Unpacking the R846 Billion

Mon, 17 Oct 2011 12:12

THE SPRINT IS OVER, A MARATHON BEGINS
Unpacking the R846 Billion

“Underpinning our strategy for economic recovery and growth is our capital investment programme. Over the next three years government will spend R846 billion on public infrastructure.”

President Jacob Zuma
State of the Nation Address, February 2010

The World Cup was something of a clairvoyant. It gave South Africa a glimpse into what could be, into a parallel world to the top of which rose a cream of the finest racial blends. It was an achievement that deserves its place in history beside Nelson Mandela’s release and the New Democracy. Each was an occasion that should never be forgotten, for within them are the essential ingredients of growth and progress.

Clues to South Africa’s development surely rest in how the country not only managed to deliver the required infrastructure under the iron-fist of FIFA, but also went on to host one of the best tournaments in World Cup history. While the Cup itself was a compelling catalyst behind the infrastructure rollout, a number of challenges now face an industry in sombre, post-World Cup slump.

The gravity of it all has been made clear in the South Africa Federation of Civil Engineering Contractors’ (Safcec) ‘State of the Civil Engineering Industry Report’ for the first quarter of 2010.

Decline in the sector is clearly visible (up to 40% this year), and along with it are dropping employment figures, capital expenditure, tender activity and contract awards. Projects across the public and private sectors are being decelerated, postponed and re-scoped. In the face of Government’s oft-said promise to spend R846bn, is one of the reports most salient points – the impact of ‘institutional decay’ on delivery, for it is delivery that will shape the industry in the years to come.

The achievements of the World Cup can be largely attributed to how the right people for the job bypassed the dead weight deep in the bowels of the public service. The best of both worlds – private and public – partnered and made things happen. Common goals were established, big business supported small, productivity grew, and employment followed.

The construction industry is one of the largest employers in the country, which would explain why the figure of R846bn is being used to allay fears of workflow and job creation. But the number is shrouded in mystery, and sceptics (many of whom are CEOs of large corporations) are becoming increasingly vocal about the legitimacy of the figure. Only time will tell what path Government will take, whether it will heed the World Cup’s lessons, whether it will embrace the help of the private sector, and whether the R846bn is just a number on a page.

The Basics

In Government’s Medium-Term Economic Framework (MTEF), last year’s R787billion budget was revised to the R846billion to be spent until 2013. This figure is made up of the infrastructure budgets of national, provincial and local government departments, as well as public-private partnerships (PPPs).

According to the National Treasury, non-financial public enterprises, such as Eskom, Transnet and SANRAL, make up the largest share of the spending, contributing 53.6% (R453.7bn) of the total. Spending by municipalities is the second largest contributor, making up 17.5%.

Figure 1: Budget Breakdown

	2009/10	2010/11	2011/12	2012/13	2010 MTEF	2009 MTEF
National Departments	6382	6847	7758	10703	25308	29532
Provincial Departments	41185	45623	49971	50786	146380	138855
Municipalities	37480	41305	50449	56028	147782	162308
PPP’s	13751	9939	11389	6109	27437	37316
Extra-Budgetary Public Entities	10859	11175	15083	18821	45079	22592
General Government	109657	114889	134650	142447	391986	390603
Non-Financial Public Enterprises	125504	147025	148665	157970	453660	396762
TOTAL (1000 million)	235161	261914	283315	300417	845646	787365
% GDP	0,10	0,10	0,10	0,09	0,09	0,10
GDP	2449858	2699888	2967560	3295749	8963197	8113457

Spending on economic services makes up the majority of spending, at 85.3% of the total (R720bn). This includes electricity provision, roads, pipelines, bulk infrastructure for water and sanitation, and housing. Infrastructure spending on social services makes up 11.3% of the total (R95bn), and constitutes spending on schools, hospitals and community facilities, including libraries, sports fields and community centres.

In addition to driving economic growth, this spending is designed to boost labour creation. For example, the budgets for the Municipal Infrastructure Grant (MIG) and the Infrastructure Grant to Provinces have been used as primary sources of funding for Expanded Public Works Programme (EPWP) projects in provinces and municipalities. A major thrust of the EPWP is to create jobs, and not only through construction of infrastructure, but through its maintenance as well.

But as the memory of the Cup fades alongside the adrenalin-fuelled momentum, doubt is beginning to creep into this figure of R846bn. A perilous gap appears to be growing between Government’s spoken word and real-time implementation.

The Road Ahead

Treasury reports that municipalities are battling to collect revenues, owing largely to last year’s recession. As a result, their capital projects are steadily dropping off the ‘to do list’. The expectation is that as the economy recovers – and people pay their bills again – the flow of projects will resume.

