/ 4 November 2011

Banking on infrastructure

Infrastructure development will be a “trigger” to the implementation of the government’s new growth path (NGP), with about 200 major projects being mapped out under the auspices of the presidential infrastructure co-ordinating commission (PICC).

This is according to Economic Development Minister Ebrahim Patel, who detailed the growth path’s progress on the eve of its first birthday in an interview with the Mail & Guardian.

As part of a “sea change” away from consumption-led growth, the commission is working to develop a 10-year pipeline of projects aimed at ensuring that infrastructure spending will be sustained between 9% to 10% of gross domestic product.

Infrastructure development forms a key “job driver” for the NGP, which has received a hostile reception from labour and business.

In recent weeks, rising administered prices, notably for energy and transport logistics, have sparked criticism from the private sector as hampering efforts to grow local businesses and boost manufacturing competitiveness.

The development of new economies such as the green economy is another key job driver. It has been slow to take off, with an emphasis on the roll-out of solar water heaters and the renewable energy procurement programme launched in August.

The NGP’s identification of traditional economic sectors such as mining and manufacturing as being capable of absorbing more labour has been questioned. Research from the Unisa Bureau for Market Research shows the already poor record of these sectors to absorb labour over the past decade, and highlights the impact labour-market constraints and the skills deficit have on businesses’ ability to grow.

Efforts outlined in the NGP to promote macroeconomic interventions to create a more competitive currency have experienced little traction. The Reserve Bank’s work to build foreign reserves, largely in response to foreign capital inflows, has done little to curb a volatile rand.

For Patel, the first step in addressing much of the criticism thrown at the NGP begins with addressing infrastructure development.

Infrastructure constraints and development “go to the heart of making the New Growth Path work”, Patel said, particularly in the light of the government’s underinvestment in infrastructure over the past decade. Growth in recent years was predicated on consumption, which was not sustainable, said Patel. “You can sustainably consume only by increasing your productive capacity,” he said.

To achieve the shift from consumption-led growth to investment-led growth was “the work of a generation” and would involve a “sea change” in how the government worked.

For that to happen, a number of issues had to be addressed, including skills shortages, improving private investment, bringing about greater balance in trade markets and increased competitiveness in the economy as a whole.

But infrastructure development, he said, was “the trigger”.

The PICC, set up in July, brings almost half the Cabinet together. Along with ministers from economic and infrastructure clusters, it includes all provincial premiers, the heads of the major metros and the leaders of state-owned enterprises and development-finance institutions.

“We have all the economic decision-makers in one room,” said Patel.

The PICC is developing an infrastructure book, mapping out the 200 major infrastructure projects to be undertaken in the economy.

These include water, roads, rail, ports, inland transport hubs, energy and broadband roll-out projects. But aside from industrial infrastructure projects, such as industrial development zones, social infrastructure projects are also included, such as hospitals and university build programmes.

The PICC will then focus on strategic projects over a 10-year pipeline, given the long lead times required for these types of investment.

Major blockages are being identified, including the slowness of the state in manoeuvring through the regulatory hoops required for major projects. Everything from environmental impact assessments to feasibility studies and tender processes contributes to the time taken to get projects in progress.

“We are looking to re-engineer that pipeline to find ways to shorten these processes,” Patel said.

Central to the considerations had to be that the projects chosen contributed to higher productivity, both directly and indirectly, so that they could be financed without imposing excessive costs on the economy, Patel said.

Investment in maintenance was also to be increased, with the added benefit that maintenance was labour intensive, he said.

As a way to review administered prices, the Cabinet recently mandated reviews of electricity tariffs, road tolls and was looking at new options regarding port fees, said Patel. “While we are sure some efficiency gains are possible, we have to accept that higher investment to improve the quality of infrastructure costs money, which in turn means that, in some areas, price increases will be unavoidable,” he said.

“Our challenge is to ensure it does not hurt the poor or our industrialisation efforts.”

The PICC also aimed to get the state out of its habit of working in silos. “Over the past two years, there has been a lot more use of inter-ministerial committees,” Patel said.

The Integrated Resource Plan 2010 was developed in this collaborative way, he said, incorporating a greater element of localisation along with a significant commitment to renewables.

Green economy
Patel said that the Industrial Development Corporation had put R22-billion on the table for the development of green projects, as well as a further R3-billion for producing green products. Although the solar water heater project was “symbolically” important, it was only one aspect of a much larger drive towards a greener economy.

More detail would come from the green economy accord being developed. It would follow other accords announced recently aimed at promoting skills and local procurement.

The wage pact
Patel defended the position taken in the NGP on capability of the economy’s “core productive sectors to absorb labour”, citing research conducted by the economic development department. South Africa could not simply “grow its way out of the crisis of unemployment and inequality”, he said. “We have to develop the kinds of industries that will create employment on a large scale, while continuing to advance and diversify the core productive sectors — mining, agriculture, manufacturing and high-level services — that can drive growth in South Africa and the region in the longer run.”

But a hurdle to advancing the productive sectors of the economy, as a number of economists point out, remains the issue of labour-market reform. The NGP’s proposed pact on wages to start addressing these matters is a thorny issue.

Patel said that, as part of the agreement reached in the social dialogue process at the National Economic Development and Labour Council, discussion would start “with issues where we can reach agreement relatively easily in order to build trust as the basis for addressing these more difficult challenges”.

The pact was aimed at ensuring a more equitable, fair and effective remuneration structure, he said, and avoiding excessive increases in costs relative to productivity.

Macroeconomic interventions
As part of its macroeconomic package, the NGP has advocated more aggressive attempts to create a competitive currency. It identified increasing foreign currency reserves as a way to stem a rising rand owing to foreign portfolio flows into South Africa. But many months and billions of rands later, the volatility remains, thanks in large part to global economic uncertainty.

But, referring to economist Joseph Stiglitz, Patel asked whether local economists had considered how much worse things could have been if the measures had not been taken.

Disproportionate portfolio inflows remain a concern, he said. “It would be more sustainable if capital inflows paid for investment goods, which could raise productivity in the long run.”