Infrastructure-Led Economic Recovery: Key questions following SONA

The State of the Nation Address (SONA) this last week focussed heavily on economic recovery. President Cyril Ramaphosa pledged a new social compact within 100 days, “working together to revitalise the economy”. Additionally, there was a focus on regulatory reform to cut red tape, measures to assist small business, improve water management, and secure stable electricity. With regards to regulatory reform, a new unit in the presidency was announced to clear bureaucratic obstacles and thus facilitate enterprise. The new unit will join operation Vulindlela, the joint Presidency National Treasury Initiative to overcome bottlenecks, the Investment and Infrastructure Office, and the State-Owned Entities Council amongst others.

The social compact builds on the economic recovery as previously envisioned and will retain government priorities of last year’s SONA including infrastructure roll-out, local production, employment stimulus and the rapid expansion of energy generation capacity.

The President also provided more detail on previous announcements regarding regulatory and structural reform including reviewing the Business Act, easing small business permit requirements, and amending the Electricity Amendment Act to create a competitive electricity market.

The speech contained a repeat of previous promises, especially with regards to the challenges and obstacles in various sectors identified by government last year. Although the address was promising, implementation remains the key issue – especially against the background of the February 2020 SONA when the Economic Reconstruction and Recovery Plan was announced. The plan’s focal points revolved around infrastructure, industrialisation and local production, employment stimulus and energy security. 

The following are the plan’s key areas of focus: Allocating R340 billion to infrastructure investment in network industries such as energy, water, transport and telecommunications; allocating R19 billion to road projects; focusing efforts on additional housing and water infrastructure; and the continuance of previous initiatives through the Infrastructure Fund, namely, allocating R100 billion to the Student Housing Infrastructure Programme and SA connect, a programme to roll out broadband to schools, hospitals, police stations and other government facilities.

Subsequently, the Infrastructure Investment Plan (IIP) was announced in October of 2020 and hailed as the cornerstone of economic recovery. The projects within the IIP covers human settlements, transport, energy, water and sanitation, digital infrastructure, agriculture and agro-processing. In a presentation to the joint committee meeting of the Department of Public Works and Infrastructure, Minister Patricia de Lille set out the implementation of the IIP against the historical background of substantial underspend on infrastructure by all spheres of government and the lack of clear national direction and strategy for infrastructure as well as scattered oversight. The plan was described as bold, targeted and implementation orientated in the immediate term. The plan consists of numerous technical, financial, legislative and developmental reforms approved by Cabinet and that forms the basis for infrastructure implementation to be prioritised. 

More specifically, the plan aims to identify projects across regions and sectors to which funds can be best allocated in the short, medium and long-term; to approve and implement additional mechanisms that will fast-track the implementation of sustainable infrastructure; and increased funding from the private sector or agencies. The IIP also established Infrastructure South Africa mentioned above –  the single point of entry for all Infrastructure assessment, verification, strategic development management and investment facilitation under the guidance of the Infrastructure and Investment Office (IIO). Of critical importance is the plan’s recognition of the need for a credible and comprehensive project pipeline.

Additionally, in his Mid-Term Budget Policy Statement last year, Finance Minister Enoch Godongwana emphasised the fact that infrastructure development is critical for economic recovery and growth. In line with the previous contentions in the IIP, the Minister also noted that public-private sector partnerships are required to fill a R441 billion gap in infrastructure financing for the 55 infrastructural projects announced by Government. The Minister also noted government’s review in May of last year of public-private partnership regulations. Government recommended eliminating delays in approval and implementation, standardising project preparation, building capacity at all levels of government, and simplifying regulations. The plan is set to be implemented this year.

The Infrastructure Fund, Treasury and Infrastructure SA are all currently involved in initiatives to improve the scale, efficiency and speed of infrastructure spending. This includes a projects appraisal, attracting private-sector financing and creating and maintaining the pipeline for projects, first set out in the IIP.  In addition the new social compact was announced during last week’s SONA.

