GNU woos private sector to boost infrastructure projects for job creation

3 Nov 2024

Finally, the government seems to be moving in the right direction by promising to amend regulations and offer incentives to make it easier for private sector capital to start investing.

Over the past 15 years, the government has consistently neglected spending on infrastructure projects, sending South Africa into a brutal spiral of low economic growth, a stubborn jobs crisis and an overall poor quality of life.

Shoddy infrastructure quality can be felt in all sectors of the economy. Potholes in roads have made it difficult to link producers to markets, workers to jobs, and students to schools. Breakdowns in rail infrastructure have hobbled exports of coal, iron ore and other minerals.

Not expanding SA’s high-voltage power lines in the Western Cape, Eastern Cape and Northern Cape has made it difficult to connect the new renewable energy produced by private players to the national grid.

The Government of National Unity (GNU), supported by the National Treasury, is trying to reverse all this by reviving investments in new infrastructure projects and making it easier to partner with the private sector on mega projects.

The idea behind this is that improved infrastructure investments have the potential to create jobs, which is one of the GNU’s priorities. The positive impact on jobs can be seen through labour-intensive sectors such as construction. The Treasury estimates that for every R1-million spent on a construction project, more than three jobs are created for individuals whose highest qualification is a matric certificate.

By comparison, a similar investment in mining creates just one job for someone with a matric certificate.

The government wants to accelerate infrastructure projects, but it doesn’t have the money, skills and capacity to lead such projects. So, help is needed from the private sector, which in turn needs incentives from the government so that it can back its infrastructure development goals.

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Enter the Treasury, and so it did through the 2024 Medium-Term Budget Policy Statement.

Infrastructure reforms

The Treasury has committed itself to amending regulations to make it easier for private-sector capital to invest in public infrastructure, and it is also offering incentives for doing so. It will launch a credit guarantee vehicle, backed by the World Bank, to de-risk infrastructure projects that are taken on and funded by private-sector players.

How it works is that the private sector players use debt to fund mega infrastructure projects and will probably take the same approach when embarking on state-led projects. To motivate them to embark on such projects, private-sector players want to share the debt risk with the government.

In the long-established Renewable Energy Independent Power Producer Procurement Programme, the government launched a scheme that guaranteed up to 100% of the debt undertaken by private-sector players to roll out infrastructure that would feed renewable energy to Eskom and the national grid.

If they failed to pay back the debt taken, the government (taxpayers) would step in and be on the hook for debt repayments. This exposed public finances to enormous risk, causing contingent liabilities to pile up on the state’s financial books and exposing South Africa to further downgrades by credit rating agencies.

The new credit guarantee vehicle, which is set to operate by the end of next year, will shift the risk from the state’s financial books to the World Bank’s Multilateral Investment Guarantee Agency, which typically insures investments in the developing world against political risk.

The Treasury’s director-general, Duncan Pieterse, said projects in electricity transmission infrastructure are first in the queue to receive the new credit guarantee vehicle, with projects in water and transport to follow if successful.

“This reform will crowd more funding in infrastructure spending and leverage the private sector’s balance sheet, which will lead to a better outcome on infrastructure spending and bring in a pipeline of projects.”

Industry weighs in on reforms

There is no shortage of money from the private sector or a lack of appetite to plan and successfully deliver projects. Underscoring this is Pieterse saying that 70% of public infrastructure investment is done by the private sector, whereas the government is only responsible for 30% – a percentage that is evenly split between state-owned enterprises (Eskom and Transnet) and municipalities. The problem has long been the lack of bankable projects on any scale – meaning the absence of projects that can successfully secure debt, become profitable and deliver returns for investors.

The key question is whether the Treasury’s new approach to backing infrastructure projects will be a game-changer and revive much-needed investments. After all, since 2016, the government has cut spending on infrastructure projects to redirect money to fund fee-free higher education and offset low revenue collection. South Africa’s gross fixed capital formation – a measure of investments including new infrastructure projects – should be 30% of GDP as envisaged by the National Development Plan, but languishes at about 16%.

Business Leadership South Africa CEO Busisiwe Mavuso is sceptical about the Treasury’s reforms, saying that the private sector was left disappointed and scarred in the past by the government’s unfulfilled promises of accelerating infrastructure projects. However, she was comforted by the Treasury’s commitment to asking for help from this sector.

Sisa Kobus, an analyst in the fixed income team at Ninety One, expects an increase in funding for infrastructure projects, because in addition to the Treasury working on the credit guarantee vehicle, some projects will be funded by the budget through infrastructure bonds, bilateral loans and concessional funding.

The research team at consulting firm Krutham, led by MD Peter Attard Montalto, said credit guarantees and concessional loans could further increase investment appeal, especially in infrastructure-intensive industries such as transportation and logistics. However, the intervention does not go far enough.

“It lacks detail on de-risking strategies specific to South Africa’s infrastructure. Strategies such as long-term guarantees, government-backed minimum revenue commitments and enhanced insurance products would reduce risk and likely attract private capital more effectively,” the Krutham team said. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

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Infrastructure reforms

Industry weighs in on reforms