01 Apr The road (un) paved with good intentions: Infrastructure-led Economic Recovery
The 2022 Budget Review provides an update on Government’s infrastructure investment drive, increasing infrastructure spending to an estimated R812.5 billion over the next three years. Finance Minister Enoch Godongwana‘s budget echoed the same sentiments and commitments espoused during the State of the Nation Address (SONA) – infrastructure investment and development are critical for economic recovery and growth. The Economic Reconstruction and Recovery Plan (ERRP) announced in October 2020 described infrastructure development as the flywheel to economic recovery, linking infrastructure investment and related institutional reforms to support higher economic growth. Many of the reforms involve pooling resources with the private sector. Hopefully, the lower corporate tax announced in this Budget signals some action – even if more symbolic than effective – to the private sector.
Since the ERRP’s announcement in 2020, a series of developments followed.
Of particular significance was the Infrastructure Investment Plan (IIP) also announced in October 2020. The projects within the IIP cover a range of sectors and industries – 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. It consists of numerous technical, financial, legislative and developmental reforms approved by Cabinet and that form the basis for infrastructure implementation to be prioritised.
The IIP also sets out 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. The IIP further established Infrastructure South Africa – 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 was the recognition that a credible and comprehensive project pipeline is required.
In October 2021, government unveiled the second tranche of the Sustainable Infrastructure Development Symposium of South Africa (SIDSSA) project pipeline comprising 55 projects valued at R595 billion and for which R441 billion is needed from public-private partnerships (PPP’s). SIDSSA is the platform aimed at bringing together critical role-players in the infrastructure investment space to accelerate the 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. This is an important development against the background of the decline of PPP’s in recent years – from an estimated R10.7 billion in 2011/12 to R5.6 billion in 2019/2020.
National Treasury completed its PPP review, in September 2021, emphasising the need to simplify approval and compliance requirements and reform the policy framework to assess and prioritise cross-sector partnerships. The review also recommends the creation of a PPP centre for excellence as well as expedited approval processes for projects under R1 billion. Treasury aims to implement these reforms over the next two years. The Budget highlighted some of the reasons for the decline as described in the PPP review, which included onerous approval processes, especially for small projects, and poor capacity of government departments to estimate risk-sharing with the private sector.
The Budget states that The National Treasury, Department of Public Works and Infrastructure (DPWI), Infrastructure South Africa, and the Infrastructure Fund are undertaking complementary reforms to strengthen the infrastructure value chain. Initiatives include the National Infrastructure Plan 2050, the Budget Facility for Infrastructure (BFI), and the Infrastructure Fund. The DPWI is developing a comprehensive, focused infrastructure plan; Infrastructure South Africa is working to unblock policy and regulatory obstacles to build a credible and bankable pipeline of projects; the BFI is increasing the rigour in the planning and appraisal of projects; and the Infrastructure Fund is increasing skills and capacity in the structuring of blended finance projects, where most of the financing will come from the private sector.
From 2020 with the ERRP announcement, there is a clearer statement of intent from the government regarding its national infrastructure direction and strategy. However, the private sector, and correctly so, is, once again, raising concerns with the ‘bold, targeted and implementation orientated’ IIP, specifically regarding delays in awarding tenders and issues with oversight mechanisms. What is more, increased infrastructure spend has not increased infrastructure implementation – 75% of the required investment for the second tranche of projects is not available and the rollout of projects is slow – 54% of all the potential projects are either in pre-feasibility or feasibility stage, with less than 10% under construction.
With the government’s limited ability to date to deliver on its infrastructure priorities, drawing on private sector investments, while the only feasible option, is not viable as long as the hurdles to effective, quick, and transparent project rollout exist. Treasury’s commitment to implement the review over the next two years may provide impetus to the private sector to partner with the government. For a complete overhaul, Treasury will also need to take into account the comprehensive IIP that contains critical recommendations for the infrastructure-led economic recovery plan, including leveraging private sector expertise, 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 also plays a critical role in this regard as well as the Infrastructure and Investment Office (IIO) as a single point of entry that provides transparency about all phases of projects. However, mechanisms for expedient implementation must be leveraged to their fullest extent.
Whilst LNP agrees that a more appropriate governance framework to deal with the obstacles impeding effective project rollout is required, for us to achieve political and regulatory certainty, legal and technical expertise to assess project feasibility and procurement strategies is critical. There is clearly public and private sector appetite to use the power of infrastructure to drive economic revitalisation. However, the promises on strategy and better implementation can only carry South Africa for so long. In order for the private sector to commit, a much greater sense of urgency for meaningful concretisation is needed.