Business confidence in the civil sector, which receives 88% of its work from Government, is desperately low. There is an all-round rescoping and reprioritising of work in public corporations like Eskom and Transnet, whose spending forms the bulk of the budget.

Management deficiency at the local and provincial level is leading to under-spending on many budgeted projects. There is an overall decline in the tender process. Pressure continues to mount on profit margins, and unless Government gets the ball rolling on the R846bn, employment creation is in for another shock.

In an article for Polity.org, Terence Creamer, Editor of Engineering News, highlighted that the pattern of investment cutbacks from parastatals and Government departments poses a serious threat to job creation. He shows that in the context of South Africa’s chronic unemployment problem, job creation is at the core of income equality, which in turn is ‘arguably the biggest threat to long-term social stability’.

The lifeblood of South Africa’s economy (and any successful economy for that matter) is the Small Medium and Micro Enterprise (SMME) sector, and it is another one that depends heavily on Government contracts to stay alive.

The construction industry is falling into a lull, with most leading commentators suggesting a three-to-five year recovery plan – a desperately long time for an emerging sector feeding off Government contracts. While the bigger players will most likely seek respite in international markets, smaller local companies face a long, very steep battle.

Industry CEOs sound increasingly sceptical about not only the timing, but the overall figure as well. Of the R846bn, only a fraction will fall into the hands of the construction industry. There is a real fear that Government Ministers are using the figure to allay fears concerning job losses and a decreasing flow of work, and when the numbers are unpacked, some concerning issues come into play.

Drilling Down

Firstly, a huge portion of the figure relates to Eskom’s build programme and its three-year capacity budget of R385bn. The three main projects are the Medupi and Kusile coal-fired power plants, as well as the Ingula hydropower pumped-storage scheme.

Eskom’s chief officer for generation business, Brian Dames, said Kusile was approved for an estimated cost-to-completion amount of R141.5-billion (up from R80bn), while Medupi has risen to around R125bn (up from R78.6bn). The first phase of Medupi is supposed to come online in April 2012, with the final completion somewhere in 2017. Meanwhile, funding for Kusile has yet to be finalised, so the initial launch date in 2013 has been delayed by at least a year.

Now, estimates suggest that civil construction for each project amounts to only R10bn, the rest is allocated to the buying of machinery and equipment. For instance, the dry-cooling technology in Medupi came in at R25bn, while ‘contingency issues’ added a further R10bn. Add to these figures the fact that Medupi will take another seven years to complete, yet the numbers are still included in the MTEF figure of R846bn.

Transnet is set to spend just under R20bn in 2010/11, about R16bn in 2011/12, and around R14bn in 2012/13. The numbers are somewhat vague because the composition of each project changes year-on-year. In its 2010 annual report, Transnet shows that capital investments over the next five years between ports, rail and pipelines, showing around 35% will go toward land, buildings and infrastructure – the rest to machinery, equipment, pipe networks, locomotives, wagons, and so on.

Regardless, these figures are all incorporated into the total capital expenditure, of which actual construction is only a portion. Research firm Industry Insight places the figure for actual construction at around R315bn, with the work being split as follows:

Table 2: Construction Allocation (Public Sector)

	2010/11	2011/12	2012/13	3-Year Total
Government*	53 520	59 253	65 832	178 605
Eskom (10% infrastructure)	5 511	4 983	5 013	15 507
ACSA	4 635	4 172	3 755	12 561
Transnet (60% infrastructure)	6 640	9 780	9 480	25 900
SANRAL (Non-toll Roads)	4 065	5 812	6 384	16 261
Sasol (Pipelines)	4 500	5 700	5 700	15 900
Human Settlements	15 160	17 222	17 938	50 320
Public Sector	94 031	106 921	114 102	315 054

(* Government excludes SANRAL and housing, but includes provincial and municipal grants)

Ultimately, R846bn will only be spent if there is implementation, which seems curiously absent at the moment. A second challenge is that much of the money needs to be raised in foreign markets, many of which are still reeling from the financial crisis. Coupled with that is the scourge of corruption running rampant through the civil sector, posing a major health risk for foreign investors.

The MTEF submissions by State-Owned Enterprises (SOEs) and the three tiers of Government give rise to the figure, but the calculations are simply not being released to the public, which makes planning extremely difficult. The figure is clearly based on real inputs and is being used as a marketing tool, but by not releasing those calculations, a climate of mistrust is bred among those who expect to do business with Government. Effective planning forms the backbone of this infrastructure programme, and if it fails on this front there will be a major disappointment in the years to come.

An immense opportunity lies before South Africa and while it’s tempting to expect the solutions to come from Government, it may well be that the solution – and the drive – can only come from playing as a team. If the World Cup taught South Africa one lesson, it is that success only happens when we move as one.

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