Can you spend your way out of trouble?

The debate is still raging. On the one hand, many an expert believes government spending on massive infrastructure projects is one way to stimulate a faltering economy. On the other hand, some propose different avenues to economic stimulation. Whatever the case, the government of South Africa has unveiled an ambitious infrastructure development programme and recently hosted a symposium to that end. Below, our summary of what the whole initiative is about.

Sustainable Infrastructure Development Symposium South Africa (SIDSSA)

The Inaugural Sustainable Infrastructure Development Symposium of South Africa (SIDSSA) marks the beginning of a journey to economic prosperity for the country. The pro-activeness of government to initiate a suite of interventions and growth reforms aimed at recalibrating the country’s economic trajectory in order to promote inclusive growth, economic transformation, spatial justice, and create a globally competitive economy can only stimulate investor confidence going forward.

Infrastructure investment: Cornerstone of South Africa’s economic growth in the post COVID -19 era

We are transforming South Africa’s economy

Following years of a steady decline of infrastructure spending, South Africa is changing course. We know that superior quality infrastructure allows an economy to be more efficient, improves productivity, and raises long-term growth and living standards. We are well aware of the scale of the interventions required.

The country is far from reaching the National Development Plan target for public sector infrastructure investment. There is has been massive underspending by all spheres of government and SOEs, with public infrastructure spending amounting to only 13% of total expenditure.

We expect the effects of COVID-19 to drive South Africa’s economic growth over the short-term below the initial projection of 1%. We also expect the impact of the pandemic to increase our already high unemployment rate further. Along with recent economic downgrades, the social, economic and political ramifications of the pandemic now mean that the groundwork for, and the construction of a national economic growth plan will need to be more collaborative.

Our analyses show that infrastructure investment will not only change South Africa’s economic prospects over the medium to long-term, it will also mitigate the short-term impact of COVID-19. However, to capitalise on the economic benefits of infrastructure investment, we need to ensure we partner, plan and implement in the best and most innovative ways.

We have found that there is no shortage of money or appetite in the private sector to invest in South Africa’s public infrastructure. To date, the challenge has been a shortage of projects that have been developed and prepared as bankable projects for private sector investment. We are changing this.

We have redesigned our infrastructure planning and delivery architecture

SIDSSA brings government, SOEs, MDBs, DFIs, the private sector, academia and research institutions under one roof. According to Honourable Patricia de Lille, Minister of Public Works and Infrastructure, it launches the “now” infrastructure project pipeline that has used a new comprehensive methodology that moves away from a transactional approach and ensures the realisation of the country’s development goals for the benefit of South Africans.

SIDSSA allows the public to scrutinise our plans

SIDSSA is essentially a viability exercise – an opportunity for the private sector and government to evaluate each other in a way that is constructive and risk free. What makes SIDSSA unique is that each step of the project pipeline is mapped out by all parties involved; thanks in part by the role played by multilateral funders that validate and ensure the project proposals can be realistically sustainable for investment and ultimately completed.

Just like President Cyril Ramaphosa said, projects are considered based on the high-level project criteria that include: development impact, job creation, contribution to economic growth. Additionally, technical project information such as ability to generate revenue and environmental considerations are considered. SIDSSA helps the South African government identify the regulatory impediments before final, costly decisions are made.

We concluded that significant investment in the following areas will accelerate growth:

