Recalibrating the procurement framework: Infrastructure investment’s last chance saloon

First published in the Daily Maverick 168 weekly newspaper.

Galvanising infrastructure investment is the only – and best – way for the SA government to kick-start economic growth and provide citizens with the means to improve their own lives and boost their incomes. But despite years of talk about enabling infrastructure investment in the country, we have gone backwards.

Infrastructure investment has fallen precipitously, from 20.3% of GDP in 2015 to 17.9% in 2019. The fall has been particularly evident in public sector spending. In the 2019/20 financial year, public sector spending was 27% or R70-billion below the budget of the previous year. It gets worse when it comes to state-owned enterprises (SOEs) and municipalities, which generally spend half of what is provided.

This reflects the legendary capacity constraints in public institutions and the unnecessary complexity of the regulations for public sector spending (on-budget expenditure), as well as public-private partnerships (PPPs).

Thus, achieving the target set in the National Development Plan of investing 30% of GDP by 2030, or even the 23% targeted by the Minister of the Department of Public Works and Infrastructure, Patricia de Lille, by 2024, seems like a pipe dream.

This level of spending would bring South Africa closer to high-growth emerging markets such as China, which has spent more than 40% of GDP on gross fixed capital formation through the past decade, and India, which has spent about 30% of GDP.

For SA citizens, the fact that the country has effectively missed a generation of capital investment in roads, rail, ports, electricity, water, sanitation, public transport and housing is all too apparent.

Shifting this is an enormous challenge, as Dr Kgosientso Ramokgopa, Head of the Investment and Infrastructure Office in the Presidency, knows only too well. Spending of 17.9% of GDP amounted to R909-billion in 2019. Increasing this to 25% would imply an extra R360-billion of spending a year, equivalent to building 12 Gautrain projects a year or a Sol Plaatje University every day. Achieving this goal will require radical interventions.

A report commissioned by Business Leadership South Africa and researched by Intellidex shines a light on the issues constraining infrastructure delivery and finds that current solutions such as the R100-billion Infrastructure Fund, while noble in intent, do not go far enough.

“The scale of what needs to be achieved is massive,” says Stuart Theobald, lead researcher on the project. “Infrastructure spending happens through multiple channels – the public sector, in particular at local and provincial level, through SOEs, the private sector and PPPs. There are blockages at each of these levels. Current solutions are focused on solving narrow blockages ... and do not tackle the problem at the macro level.”    

Instead, what is required is a recalibration of the country’s infrastructure procurement framework to unleash high volumes of investment.

Draconian regulations designed to curb fraud and corruption have made infrastructure investments complex, contributing to the collapse in spending. Amendments are required to the Municipal Finance Management Act and the Public Finance Management Act, and their regulations to simplify and standardise the procurement process while ensuring accountability remains, the report says.

The researchers found that the legislation governing PPPs – lauded as the solution to the state’s lack of capacity and funding – is even more draconian.

“On-balance sheet procurement is complex,” says Theobald, “but PPPs are subject to onerous additional bureaucracy ... As a result, the use of PPPs has collapsed, with no new projects registered since 2017.”  

The report suggests that the newly created Infrastructure South Africa should focus on advocating increased use of PPPs across the public sector. In addition, the Infrastructure Fund at the Development Bank of Southern Africa (DBSA) should be used to de-risk projects to ensure they can form viable PPPs. Infrastructure South Africa and DBSA should work together with public institutions to create viable PPPs that are then overseen by the National Treasury through its Government Technical Advisory Centre and PPP Unit.

The report notes that there is one major exception to the recent history of PPPs, and that is the Renewable Energy Independent Power Producer Procurement (REIPPP) Programme. In the first four procurement rounds of the programme conducted between 2010 and 2015, R209.7-billion of investment was generated. This quantum is more than twice the R91-billion that has been invested in 36 PPPs since the early 2000s.     

But, despite its success, the author's counsel against following in the REIPPP’s footsteps. It was conducted without a formal framework, making budgeting and accountability difficult. Although such ad hoc measures can seem effective in stepping around blockages to deliver infrastructure projects, they ultimately undermine the coherence of the government’s overall infrastructure strategy.

“It is preferable to create a standardised procurement framework that encourages efficiency, specialised solutions in particular segments and maximises overall value for money within a coherent policy framework,” Theobald says.

Creating this framework, revising legislation and ensuring that the National Treasury, the Department of Public Works and Infrastructure, and everyone in between is pulling in the same direction is no small task.

Meantime, the authors note, crowding in private sector investment is the easiest problem to solve and costs the state nothing.

Many of these have been said before, but are worth repeating:

Opening up own-generation licensing for companies to build new energy-generating plants of more than 1MW is one quick solution.

Another would be to urgently license spectrum for cellular networks to expand capacity and grow 5G networks.

Concessions by SOEs, particularly of ports and rail, are being explored by the likes of Transnet. This would unlock capital for SOEs while allowing private companies to use existing infrastructure to facilitate greater economic activity.

Mining exploration should be revisited. The collapse of exploration investment reflects both long-running policy uncertainty and regulatory incompetence. In 2018, when SA recorded just R387-million in mining exploration investment, Australia recorded R23-billion, despite worse prospects for mineral resources, the report notes.

Capacitating local offices while finalising the Mineral and Petroleum Resources Development Act and Mining Charter would allow investment to restart.

Lastly, there’s finalising the Expropriation Bill and proposed amendments to section 25 of the Constitution to recommit to property rights. The more robust the protection afforded property rights, the lower the risks facing investors and therefore the higher the volumes of investment.

These are the steps that will have the biggest impact while the macroeconomic framework is revised. Tinkering with infrastructure funds and offices is not going to get SA’s economy moving. We need to add fuel to this effort. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.