Major investments in infrastructure are catalysing growth

The National Development Plan (NDP) provides the underlying blueprint for socio-economic development until 2030. It sets out the aim of achieving an annual growth rate of 5.4%, which the government projects as necessary to eradicate the triple challenges of unemployment, poverty and inequality.

In recognition of infrastructure’s role in improving service delivery, job creation and stimulating the economy, the NDP aims to increase the contribution of gross fixed capital formation (GFCF) to 30% of GDP, with public infrastructure investment accounting for one-third (10%) – which has major implications for the country’s contractors.

Management

Incorporated within the umbrella of the NDP is a National Infrastructure Development Plan that includes an Infrastructure Development Bill that was signed into law on May 30, 2014 and is intended to address inefficiencies attributable to a lack of integration and buy-in across government departments that has been shown to delay infrastructure advancement in the past. Crucial to improved coordination is the Presidential Infrastructure Coordinating Commission (PICC), a body chaired by the president and consisting of designated cabinet members that has prioritised and will decide on the time-line for 18 Strategic Infrastructure Projects (SIPs) (see Economy and Transport chapters). The PICC will also establish and supervise the steering committees assigned for the implementation of each.

A key difference over how infrastructure delivery will be managed under the PICC is that selected strategic projects will no longer be directed to the applicable ministry, but will instead be overseen by a designated public enterprise. For example, rather than falling under the auspices of the Department of Energy, SIP 9, related to electricity generation, will be handled by ESKOM (the state-owned utility) while SIP 8, related to green energy, will be monitored by the Industrial Development Corporation (a state-owned development finance institution, DFI). Similarly, SIP 14, which is related to higher education, will fall under the purview of the Council for Scientific and Industrial Research (CSIR) instead of the higher education ministry. While SIPs 6 and 13, related to municipal infrastructure and schooling, respectively, will be supervised by the Development Bank of Southern Africa (another state-linked DFI) instead of provincial and municipal governments and the basic education ministry.

The impact of SIPs on construction activity remains unclear, although it does not represent a marked change from previous expectations of medium-term project books. “You have to step back and realise that many of these projects have been in the pipeline for a long time and are just being aggregated into the PICC,” Rodney Milford, a CIDB programme manager, told OBG. “What the PICC, through the SIPs, is doing is adding nuance, not necessarily new work”.

Although the 2014 National Budget Speech, delivered by the former finance minister in February 2014, sets aside R847bn ($80.21bn) for public-sector infrastructure over the next three years, a significant proportion of the spend is for equipment rather than new construction build.

Institutional Importance

The bulk of public capital spending is assigned to Eskom, Transnet and Sanral (South African National Roads Agency), presenting these three infrastructure spending vehicles as the more keenly observed when it comes to examining implementation track records and budget allocations. According to Reserve Bank figures, state-owned enterprises accounted for 80% (R109.9bn; $10.41bn) of government infrastructure spend in 2012/2013, with Transnet, Eskom and Sanral responsible for 90% of this figure.

Eskom, which currently accounts for around 95% of the nation’s power generation, has been undertaking a $50bn build programme to revamp existing and construct new power facilities in order to close the gap on the country’s electricity shortage and meet projected future demand growth of 4% per annum. When completed, the Kusile and Medupi power stations, located in the provinces of Mpumulanga and Limpopo respectively, will be the third- and fourth-largest coal powered facilities in the world, adding 9600 MW in generation capacity to the national grid. Both projects have fallen behind schedule due to technical issues and labour disruptions – Medupi has so far been delayed by 48 months with estimated costs, including financing, projected to be at R130bn ($12.31bn), over double the initial budget of R52.9bn ($5.01bn), while in early July, a strike called by the National Union of Mineworkers halted work at Kusile’s construction site, but should see the first stages completed in the coming months.

