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31 MAY 2012
SA’s infrastructure plan
by Claire Bisseker

Photo: Flickr, Aquila.
Government’s ambitious infrastructure drive aims to unblock the economy and kick-start SA’s reindustrialisation.

SA firms are relatively efficient but they often lose their competitive edge in the logjam caused by SA’s outdated power and logistics environment.

Faced with disappointing growth and intractable unemployment, government is finally going on the offensive. The main impetus will come from ramping up public-sector infrastructure spending: 43 major projects worth R3,2trillion up to 2020 are under consideration. So far, about a quarter of these are definitely being financed and implemented.

Over the next four years, the public sector has budgeted to spend roughly R250bn on infrastructure each year. This is about R100bn a year more than the average spending in the five years before 2011/2012 — World Cup spending included.

Construction and engineering firms, as well as producers of cement, aluminium, steel and related products, are all set for a windfall.

But business remains sceptical that government can deliver all these projects on time and within budget. The most the public sector has managed to spend from the main budget on infrastructure in any given year is R203bn (in 2009/2010) and even then almost 20% of the actual budget went unspent.

Under spending of capital budgets by provinces and municipalities is endemic and getting worse. Treasury estimates that in 2010/2011 only R178bn was spent out of a total capital budget of R260bn — about 68%.

Government is now aiming to spend R262bn this financial year and R284bn in 2013/2014, rising to just under R300bn in 2014/2015. It’s going to be a big stretch.

“The chronic inability to fulfil investment budgets is detrimental to SA’s economy and one of the biggest obstacles preventing the economy from raising its growth potential,” says Moody’s ratings agency in a recent credit note. “Infrastructure constraints are a key reason why SA has been unable to benefit substantially from the global commodity boom over the past decade.”

Mindful of this, last year cabinet created the presidential infrastructure co-ordinating commission (PICC) to drive and oversee SA’s big infrastructure push. It is chaired by President Jacob Zuma and brings together half the cabinet with all nine provincial premiers, the metro mayors and local government representatives.

The World Cup roll-out showed what SA is capable of when government and private-sector professionals work together, driven by a strong co-ordinating body. But this time much of the infrastructure needed is at a municipal level, where the lack of capacity and skills is most stark.

This is why the co-ordination role of the PICC is so critical. It must ensure that the different spheres of government work together so that infrastructure is not delayed by technical glitches, turf wars or drawn-out decision making.

Drawing on government’s experience with large infrastructure projects, the PICC has devised a national 20-year infrastructure roadmap that it will monitor and drive centrally.

It is taking a long-term view to ensure that SA plans ahead properly and moves away from the stop-start nature of its previous capital-spending programmes. The intention is that this will allow for better financial mobilisation from investors, provide greater certainty to the construction industry, and give educational institutions a framework around which to plan their skills development strategies.

Earlier this year, cabinet approved the PICC’s infrastructure plan. It clusters more than 150 smaller infrastructure projects into 17 large strategic integrated projects (SIPs) which cover everything from road, rail and ports to new energy-generation plants, broadband infrastructure, as well as hospitals, schools and universities.

To ensure that the plan’s requirements aren’t met mostly through imports, it is being coupled with local-content requirements that all government agencies must adhere to. And to ensure that local manufacturing is able to rise to the occasion, a new incentive scheme — the R5,8bn Manufacturing Competitiveness Enhancement Programme (MCEP) — will help firms invest in new plant and competitiveness upgrading.

The MCEP consists of two components: a production incentive in the form of a cash grant, and industrial financing loan facilities.

The benefits can be substantial. For instance, qualifying firms wishing to undertake capital investment or resource efficiency improvements (like switching to green technology) can claim up to R50m in each category. If they can create 10 to 25 additional jobs in the process, they can earn a bonus payment of 10%, taking the overall benefit to as much as R110m across these two categories alone.

