State has a mountain to climb
Whatever form the government’s stimulus package takes, the business community wants the state to avoid taking on additional debt “at all costs, regardless of whether this is for investment purposes”, said the CEO Initiative’s co-convenor, Jabu Mabuza.
“South Africa should stay focused on disciplined fiscal consolidation to create a stable and attractive investment environment that can withstand external shocks to the economy,” Mabuza said.
His comments come as the country awaits the details of an economic stimulus package from the government, as well as the closely watched medium-term budget policy statement to be delivered by Finance Minister Nhlanhla Nene on October 24. The cabinet approved the stimulus package this week, and President Cyril Ramaphosa is due to announced the details on Friday (September 21).
Investment in infrastructure will form a key part of the stimulus package which will draw in private sector funding and delivery expertise. The extent to which the government can fund it alone, given the constraints to the budget, has been questioned.
In a recent policy brief, think-tank Trade and Industrial Policy Strategies (Tips) noted that modelling suggested that the stimulus package needed to be about R60-billion to have a significant effect on growth.
Senior economist at Tips Neva Makgetla said a stimulus package could be done in a deficit-neutral way, although financing would still be a problem. Options included the use of surpluses in the Unemployment Insurance Fund, said Makgetla, or using the Chinese or other foreign concessional funds.
Mabuza said that although the fiscal position was tight, “pushing the envelope is not what is ideal”.
There was a need for a combination of streamlining government departments and reallocating existing public funds, as well as ensuring that the infrastructure proposal presented a clear investment case for the private sector to partner with government on the project.
Mabuza’s comments echo those made by investment and asset managers at a recent breakfast held by the Association of Savings and Investment South Africa (Asisa).
Leon Campher, chief executive of Asisa, said there was clearly an appetite for infrastructure investment at project level, from the banking and the long-term savings sector.
“We don’t want to do what we have historically tended to do, [where] infrastructure happened via the SOEs [state-owned entities],” he said.
What was needed was bankable projects with “certain predetermined priorities”, he said, referring to the government’s renewable independent power producer programme as an example of a success. Campher said that if these projects could be created, there was potentially a “substantial” amount of funding that could be directed towards them.
David Munro, chief executive of Liberty Holdings, said: “Frankly, I don’t think it’s lack of capital or shortage of funding that is the bottleneck in infrastructure at all. It’s the flow of projects and the ability to get them to financial close — and [that] requires some level of commercial completion.”
Last week, Nene said it was urgent that government began “changing the conversation about our expenditure” and it was redoubling its efforts to address the main cause of poor economic growth — weak investment.
He stressed that government’s participation in the economic stimulus plan “will be through existing budget resources and will be focused on unlocking efficiencies within the public sector”. Since February’s budget, more demands have been made on the fiscus — notably the higher-than-budgeted-for public sector wage agreement. The deal is expected to add R30-billion to the budget in the coming three years. At the same time economic growth has deteriorated, with the country hitting a technical recession in the second quarter of the year, which has the potential to undermine revenue collections.
Moody’s, which is the only agency that rates South Africa’s debt as investment grade, has said the medium-term budget policy statement will be critical to its outlook for the country.
In February’s budget, the state’s net debt as a percentage of gross domestic product (GDP) was forecast to reach just over 50% in 2018-2019 rising to just over 52% in 2020-2021. The budget deficit was expected to be 3.6% of GDP in 2018-2019, declining to 3.5% in 2020-2021.
Although a decade ago SOEs such as Eskom, the Trans-Caledon Tunnel Authority and Transnet had launched an infrastructure drive to mitigate the worst effects of the global financial crisis, Nene said that in recent years many of the state-owned companies “have had their ability to contribute to economic growth severely weakened”.
Nene said the state was building a pipeline of investment opportunities and infrastructure projects, and had identified 64 projects through its budget facility for infrastructure, located in the treasury. So far, 38 projects had been subjected to rigorous financial and technical evaluation for possible investment.
Makgetla said: “Financing any major programme will have repercussions and risks — but the risk of not doing anything, given the high levels of joblessness and inequality that already exist, is larger.”
She added that “with any stimulus package, the risk is that the money takes forever to spend. It’s really hard to find ‘shovel ready’ projects. There is a recognition of that in government, and I think the aim is to focus on municipal projects that are smaller and easier to get going.”
South Africa’s infrastructure “desperately needs revival”, said Iraj Abedian, chief executive of Pan-African Investment & Research Services. But if the state’s stimulus plan relied on large, centrally planned and SOE-driven projects, it could lead to “a very unfortunate retracing of what could go horribly wrong”.
The tens of billions of rands needed for projects such as upgrading Transnet’s rolling stock or building a power station similar to Kusile was, by definition, very chunky and attracted “the crooks and local and international networks of extractors”, said Abedian.
What was needed were investments at a local and regional level that focused on projects such as urban infrastructure, the funding of which would then become a “completely different proposition”, he said. “[There is] no need for 100% public financing of these projects because a lot of these projects will be good, viable candidates for private public- partnerships … at the local level.” But this would require a completely different approach from government, he said.