STUART THEOBALD: Policy digs us into a hole instead of helping SA mine private investment

Posted in: Capital Markets, Economics, i-Blog, South Africa on October 11, 2021


Getting the private sector to increase investment levels could be a big win in the overall infrastructure effort.

This column first appeaered in Business Day. 

We do a lot of talking about infrastructure investment, but less and less is actually happening. We spent 14% of GDP on gross fixed capital formation in the second quarter, a number made worse by the rebasing of GDP by Stats SA in August.

When broken down, it is clear that both private and public sectors are investing less. Public sector investment was just 3.9% of GDP while the private sector invested 10.1% of GDP. These figures have steadily declined since late 2008 when as a country we hit a democratic-era record 21% of GDP, 14.1% from the private sector and 6.8% from the public sector (though the public sector’s own record was a quarter later when it hit 7%).

There are many reasons. In the public sector these are mostly to do with a big skills shortage, bureaucracy, corruption and fiscal constraints. But the decline in the private sector seldom gets the attention it deserves. If more policy focus was placed on it, we could do more to get overall investment levels up.

Public and private infrastructure investment are deeply linked — factories, mines and shopping centres don’t get built if there isn’t public infrastructure, from roads to sewerage, to service them. SA’s electricity woes are obviously critical — there is no way to build power-hungry factories with no security of supply. Getting public investment right is a precondition to much private sector investment. But that isn’t all there is to it.

Records were set in 2008 because a long bull market had resulted in high levels of capacity utilisation and confidence about the future was high. Factories were running at maximum output, so businesses invested to expand. Of course, the financial crisis soon reached our shores and investment levels plummeted. Public sector investment bumped along in an effort at countercyclical aggregate demand stimulus, but began to plummet in late 2015, in large part due to the collapse in finances of state-owned enterprises. That trajectory has not turned.

But can it be turned in the private sector? There are clear policy levers that can be pulled. One of the most important and frankly visionary steps in this regard is the change to the Electricity Regulation Act (ERA) to allow private businesses to build their own electricity generation plants up to 100MW without a licence. This does two things: it directly enables businesses to invest in generating electricity, an area in which they can reliably anticipate demand, and then it removes one of the greatest uncertainties for investment into core capacity — the lack of energy reliability. It is going to take a year or two before we see its impact in the gross fixed capital formation statistics, but it will come.

The change to the ERA is a good example of how the government can materially shift the needle for private sector investment. The other one that is massively overdue is additional spectrum for increased cellular broadband. Communications infrastructure has been the one area of clear growth in private investment over the last decade as firms have invested in both fibre and cellular networks. But the cellular side of the equation has stalled because networks could not access additional spectrum.

There is a complicated story on why spectrum auctions have not happened despite having been policy since 2007 largely driven by incompetence, vested interests and rent seeking. This remains a huge political challenge as the spectrum in question has to be vacated first by moving television broadcasting to digital, and that is complicated. President Cyril Ramaphosa is committed to making it happen, and he may have the statesmanship to pull it off.

But there is one other area ripe for a dramatic policy-led investment boom: mining. We are sleepwalking into a collapse of the mining sector. There is almost no investment happening into exploration, which means there is no pipeline to replace existing mines when they are exhausted. For an economy built on the back of mining and an industrial base still tightly linked to commodities, this would be a disaster, and one that receives far too little political comment. The reason for the collapse is obvious: huge policy uncertainty driven by over a decade of dithering and confusion about both the mining charter and amendments to the Minerals and Petroleum Resources Development Act.

While energy and mining have found themselves in the same national department, the contrast between the policy-led investment boom in electricity and the investment collapse in mining is stark. If an enabling approach to mining policy was pursued with the same enthusiasm as energy, we could start to see a real change in private sector infrastructure investment.

Getting the private sector to increase investment levels could be a big win in the overall infrastructure effort. We shouldn’t lose sight of it while we work on getting public sector investment levels to recover.

Theobald is chair of research-led consulting company Intellidex.

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