“It’s probably the most meaningful thing that’s happened to manufacturing in the past 10 years,” says Genrec Engineering MD Laurence Savage. “SA’s factories are old and it’s hugely expensive to mechanise up to a world-class standard. This is one way to put us on a par with the rest of the world.”

André Pottas, who heads Deloitte’s Corporate Finance Advisory division, believes the MCEP, combined with the infrastructure programme and local-content requirements, will “partner up to create the kind of energy and momentum to really drive growth”.

Excitement is beginning to stir as SA’s biggest construction, engineering and infrastructure services firms contemplate what it would mean to win the lion’s share of this new business.

“If they unlock the Waterberg, it’ll be brilliant news for us because about 70% of what we do is supply the conveyor equipment that moves coal,” enthuses Gavin Hall, MD of Melco Conveyor Equipment. “There’ll be conveyor belts everywhere — it’ll look just like Witbank.”

Robor, the steel tube and pipe manufacturer, also stands to gain. There are two big infrastructure projects that it hopes to score from: government’s R320bn planned investment into renewable energy, particularly the new solar park intended for the Northern Cape, and the Passenger Rail Agency’s (Prasa’s) plans to spend R123bn purchasing 7224 passenger rail coaches over the next 20 years. (Government wants a minimum of 65% of this rolling stock contract to be met by local suppliers.)

“The Prasa job is 10 years’ work,” says Robor chairman Mike Coward. “We wouldn’t spend until we had firm orders in our hands. But if we did get a decent slice of both projects, certainly we would tool up and could employ 10%-15% more workers.”

And if SA set up a cluster of firms to supply this infrastructure, “there is no reason why we couldn’t supply passenger wagons and solar to the rest of Africa, too”, he adds.

Indeed, the idea that local firms would gear up for export on the back of a long-term infrastructure programme is the real kicker that makes the infrastructure plan the pillar of SA’s new growth strategy — because if this happens, then the job creation and growth benefits will be multiplied and sustained.

But some economists remain sceptical that the infrastructure plan will be a sufficient catalyst for SA’s reindustrialisation, as government is hoping.

They make two main points: firstly, there is a danger that the provision of essential infrastructure will be delayed and made more costly by adherence to local-content requirements; secondly, that the infrastructure drive will not be enough to compensate for poor or inconsistent public policy in other areas.

“The provision of infrastructure is a necessary condition, and it can take us a long way, but it’s not a sufficient condition to create sustainable jobs and growth,” says Nedbank chief economist Dennis Dykes. “We’re creating the infrastructure not for its own sake but to help other industries become more competitive, because that’s when you increase job creation and get the rest of the economy growing.”

And since the intention is to benefit the economy as a whole, the aim should be to get essential energy and transport infrastructure in place as quickly and cost-effectively as possible.

Requiring that locally produced inputs be utilised is no problem where local suppliers are already the most efficient, says UCT economist David Kaplan. But where they are not, designating local supply will lead to delays and higher costs. “This imposes higher costs and lower efficiencies on business right at the point at which it is most vulnerable.”

Dykes agrees: “If you decide to produce turbines in SA, you’re almost surely going to be making projects more expensive and delaying them. It could prove an expensive way of creating jobs.”

Turbines have been designated for local supply, along with trains, boilers, earth-moving equipment, bus bodies, power pylons and other key inputs.

The only economic justification for instituting local-content requirements is if it will allow the subsidised local company the scale to develop into a globally competitive producer for export. This is precisely government’s intention. But, says Kaplan, there is no compelling evidence that local procurement will result in a sustainable increase in the capacity of local suppliers.

Moreover, he argues, to be effective as a development instrument, local procurement requires that the state has well-trained staff and strong organisational capacity in the awarding of tenders. Tenders should be free of corruption. There should also be strong levels of competition among local suppliers that are close to global best practice. “In SA,” he says, “many of these requirements will not be met.”

Though the department of trade & industry (DTI) has said it is willing to pay a slight premium to source locally, given the significant multiplier effects on job creation and growth that should come from stimulating domestic manufacturing, it is still determined to wring competitive prices out of local suppliers.

