastructure development and modernisation.
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