/ 23 February 2012

Big spender faces big hurdles

Big Spender Faces Big Hurdles

The state, as it heads towards raising R1-trillion in revenue, hopes to spend triple that — R3.2-trillion — to build new hospitals, roads, railways, ports, dams and power stations.

But the success of this massive expenditure on infrastructure will depend largely on the ability of state institutions to perform effectively. Finance Minister Pravin Gordhan said in his budget speech on Wednesday that the state needed to improve in this regard and to operate within a responsible and sustainable fiscal framework.

There is also the question of where South Africa would get the skills to pull it off. “We’re aware of several weaknesses in the state’s infrastructure capacity,” said Gordhan.

Despite delays, cost overruns and the government failing to spend 32% of the R280-billion allocated for infrastructure in 2010-2011, Gordhan gave assurances that the state could spend the R4.5-trillion wisely and efficiently.

“We shall step up the quality of planning, costing and project management so that infrastructure is delivered on time,” he said. “We have money within the system and we will find money if the government has the will and ability to implement.”

The bulk of the five infrastructure megaprojects announced in the State of the Nation address will cost a total of R565.95-billion in the coming three years. These projects include road, rail and waste infrastructure in the Waterberg and Steelport regions of Limpopo; the Durban/Free State/Gauteng corridor; and the southeastern development node, linking industry, agriculture and export capacity in the Eastern Cape.

The bulk of the money, R331.55-billion, has been provided for in the medium-term expenditure framework. The rest, R168.1-billion, is provided for in the “outer years” between 2015 and 2017.

First of 43 projects which will total over R3-trillion
These are the first of 43 projects — planned to cover transportation and logistics, social infrastructure and energy — expected to cost the country R3.2-trillion in the coming years.

But Gordhan and his deputy Nhlanhla Nene were quick to point out that these would be subject to feasibility assessments, improved regulation and oversight, and enhanced planning and implementation capacity before funding would be allocated.

Water, electricity and transport projects to the value of about R1.7-trillion have already reached financing and detailed design stage.

Other projects to the value of more than R2-billion are in concept, prefeasibility and feasibility stages. These include: the building of nuclear power stations, which is in the final stages of consideration before financial proposals can be determined; the feasibility of a third new coal-fired power station is under consideration; and funding has been committed for the project development of two new universities, proposed for Mpumalanga and the Northern Cape.

Feasibility studies are also in progress for the upgrading and rehabilitation of four major hospitals, with the possible development of a new academic hospital in Limpopo.

But Gordhan was adamant that the programme should be done within a sustainable fiscal framework.

Government’s performed badly in infrastructure delivery
The state’s lacklustre performance in the delivery of infrastructure was not missed by private sector analysts. Absa’s Chris Gilmour said that much more tangible evidence of effective spending would have to be seen for the R3.2-trillion target to become a reality.

Gordhan said that, among the options to pay for the development of infrastructure, would be cost reflective but affordable tariffs paid for by the user. This would better enable state-owned enterprises such as Eskom and Transnet to finance their investments from internally generated surpluses and borrowing from capital markets.

But the costs of public service facilities, such as schools, courts, hospitals and rural roads, would be met by the fiscus.

He said private sector participation could augment the state’s capacity to build and operate infrastructure, and he hinted at concessions for the management of industrial development zones, freight logistics and port operations.

SOEs must find alternative sources of funding
In the budget vote for the department of public enterprises, it was said that state-owned enterprises had to find new sources of funding for their expanded investment plans, including a greater use of development finance institutions, pension funds and the larger customers of state-owned companies.

The new strategic partnerships sub-programme of the department would identify where external funds could be sourced.

Gordhan said the private sector had to be approached about corporate savings, amounting to hundreds of billions of rands, which could be better invested in economic growth.

But concerns have been voiced about the lack of sufficient detail on the proposed role of the private sector.

“We agree with the minister where he emphasises that business should invest in our future,” said Christelle Grohmann, director of Grant Thornton Advisory Services.

“Yet he provided no clarity or role for the private sector or on [public private partnerships] in general.”

Gordhan said that the increased role of the state had to be met with improved savings by the government and it had to work to improve its capacity, including better project management.

In a bid to build the state’s capacity, there was a host of government programmes under consideration or being implemented, according to the Budget Review. These included a support programme for cities, now under consideration, initially to help eight metros with governance, spatial planning, public transport systems and environmental management. A municipal infrastructure support agency is also being set up by the department of cooperative governance to deploy technical experts to assist rural municipalities that lack the capacity to plan.

The infrastructure delivery improvement programme already in operation assists national and provincial departments with finance, training and technical assistance in planning, procurement and project management. Since its inception, R255-million has been spent, with a further R98-million a year allocated over the medium term.

The team includes the treasury, the Development Bank of Southern Africa and the Construction Industry Development Board, supported by 45 technical assistants. So far, it has assisted a number of departments, including the department of education, to develop a standardised approach to costing the construction of schools, facilitating large-scale, multiple-school building programmes and contracts, according to the Budget Review.