For instance, when it comes to steel, trade & industry minister Rob Davies has drawn a line in the sand, failing to designate basic steel for local supply for fear that ArcelorMittal’s dominant market position could allow it to jack up steel prices for the infrastructure programme. Government wants local steel producers to reduce prices to aid downstream manufacturers.

ArcelorMittal CEO Nonkululeko Nyembezi-Heita says the DTI’s decision “would be disappointing should it materialise”. Even so, she believes the action will have no material impact on current steel pricing structures because they are based on competitive international prices.

Another important contention is that though the infrastructure plan, local-content and MCEP incentives will provide a welcome boost for certain industries, it will take much more than this to achieve a significant, sustained industrial recovery.

“It is certainly a move in the right direction but falls short of what is required to act as an effective catalyst to reverse the erosion of the country’s industrial base,” says Nyembezi-Heita. She argues for a set of co-ordinated policies which emphasise technical skills development and promote private investment. The MCEP is welcome but she fears it may be insufficient to assist manufacturers to become competitive in the difficult global climate.

What is really needed to revive business confidence, say other executives, is clear, consistent government leadership and policy direction. Few industrialists are going to make long-term investments in an environment where uncertainty exists around fundamental business issues like property ownership and employment regulations.

“One bad policy has the potential to undo many more good policies,” says Pretoria Portland Cement (PPC) CE Paul Stuiver. “Unless we resolve the endless debates and uncertainty around our bad policies, I doubt that the ‘good’ infrastructure plan and ‘good’ procurement regulations will be sufficient to turn SA’s deindustrialisation around.”

Stuiver expects the infrastructure plan to result in a 20% increase in overall cement demand but, given that the local cement industry is recovering from its worst down-cycle in 50 years and is running at about 75% capacity, he believes the existing capacity will suffice for the next five years or so. As such, PPC is not planning any major new investment in SA on the back of the SA infrastructure programme.

This was a recurring refrain among the half-dozen large industrialists canvassed by the FM. Nearly all industries have substantial surplus capacity as a result of the global financial crisis and none is yet planning major expansion in anticipation of the infrastructure plan.

Even Bell Equipment, the only domestic producer of certain heavy industrial machinery for the construction and mining industries, will not start investing solely for the infrastructure plan until tenders are published or it sees a trend in rising demand and actual spending by government.

Altron is another company that should find itself in the pound seats. “Of course we’re excited,” says Altron CE Robbie Venter, “but having it in the [national] budget and actually getting it done are two different things. If the past is any guide, these things don’t happen in the time frames specified. If we see meaningful spend coming through, we’ll increase our capacity.”

Industry’s caution is understandable since it has been burnt before. Take prisons. Several years ago the department of correctional services went through a lengthy bidding process, inviting private consortiums to build and operate prisons, only to have a change of heart. After three years, the bids expired without the department ever having opened the bid envelopes.

The debacle over e-tolling is another case in point. “Late-stage changes in policy make potential investors nervous because they are looking at a 30-year horizon to recoup their investments,” says Pottas.

The bottom line is that investors need stability and the infrastructure plan needs investors.

But even if the infrastructure roll-out goes according to plan, to make a real difference to growth and employment, fixed investment activity will have to rise to about 25% of GDP (from 18,9% now) and remain there for at least 10 years. This is going to require extensive expansion by all participants in the economy.

Dykes puts it well: “For the infrastructure plan to really dent SA’s high unemployment rate, you have to have the private sector buy into it in a big way and say: ‘Now we have great infrastructure and consistent public policy, (including on the labour market), this is a country where we can invest for the long term.’”

This outcome is within SA’s grasp. Mostly the country needs to rediscover the discipline, innovation and co-operation that allowed it to make a success of the World Cup. If so, the infrastructure and reindustrialisation drive could well mark a decisive turning point for the economy.
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