September 30, 2019
Share this Article
In recent years, the South African economy has not grown at the pace needed to create jobs. At the same time, public finances have been constrained, limiting the ability of government to expand its investment in economic and social development.
This fiscal constraint is reflected in the fact that government debt has risen from a low of 26% of GDP in 2009 (at the time Moody’s assigned South Africa an ‘A’ credit rating), to an estimated 58.5% of GDP in 2019/2020. In value terms, since 2009 government debt has increased by more than R2.5 trillion, which equates to an average annual increase of a staggering 16%. This increase in debt is especially damning considering the deterioration in the supply of key services such as electricity and water, as well as the weakness in the provision of education and healthcare services.
The R2.5 trillion increase in government debt excludes the debt incurred by State-Owned Enterprises (SOEs) such as Eskom, which equates to a further 10.5% of GDP.
While there has been an attempt recently to start to restore fiscal discipline, the split between consumption and capital expenditure remains hugely problematic. Over the past ten years government has tended to shift spending away from capital products, such as infrastructural renewal, in favour of consumption, such as government salaries. This shift in spending priorities has undermined economic growth over the longer term, resulting in a deterioration in many vital areas of service delivery.
Fortunately, government’s plans to revitalise the South African economy include infrastructural development. More specifically, the government has made the decision to set up an Infrastructure Fund, inviting the private sector to enter into meaningful partnerships with government. Infrastructure expansion and maintenance have the potential to create jobs on a large scale, attract investment and lay a foundation for sustainable economic expansion. The contribution from the fiscus towards the Infrastructure Fund over the medium-term expenditure framework period will be used to leverage additional resources from developmental finance institutions, multilateral development banks and private lenders and investors.
To ensure these funds are used effectively and that projects are completed on time and within budget, the government is establishing a dedicated Infrastructure Execution Team in the Presidency. The team has extensive project management and engineering expertise to assist with project design and overseeing implementation.
Under these circumstances, it is clear that private-public partnerships (PPPs) are an effective way for the public and private sectors to work together to deliver much-needed infrastructure.
A PPP is defined as a contract between a public sector institution and a private party, where the private party performs a function that is usually provided by the public sector. Under these circumstances, most of the risks associated with the developmental (infrastructure) project (technical, financial and operational) are transferred to the private party. The public sector pays for the new infrastructure, maintenance of the asset and facilities management, through monthly or annual payments. In contrast, when government takes responsibility for the entire infrastructural project, the public sector pays for the capital and operating costs, and carries the risks of cost overruns and late delivery.
It is not well known that government has completed 34 PPP projects since this type of partnership was first introduced in SA in 1998. The total value of these projects is R89.6 billion, including hospitals, transport and roads, tourism, and head office accommodation projects. This excludes the Independent Power Producer (IPP) initiative launched a number of years ago by Eskom to supplement SA’s struggling electricity supply.
These 34 PPP projects were funded through a combination of equity, debt and, in some instances, government capital contributions. Most of these projects are already operational, with a few having reached the end of their project term. In some instances, project durations have been extended.
Out of government’s current R864.9 billion public-sector infrastructure budget for the next three years, PPP projects account for R17.3 billion, or 2% of the total public-sector infrastructure budget estimate.
At this stage most of the PPPs that are currently under way include transport and accommodation projects, with a few in the health and correctional services sectors. Municipal solid waste, transport and accommodation projects are also starting to play a larger role in PPPs and this trend is expected to continue over the next three years.
More specifically, the current pipeline of PPP projects includes extending the Gautrain rapid rail network, redeveloping six border posts, constructing the Kopanong precinct and building new schools for the Gauteng Schools Programme. However, it is apparent that this pipeline could be expanded substantially to include water treatment, the renewal of public sector hospitals, the upgrading of road networks, and a range of local government infrastructure that has deteriorated in recent years.
If managed correctly, the Infrastructure Fund, including the increased use of PPPs, has the potential to provide a catalyst for additional private sector investment. Government needs to urgently identify key infrastructure development projects, complete feasibility and environmental impact assessments and then implement the projects as quickly as possible.
In the past, whenever government has announced an ambitious infrastructural development programme, it has largely failed to focus on implementing the projects in a timeous and efficient manner that adheres to budgets and completion deadlines. This lack of implementation has, over time, undermined the credibility of government’s stimulus package, thereby weakening business confidence. Consequently, it is critical that all investment projects are independently verified and evaluated to reduce levels of corruption, as well as to ensure that projects are completed timeously and within budget.