Government still has one lever to pull: Infrastructure investment

The Covid-19 pandemic is stalling economic growth around the world. South Africa, already teetering on the brink, is likely to enter a full-blown recession with growth receding by an estimated -2.5% in 2020. 

While central banks are throwing resources at the problem, the SA Reserve Bank has limited fiscal space in which to launch a stimulus package. It has pulled the monetary lever in the form of lowered interest rates – and may do so again – and will ensure liquidity in the banking system. But that is as far as it has gone.

Research firm Intellidex predicts that if growth retreats by -2.5%, the budget deficit would leapfrog to around -10.8% of GDP in the coming fiscal year, from 7%, while debt rises to a budget-sapping 74% of GDP. 

Industry, from restaurants and the farmers that supply them, to manufacturing operations and motor vehicle plants to fruit exporters, is already coming to a shuddering halt and job losses could eventually rise to tens of thousands if not more.

As a country, we do not have to wring our hands. There are levers that government can pull – but it needs to put ideology and vested interests aside first.

As the CEO of Business Leadership, Busi Mavuso, argued in her newsletter last week, the president must focus on the structural reforms that the economy urgently needs – reforms that will spark economic activity that has been frustrated by policy uncertainty and other constraints.

Firstly Gwede Mantashe, the “I-will-not-be-rushed” minister of mineral resources and energy, needs to open up energy generation. The process is being railroaded by ideological and race-based debate and in the process, government is gambling with South Africa’s future.

If this doesn’t happen, President Cyril Ramaphosa may find himself forced to apologise to the South African public for deliberately harming the economy in the same way that Thabo Mbeki did in 2007. At the time Mbeki acknowledged that “Eskom was right and the government was wrong,” after admitting that Eskom had asked the government to invest more in power generation.

Ramaphosa can also stimulate economic activity by settling disputes over mining regulation – the government can easily unlock billions in investment by giving the industry the regulatory certainty it craves, said Mavuso. 

“We can also accelerate spectrum auctions by engaging with Icasa with the same spirit of engagement with Nersa,” she added. 

The next big lever lies with infrastructure spending.

Turning this lever will also take political will and concerted action, but solutions do lie within the government’s grasp.

The National Planning Commission has produced a draft policy paper that examines the public infrastructure space in the country and the problems that bedevil it and provides guidelines on how government can, quite quickly, improve the quality and impact of its spending on infrastructure.

The paper is the first in a series of 12 on the SA economy and contributes to an understanding of how to progress towards the National Development Plan Vision 2030.

It was authored by Sean Philips (now head of the Infrastructure Fund) and Ron Watermeyer, director at Infrastructure Operations, Wits University.

“The authors have looked at what has gone wrong with public and private spending and have identified those areas that are immediately in government’s control and suggested remedies to improve them,” says Miriam Altman, a commissioner on the National Planning Commission in the Office of the Presidency. She was addressing delegates at the annual Infrastructure Indaba hosted by the Consulting Engineers of SA.

In South Africa, megaprojects, including coal-fired power stations Medupi and Kusile, the Ingula Pumped Storage Scheme and the Gauteng Improvement Project, are characterised by cost overruns and late delivery.

“These projects provide an indication of the degree to which mismanaged mega projects can damage the economy,” said Philips at the same meeting. But he points out that not all projects in the public sector have failed in terms of time, cost and performance. A notable exception was the delivery of the Sol Plaatje University in Kimberley and the University of Mpumalanga on time and within their billion-rand budget.

The difference between successful and unsuccessful public infrastructure projects is the way in which they are procured and their delivery is managed, he says.

In the case of the new universities, the Campus Development and Planning unit at Wits was appointed to lead the project management team.

Government has made several attempts to address its poor infrastructure record, beginning with the Infrastructure Delivery Improvement Programme which ran between 2003 and 2017.

In 2006 the DBSA launched the Siyenza Manje (we are doing it now) initiative which deployed retired and semi-retired professionals at almost 200 underperforming municipalities.

Other initiatives include the formation of the Government Technical Advisory Centre, an agency of the National Treasury; the Presidential Infrastructure Coordinating Committee in 2012; and in 2013 the Office of the Chief Procurement Officer was established to modernise and oversee the South African public procurement system.  

In 2018, a project preparation facility was established. This responded to an acknowledgement that weak project preparation, planning and execution had resulted in lengthy delays, overspending and underspending and problems with quality.

“There were progressive improvements in infrastructure procurement until 2014,” says Altman. 

“But when the Office of the Chief Procurement Officer changed, processes reverted. It shows in declining public-sector infrastructure spending since then. We want to get back on that track.”

The report states that the procurement process is overly bureaucratised with the emphasis on compliance by box-ticking, which makes the system costly, burdensome, ineffective and prone to fraud, and has “become entrenched as opposed to being dismantled”.

In addition, the mechanisms for attracting and securing private sector investments have not delivered the desired outcomes.

While corruption and State Capture have also had an impact on public infrastructure delivery, the root cause of underspending and poor project outcomes, says Altman, can often be attributed to weak governance and poor procurement and delivery management practices, which are under government (the client) control.

The recommendations of the report are practical in that they include short, medium and long term measures – but there are no silver bullets.

For instance, in the short term, it is proposed that the government appoint people with infrastructure procurement and project management capability into senior management roles in institutions with infrastructure responsibilities.

The paper also proposes that infrastructure procurement is treated differently from that of general goods and services in government’s supply chain management system to recognise that procuring the parts for a multibillion-rand power project is different to procuring desks and chairs for a school. 

In the medium term, the paper proposes that government address fragmentation in legislation in a way that makes it easier to undertake infrastructure procurement and delivery; it suggests that public-private partnership regulations are reviewed – they are so burdensome that most public sector officials don’t want to engage with them.  

Longer-term, the report proposes that client delivery managers certify their capabilities.

“The bottom line is we want to make government better at project oversight of the built environment,” Altman says.

Unless the recommendations are adopted, the government’s target for public infrastructure investment (at 10% of GDP) is unlikely to be achieved.

Currently, public infrastructure investment is just under half of this value and private investment in public infrastructure is a woeful 2%. BM