Hello and welcome to this So What podcast, which I'm very happy to announce just won
gold in the politics and opinion category of the inaugural South African podcast awards
which happened in October of 2024.
In these conversations, political economic analyst JP Landman discusses the issues uppermost
in the minds of South Africans.
You can find a written version of this content on JP's website jplandman.co.za.
I am Ruda Landman and I am your host.
This discussion accompanies the newsletter dated 21 November 2024 with the title, Investment
Pulling It All Together.
It's information laden, so I would recommend that you look at the written version as well
to digest the numbers.
The website again, it's jplantman.co.za.
JP, so investment in South Africa, the overall picture?
The overall picture is that in 2023 we invested just over a trillion rand, that is the public
sector and the private sector combined, and one must see that one trillion rand investment
in the context of an economy which is about seven trillion rand big.
So one looks at an investment to GDP ratio of 15%, that is the standard measurement worldwide.
And how does that compare internationally?
It probably compares with a range of countries, but if we compare it to what we would like
to do in South Africa, then we certainly need more.
The now defunct National Development Plan used to talk about the 25% ratio, 10% by the
public sector and 15% by the private sector.
Now at 15% we are not close to that number.
And that number is relevant Ruda, because several ministers in the government of national
unity, DA ministers as well as ANC ministers, have spoken about converting or transforming
South Africa into one big construction site.
So what we want to do in this note is to see how that is going.
And 15% is not enough to get us to one big construction site.
That number of 15 will have to increase.
You say two sectors, public and private.
What's the ratio between those two?
Additionally, the public sector contributed about a third of investment in the country
and the private sector two thirds.
In the last couple of years that ratio has changed.
The public sector ratio went down.
In 2023 it came to about 28% and private sector investment came to 72%.
So there's been a tilt away from two thirds, one third to about 72, 28.
And you think, you believe that the private sector investment is really important.
What do you base that on?
I base it on a new report that was published by Professor Philippe Berger, who is the Dean
of Economics at Freestead University and a very, very competent macroeconomist.
And he did a lot of research recently for UNWINDER, which was published not long ago.
And he found that for every 1% increase in the ratio of private sector investment to
GDP for every 1%, economic growth increases by 0.67% per annum.
Now that's an enormous dividend to spend 1% more and you get 0.67% more in economic growth.
That's really an enormous dividend.
In contrast, he found that public sector spending, particularly by SOEs, is almost statistically
insignificant.
In other words, you can increase public sector to investment to GDP ratio, but you won't
get a statistically significant dividend in terms of growth.
Now this sounds very bleak and so on, but it ties up with common sense.
If you think ESCOM building Madhupi or building Kusili, how long that took, what the overspending
was, how much money in the end it cost, and what is the return that you get.
You compare that with a private company building a solar farm, for example, what it cost, the
speed of finishing the project and what you get back.
Then it makes perfect sense.
We know that the private sector in general is more disciplined and more efficient in execution
than the public sector.
Not always, but in general.
So in that sense, Philippe Berger's numbers are not a surprise.
With that said, let's start with public sector investment.
We are all aware of budget austerity in these times.
What does that mean for investment from the public sector?
Well, the interesting thing here is the truism is that if you have budget austerity or your
budgets are cut, the first item to be cut is capital expenditure.
The interesting thing is that is not happening at the moment.
The 2024 budget is giving us a three-year projection of capital expenditure, public sector
infrastructure spending, and over the three years it comes to 943 billion rand.
That is about 29% higher than the three-year cycle that we've just got behind us.
So if you compare three years with three years, what you see is the 29% increase.
That's a huge increase.
It beats inflation by a comfortable number, and it tells you what the political priorities
are.
So that old truism that when there's austerity, you cut capital expenditure, is certainly
not holding.
And I think that's a very encouraging sign.
And if you say public sector, what does that mean really?
Who gets to spend this money?
Yeah, indeed.
