STUART THEOBALD: Private infrastructure investment should take centre stage to rebuild economy

Posted in: Economics, i-Blog, South Africa on November 17, 2020


Ramaphosa could use the conference this week to shift emphasis away from public projects.

This column was first published in Business Day. 

The infrastructure debate has been overly focused on public infrastructure. That’s the kind that includes roads, railways and ports, as well as hospitals, schools and government buildings. The other kind — private infrastructure — has not been much talked about. If we are to turn around the economy, that must change. President Cyril Ramaphosa could use his infrastructure conference this week to do so.

The oft-cited 30%-of-GDP goal for infrastructure investment in the National Development Plan includes both public and private investment. Public works & infrastructure minister Patricia de Lille recently said her goal is to get infrastructure spending up to 23% of GDP by 2024, 15 percentage points of that from private infrastructure and the balance from public infrastructure.

In 2019, investment was 17.9% of GDP, 12.5% of it private and 5.4% public.

Private investment has always been the bigger component. Yet, in all the moves by Ramaphosa to boost infrastructure investment, such as establishing the Infrastructure Fund, now within the Development Bank of Southern Africa, and Infrastructure SA as a co-ordinating body, none have focused explicitly on driving private sector investment.

This week’s investment conference will be a beauty parade of companies making public the investment plans they have anyway. It is an exercise in optics that allows the president to demonstrate to politicians that the private sector is important. But what really matters is shifting the underlying conditions that affect private sector plans in the first place.

The post-1994 investment peak was 2008, when private sector investment hit 15.9%. That followed several years of strong GDP growth in which demand exhausted private sector capacity and investment for expansion became essential. In the same year, public investment was a strong 7.6% but the record was in 2009 when it hit 7.9%. That year the government used its fiscal space to lean against the post-financial crisis recession.

However, a lot of that investment was squandered by corruption and weak project management, resulting in poor return on investment. Public sector spending has fallen sharply since 2015 largely because the state-owned enterprises (SOEs) began to struggle to raise debt on public markets to fund further investment. Spending in itself is not the point — it must provide value for money through better public services.

General deindustrialisation

We now face unprecedented fiscal pressure on the public sector with the SOEs deep in junk territory, far worse than the junk sovereign. Raising funding for infrastructure will be hard. The Infrastructure Fund and Infrastructure SA will not be able to fix that, at least not without a wider economic recovery. We need growth-enhancing private sector investment that will allow the economy to grow, building tax revenue and repairing the government balance sheet.

You can see what’s been going on by digging into the private sector investment numbers published by the Reserve Bank. By far the biggest investment line item is machinery and equipment, which peaked in 2008. Its decline tracks general deindustrialisation due to electricity supply problems and cost hikes. Mining exploration investment has fallen dramatically. It peaked in 2007 at R4.1bn, but in 2010 it fell off a cliff, dropping to R525m.

Some areas have grown over the period — ICT equipment, unsurprisingly, as companies have become increasingly digital and communications networks have grown. Private sector spending on transport equipment and construction works (such as roads and bridges paid for by the private sector) has been growing too, arguably to compensate for a lack of state provision in those areas.

To drive private investment, we need to accelerate the growth areas and tackle those that have been struggling. A simple way to accelerate ICT investment would be to provide more spectrum to the cellular companies. Providers would immediately invest to expand capacity. A spectrum auction is set down for March 2021, which, would you believe, has been on the cards since 2007 when the policy directive was first issued.

Haphazard efforts

If you want to turn the trend in investment in machinery and equipment, that too is easy. Get rid of the requirement to go through the expensive and slow process of obtaining a licence from the National Electricity Regulator of SA for any plant over 1MW. Allow companies to generate their own electricity and feed excess into the grid or at least wheel it to customers or their other operations.

The mining sector is a disaster. The collapse in investment coincided, and was certainly caused by, haphazard efforts to amend the Minerals and Petroleum Resources Development Act. Those have at times included ministerial pricing controls for the domestic industry; compulsory purchase of stakes in mines by the government for free; and chaos over royalty taxes and “strategic” minerals. Separate, but related, has been a battle over amending the Mining Charter, one largely about BEE ownership interests. The last decade has been by far the worst for mining investment since 1960 when records began.

If Ramaphosa could fix these issues, it would be a big step forward for the infrastructure effort. Projects that were unviable would be made viable overnight. The economics would suddenly start to work for private investment to happen. The investment conference is the opportunity.

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