STUART THEOBALD: New infrastructure needs economic legs (and good brains driving it)

Posted in: Economics, i-Blog on July 13, 2020


This column was first published in Business Day. 

Seldom has there been so much agreement on one policy intervention. Infrastructure is front and centre of economic revival policies from the ANC, business, the government and economists on both left and right. The problem is that it is much easier said than done. The fact is that public infrastructure investment has been shrinking and the causes of that cannot be wished away.

There are deep reasons for this, despite some attempts to solve it. The Presidential Infrastructure Co-ordinating Commission was created a decade ago to follow through on the National Development Plan’s infrastructure vision. Little has come of it. Now we have the Investment and Infrastructure Office in the presidency too, tasked with unblocking a pipeline for the future. There is much hope it will be able to deliver, but it has a long way to go. Its Sustainable Infrastructure Development Symposium two weeks ago was long on vision but short on detail.

There is good and bad infrastructure. Infrastructure should be about the long-term economic and social benefits it provides — the return on investment. It is not valuable in and of itself. To listen to some government ministers describe it, infrastructure is about the jobs created through the construction period. That’s really not the point. Those should pall into irrelevance compared to the jobs created by the economic catalyst of infrastructure. Whether a power station or a railway line, the measure of success must be the long-term economic activity it generates.

Everyone agrees that the private sector must play a major part in funding that infrastructure. It is, really, the only way it can be done in the context of the serious fiscal constraints on the government. Again, easier said than done. There is huge potential for the private sector to play a role. Infrastructure assets suit the investment needs of several large pools of capital — done right, it is long term and low risk, exactly what pension funds and insurance companies need. The independent power producers’ programme shows what is possible — it mobilised more than R200bn of investment in just five years from local and global sources. But that was a rare exception in what has been a long-term decline of private investment in public infrastructure.

But there is not a lack of investor appetite — there is a lack of supply, which is why talk of amending regulations for pension fund investment into infrastructure is misguided.

We were better at this before 2008. The first major public-private project (PPP) was the N3 toll road in 1998. After that, another 27 large infrastructure projects were developed between the public and private sector. But come 2007, it slowed to a trickle. Since then, almost all the public-private infrastructure projects have been office blocks for government departments, perhaps the lowest economic multiplier projects there are (really a disguised form of sell-and-lease-back). Exceptions were the Gautrain and Gauteng highway project, though both were done outside the “normal” infrastructure framework.

The golden age of public-private infrastructure was that of the Thabo Mbeki presidency and Trevor Manuel finance ministry. Through strength of will, they drove the public sector to develop public-private infrastructure projects. But they were pushing against gravity. The fact is that the public sector is institutionally designed to resist private sector investment in infrastructure. And in all the talk of infrastructure as policy centrepieces, there has not been specific discussion of the design flaws in the way the public sector procures infrastructure.

There is no systematic assessment of infrastructure plans across the  government to test for value for money. But more importantly, there is no systematic assessment of whether they are best funded on the government budget or set up as projects the private sector can fund (and manage). If you are a municipal infrastructure manager, you have the choice of whether to plump for public budget allocation for infrastructure or to structure it as a PPP. But if you go the latter route, you must put up with years of viability assessments and agree to have the National Treasury breathe down your neck throughout. It is the far harder route. Yet that is now what we’re suddenly expecting the whole of government to do.

If we’re serious about a new golden age of infrastructure, let’s fix what needs to be fixed. There must be amendments to the Public Financial Management Act and the Municipal Finance Management Act to change the way infrastructure is financed. We need to be able to develop projects that can be funded by the private sector in return for access to the cash flows that infrastructure develops, whether it be rates for water and sewerage or fees for railway lines.

We need to redesign the way PPPs are assessed and procured with streamlined processes for smaller ones, with the Treasury playing a central role in assessing all infrastructure plans to determine optimal financing strategies (the presidency is not the best place for this kind of work). It must systematically parse public infrastructure plans to assess which are best on the public budget and which done by the private sector. Good project design is not just about the financing, but the effective operation and maintenance of infrastructure. Those are critical to shape the risks appropriately to attract private capital.

Until we start having conversations at this level of detail, we’re not going to turn the policy visions into reality.

Theobald is chair of Intellidex.

Have your say.
Share your opinion

RELATED ARTICLES

PETER ATTARD MONTALTO: Mboweni has a tough task on his hands

October 26, 2020

With the MTBPS scheduled for 28 October, Finance Minister Tito Mboweni has a tough task on his hands. read more

STUART THEOBALD: What now for the Covid-19 loan scheme?

October 19, 2020

Why lenders and borrowers have given the government’s bank guarantee loan scheme the cold shoulder. read more

PETER ATTARD MONTALTO: Will it be doom or recovery?

October 12, 2020

The launch of the recovery plan by the president is a seminal moment which will define the path to economic doom or recovery. read more