It's a massive sector.
First of all, it's around about 36 national departments.
Between them they have about 116 agencies.
Think for example, Sunroll that builds roads.
That is one agency.
Think the Independent Electoral Commission, when they need to install new computer equipment
or whatever.
That's an agency of government, an agency of a national department, and they will spend
money.
Then the second category is you've got the nine provinces.
The third category is you've got about 257, 258 local authorities.
They spend money.
And then lastly, you've got PPPs, where a government agency is doing a particular project,
but they're doing it in partnership with a private company.
So it's really everything that you can think of in the bigger public sector of South Africa.
Where do SOEs fit in?
SOEs are also part of that.
In fact, SOEs are the biggest single player.
They spend about 40% of the 943 billion.
Then they followed by municipalities with about 23%.
Then provinces in the third place with 20%.
Then only the government departments and their agencies at 16% and then PPPs with about 2%.
So the biggest player is the SOEs.
You say that, of course, these numbers tell us nothing about quality of spending with
corruption, poor planning, et cetera.
And we'll get to that in a moment.
But I first want to focus on the public-private partnerships.
Only 2% of this investment.
So do they really matter?
Yes, they do matter because they give you a much better quality outcome.
As we put it in the note, they punch above their weight when it comes to quality.
And again, we know that intuitively you can just compare driving on a toll road to driving
on a provincial road and you see the difference.
Toll roads are normally PPPs and they're much better maintained, much better condition than
what provincial roads are.
So there is definitely a qualitative difference.
PPPs have not taken off in South Africa over the last decade or two, except for national
roads.
In national roads, we've been quite successful in building a large number of PPP projects,
but not wider than that.
It looks if that is changing now.
Why?
Because there are a couple of interesting PPPs going on.
There's one going on to revamp and rebuild one military hospital in Twane.
It's a big project.
There are also proposals out to the moment from the Western Cape government to redo the
Tigerburg Hospital down in the Western Cape, also on a PPP basis.
And then the third example are six border posts between South Africa and its neighbors
here in the subcontinent, which are being revamped and rebuilt with private sector money.
So those are examples of PPPs.
So it looks as if there's a bigger movement in that direction.
A very interesting little PPP, it's a small one, it's only about 120 million rand, was
conducted between the Mpumalanga Tourism and Parks Agency and the British Aspenal Foundation,
which is a charity foundation, to redevelop the Los Cobdam Nature Reserve.
Now, as I say, it's a small amount, it's only about 120 million, but it will run over
25 years and the infrastructure will be upgraded like roads, fences, staff accommodation and
field ranger facilities.
A particular emphasis of this PPP is that they would like to include public and private
land inside an enlarged Los Cobdam Nature Reserve.
Their ambition is to make it bigger than the Palansberg Reserve.
So it's a unique form of a PPP.
So one thing that will lift the quality of investment spending is working with the private
sector in the shape of PPPs.
What else has government done?
What other kind of guardrails have they put in place?
Another one which was put in place quite a while ago in 2016 already is the BFI, the
Budget Facility for Infrastructure.
And what it basically is, is public sector institutions that we spoke about earlier can
apply, they can tender to have projects that they want to do, to have those projects financed
through the budget.
But then they've got to meet certain criteria for preparation, for technical specifications
and also for execution.
Where does this live?
In Treasury?
It lives in Treasury, absolutely.
Now in the eight years since 2016, we've now had this year the seventh bit window.
One was missed in 2020 with COVID, I think.
And what happened in October this year, last month, the Minister of Finance announced that
instead of having one bit window a year, once only, we will now have bit windows on a continuous
basis.
So that should ensure a bigger supply of projects that can be evaluated and if approved, will
give you a bigger pipeline.
So the Budget Facility for Infrastructure, the BFI, do two things.
First of all, they've got, as I've said, stringent technical requirements for the project.
You cannot just jump in and say, I want money for a school or I want money for a hospital.