Transnet

As work on Medupi and Kusile wraps up, Transnet is taking centre stage as the next major parastatal customer, as it embarks on a major capital investment programme slated to gain momentum in 2014/15 and peak around 2016/17.

The custodian of passenger rail, port and pipeline infrastructure is tapped to spend up to R300bn ($28.41bn) on a market demand strategy (MDS) to expand the country’s non-passenger logistics platforms. A main aim, and in turn significant chunk, of funding ($205 of the $300bn) will go towards added rail capacity so that key bulk mineral exports can more easily reach terminals and container traffic migrate from a dependence on commercial vehicles using an already congested and heavily eroded road network. In full-year results for 2013, the state-owned enterprise reported that capital investment increased by 15.6% to reach R31.8bn ($3.01bn).

Transnet’s largest recent contract involved a R50bn ($4.74bn) locomotive manufacturing order that was awarded to a consortium made up of General Electric, Bombardier and China’s CSR Zhuzhou Electric Locomotive and CNR Rolling Stock. With a fleet supply pipeline now in place, the next significant outlays are anticipated to involve the actual construction of new and expanded rail links. This will be highlighted by a planned R37bn ($3.5bn) rail line connecting the Waterberg coal fields in the northern Limpopo province to the existing main rail line that connects the current main coal mining area within Mpumulanga province to Richard’s Bay Coal Terminal (RBCT) in KwaZulu-Natal. The new line should increase the carrying capacity of coal originating at Waterberg from 4m to 80m tonnes per year. In anticipation, the main coal line could potentially be expanded to carry up to 120m tonnes (from a current installed capacity of 90m).

In terms of maritime capacity, Transnet has plans to spend R37bn ($3.5bn) on the construction of a new dug out port and the redevelopment of an older port in Durban. Bulk handling capacity at the ports of Ngqura (Eastern Cape) and Saldanha (Western Cape) are also tapped for expansion.

Public Financing

It is estimated that around two-thirds of the funding requirements for the likes of Eskom and Transnet are to be raised through the debt markets, with the remaining third generated from user fees, although a depreciating rand and expectations of Reserve Bank rate hikes could result in state enterprises having to spend more than originally planned to raise their requisite capital.

Ensuring cost-recovery more broadly can be tricky as the debate over the ability to pass on increased user fees demonstrates – a most recent example displayed in Sanral’s difficulties implementing and collecting electronic tolls on freeways in Gauteng Province. “Delays and complications are leading to costs rising and bond ratings declining. The re-insurance industry has become more reluctant to issue guarantees,” Lukas Marquart, managing director at construction guarantee specialist PCBS, told OBG.

PPPS

One solution towards easing the financial burden on the state is fostering greater private participation in project ownership and maintenance, an area in which the state already has some experience. The Gautrain, a rapid passenger rail network linking Pretoria, Johannesburg and O.R. Thambo airport, is considered to be the largest infrastructure public-private partnership (PPP) in Africa, and claims to have created 60,000 direct and indirect jobs while spurring new growth nodes and commercial and residential developments around its stations.

More recently, a spate of planned renewable energy power projects has increased the scope for PPPs in the coming years. The Department of Energy has rolled out a new framework for PPPs in the renewable sector, which includes an extensive consultative process and the establishment of fair terms and conditions for prospective independent power producers, and many of the tenders issued have been oversubscribed (see Energy chapter).

This has set a precedent within the country, prompting calls for other departments to emulate the factors that have contributed to the renewable energy programme’s success in engaging the private sector for both funding and participation moving forward.

You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: South Africa 2014

Construction & Real Estate chapter from The Report: South Africa 2014

Previous article from this chapter and report
OBG talks to Henry Laas, CEO, Murray & Roberts
Next article from this chapter and report
OBG talks to Louis van der Watt, CEO, Atterbury Group
Cover of The Report: South Africa 2014

The Report

This article is from the Construction & Real Estate chapter of The Report: South Africa 2014. Explore other chapters from this report.