In previous reflections, LNP noted that it is critical to utilise the Infrastructure Development Act of 2014 that aims for the fast tracking and coordination of infrastructure development and improves the management of such development during all life cycles -planning, approval, implementation and operation phases. 

The IIP outlined two important aspects, which also sets out key points for the trajectory of the construction industry this coming year and for economic recovery in general:

Firstly, the call for increased partnerships between the public and private sector for the implementation of sustainable, ft-for-purpose infrastructure. And, secondly, the need to stimulate recovery mechanisms for the construction sector.

With regards to the latter, the IIP emphasised the fact that the construction sector was the hardest hit by the downgraded economy and Covid-19, with the highest number of job losses and overall contraction of around 14% in 2020. The construction industry, alongside industrial growth, job creation and the expansion of energy generation capacity has historically been a tremendous driver for economic growth. However, it needs a sustained pipeline of activity as outlined in the IIP, by Infrastructure SA and related government initiatives to increase public-private partnerships. There is clearly public and private sector appetite to use the power of critical infrastructure to drive the economy and concomitantly revitalising the construction sector.

It is lamentable that against this background, there are still growing concerns about the slow recovery of the construction and civil engineering sectors and its knock-on effect in the wider economy. Problems have been raised about the details of implementation of the IIP and other initiatives, delays in awarding tenders, and oversight mechanisms. Therefore, although last week’s SONA made all the right noises – addressing bureaucratic and regulatory and structural reform – it will remain to be seen whether these goals can be realised. 

Some commentators have noted that even with government’s massive infrastructure expenditure, it will not ease the construction industry’s plight. As mentioned, in October of last year, government unveiled its second tranche of the Sustainable Infrastructure Development Symposium South Africa (SIDSSA) project pipeline comprising 55 projects valued at R595 billion and for which R441 billion is needed from public-private partnerships. SIDSSA is the platform aimed at bringing together critical role-players in the infrastructure investment space to accelerate the infrastructure-led economic recovery plan and to explore partnerships between the public and private sectors, regulatory and policy reforms, and innovative funding models for infrastructure and investing in infrastructure. 

The fact remains that financing is a problem; 75% of the required investment for the second tranche is not available and construction industry bodies such as the SA Forum of Civil Engineering Contractors (Safcec) and Master Builders South Africa (MBSA) are noting the slow rollout and implementation of infrastructure projects. Furthermore, according to SIDSSA, 54% of all the potential projects are either in pre-feasibility or feasibility stage, with less than 10% under construction.

As such, despite underlying indicators such as activity and profitability improving in the final quarter of last year, delays in awarding infrastructure projects have led to a drop in confidence in the construction industry in the same quarter. 

The IIP is comprehensive and contains a number of critical mechanisms for the infrastructure-led economic recovery plan, including leveraging private sector expertise and public and private sector funding, realigning public sector infrastructure funding, promoting cross-border infrastructure projects and regional and sectoral integration as well as distinguishing between projects that could be implemented immediately, and those requiring medium and long-term planning. SIDSSA plays a critical role in this regard. Essentially, many pieces are in place and there is much reason to remain optimistic for industry growth this year. However, what is clear is that construction sector mechanisms for expedient implementation must be leveraged to their fullest extent and additional work must be undertaken to catalyse private sector investment.

With the government limited in its ability to deliver on its infrastructure priorities, drawing on private sector investments is the only viable option to an improved economic outlook. In order to achieve this, government must engender confidence. In this regard, Infrastructure SA and the Infrastructure and Investment Office (IIO) as a single point of entry that provides transparency about all phases of projects is a critical step. So too, the goal of providing a credible pipeline. However, projects are not moving at the speed required and, as such, still raises many questions.

Some industry experts have previously noted that for political and regulatory certainty, additional legal and technical expertise to assess the feasibility of projects is needed as well as an appropriate governance framework to deal with the obstacles that have thus far impeded the efficient and accelerated rollout of projects. The President’s focus on regulatory reform is therefore welcomed. Along with business leaders in various sectors, LNP was also hoping for a greater sense of urgency and stronger implementation to accelerate both the reform agenda and infrastructure roll-out to back the policy.