• Energy: The energy sector in South Africa is at the heart of the country’s economic and social development. The National Development Plan envisages that by 2030, South Africa will have an adequate supply of electricity and liquid fuels and that at least 95% of the population will have access to the grid or off-grid electricity. Indigenous coal is currently the main source of primary energy contributing 69% of the total along with oil (14%), gas (3%), nuclear (3%) and renewables (11%). Insert suitable energy graphic
• Water and sanitation: South Africa’s water sector is under severe pressure and the country is facing a projected water deficit of 17% by 2030. This includes an estimated R33 billion per year funding gap over the next 10 years, needed to achieve water security. A concerted and focussed effort is required from both the public and private sector to achieve a water secure South Africa.
• Transport: The National Development Plan sets ambitious priorities for South Africa’s investments in the transport sector by 2030, including: Bridging geographic distances affordably, foster reliably and safely so that all South Africans can access previously inaccessible economic opportunities, social spaces and services; support economic development by allowing the transport of goods from points of production to where they are consumed. This will also facilitate regional and international trade; and promote a low-carbon economy by offering transport alternatives that minimise environmental harm.
• Digital infrastructure: The Information Communications Technologies (ICT) sector’s contribution to the South African economy is significant. Recent estimates indicate the ICT sector’s contribution to South Africa’s Gross Domestic Product (GDP) was in excess of R110 billion, or roughly 3% of GDP. In terms of gross value add (2.7%) this is more than the agriculture sector (2.4%) and is likely to exceed tourism (3.1%) in the mid to long term.
• Human settlements: To date the South African Government has delivered 4 million homes. Despite this, there remains a backlog estimated at between 2.3 million and 3.7 million units, which is growing by 178,000 units per annum. It goes without saying that this effort to change the lives of South Africans for the better by providing respectable, affordable and humane accommodation is integral in overhauling the effects of apartheid spatial planning and patterns of social exclusion.
• Agriculture and agro-processing: South Africa is a rich and diverse country. Farming activities range from intensive crop production in winter rainfall and high summer rainfall areas, to cattle ranching in the bushveld and sheep and goat farming in the more arid regions. Its arable land suitability stands at only 16.7 million which is 13.7% of the country’s land surface.

A well-coordinated and institutionalised infrastructure delivery mechanism that involves the public and private sectors will ensure that we emerge with projects that can leverage private sector funding and therefore loose the burden on the national fiscus, at a time when every cent in the government coffers counts.

We are partnering to do more

We have not taken advantage of all the infrastructure investment funding available. As an indication, South Africa is a capital contributing shareholder in several multilateral development banks, yet we have not made sufficient use of concessional funding and implementation support. The estimated capital available annually for South Africa from the World Bank is US $3.5bn, US $2bn from the New Development Bank, and US $1.2bn from the African Development Bank. Similarly, South Africa has not made the most of partnerships with private funders.

We tailor our partnership according to infrastructure type

South Africa’s infrastructure needs can be grouped into three categories:

1. Social infrastructure

Infrastructure investment opportunities that demonstrate unambiguous social returns higher than the cost of borrowing. Projects of this nature depend on the fiscus for funding and have minimal scope for private sector investment.

2. Commercially viable infrastructure

Projects or programmes that are purely commercial or that require financial engineering to enable private sector investment. This includes projects with revenue streams that can be discounted to create instruments like off-take agreements or power purchase agreements. Projects of this nature do not need funding by the government, but fiscal support may be considered.

3. Blended finance infrastructure

Projects or programmes that are partially viable with social or economic impact. Projects of this nature need fiscal support to attract private sector investment through a blended finance solution. This includes public-private partnerships. We are designing different funding partnership vehicles for each of these categories.

Committed to bold change

In 2018, we established the Infrastructure Fund and committed the government to contributing US $5.8bn over the next ten years to infrastructure projects. The aim of the fund is to leverage higher levels of private sector investment in public infrastructure by focusing on projects that require partial government financial support to be commercially viable.

We realise that structuring blended finance solutions requires specialised expertise. The fund will provide support to public sector bodies in structuring innovative blended finance mechanisms and solutions for public infrastructure projects. This will unlock the current shortage of bankable blended finance projects being presented to the private sector. It will assist South Africa to achieve its development goals and contribute to the achievement of the SDGs. The Investment and Infrastructure Office will determine the strategic direction of the Fund. It is overseen by the Infrastructure Investment Committee, chaired by the Minister of Public Works and Infrastructure and representatives from government and the private sector.

“We conceptualised SIDSSA, to demonstrate South Africa’s commitment to the 2030 Sustainable Development Goals, and to ensure that we could draw on the pool of liquidity seeking to fund sustainable infrastructure projects,” said Dr Kgosientso Ramokgopa, Head of the Investment and Infrastructure Office in the Presidency.

The journey continues…

SA’s Infrastructure Investment Plan was approved by Cabinet on 27 May 2020. This approval brought into being a new way of working or a new model for infrastructure in South Africa. Cabinet has now confirmed that there is to be a single point of entry for all infrastructure, a single methodology and accordingly one recognised, comprehensive, credible infrastructure project pipeline.

The planning, funding and delivery of infrastructure requires strong collaboration between all role players. To this end, we need to remain action-orientated throughout this process, to ensure that we achieve our development goals as outlined in the 2030 National Development Plan.