You've got to show that you're capable of planning the project properly, budgeting it
and so on.
But the second thing it does is to mobilize private sector money to finance that project.
Now if you look at the numbers for 2024, what you see is that 66.9 billion Rands worth of
projects have been approved and 52% of that money comes from the private sector.
38% comes from the budget, from the state, from the taxpayer and another 10% from third
parties.
So there's a distinct tilt to involving private sector funds and thereby enlarging the pool
of money that's available.
So this 66.9 billion Rand will be spent on 14 projects and if I just give you an idea
of what they are, it's social housing projects, about 14,000 housing units, five water and
sanitation projects all over the country, six revamped border posts that I've already
referred to and student housing projects on four university campuses involving some 10,000
units.
So you're talking fairly substantial projects.
So are these also PPPs?
Do they overlap?
Yes, there is an overlap.
It can very well be an overlap.
You may find that what starts off as a BFI project could end up being a PPP, but they're
not necessarily the same.
The governance arrangements normally differ.
So you may find that a particular public sector still runs the project, although they have
to do it with their private partners.
But yes, there can be an overlap.
Where do the infrastructure fund and infrastructure South Africa fit in?
The infrastructure fund is a new innovation that came in 2018 when President Ramaphosa
became president.
It was his baby.
He was an officer about three months when he said that he wanted to establish an infrastructure
fund.
The intention was to blend public and private money, take some money from the taxpayers,
take some money from the private market.
You blend it.
That brings the cost of finance down, but at the same time it enlarges the pool of finance.
He was particularly keen on it in 2018.
It took two years to operationalize it.
It just took time in the public sector and it became operational in 2020.
Currently there are 31 projects under preparation by the infrastructure fund and infrastructure
SA, and it includes schools in the Northern and Eastern Cape, as well as hospitals in
Malanga and the Free State.
Now let me just say that's the infrastructure fund.
Where does infrastructure SA fit in?
After a year or two it became clear that the biggest stumbling block in government infrastructure
spending is the quality of preparation and the quality of oversight of the project.
The skills simply does not, certainly did not exist in the public sector.
So infrastructure SA was created as an agency to help that.
They've got a team of professional people.
In the budget this year 600 million rand was allocated for technical skills inside infrastructure
SA and they can then help to plan projects, to inspect them properly, to get them running
and to look after the implementation of those projects.
So the fund is about money.
Infrastructure South Africa is about skills and the two work together.
Will it please also help water and sanitation?
Yes, I think indeed it will, included in the numbers that we talked about, the 943 billion
and included in the BFI are public projects on water.
But let's just dig a little bit deeper into it because it is such a big deal.
Overall there are 11 projects countrywide across seven provinces which total about almost
140 billion rand for water.
And I'll give you just the big ones.
The biggest single project is 42 billion rand for the Lesotho Highlands phase two to deliver
water to Gauteng, Gauteng and North West.
The completion date for that is 2028.
This project has been considerably delayed.
There were allegations of corruption and so on, but it looks as if it's now firmly on
track.
A second set of projects coming to about 46 billion rand is free projects in KwaZulu-Natal
for bulk water supply in that province.
It will help the South Coast in particular.
Water is a problem in the South Coast and these free projects should help with that.
The completion date there is between 2027 to 2032.
And a third one, which is also an interesting project because this moves towards PPP, is
the Wollifant River project Mpumalanga, which is a joint effort between the mining company
Glencor, the platinum mining company Amplats and government.
And it will involve 400 kilometers of pipelines and provide 250 million liters of water per
day.
It's equal to about one third of the total consumption of Cape Town.
Now you can see that it's a joint effort between two mining companies and government.
And they're busy negotiating at the moment with 10 local and international banks to finance
that.
They're putting that movement of private capital into a public project.
Their completion date is expected to be 2030.
So there's a strong movement around water to improve bulk water supply.
I think the country can take comfort from that.
But it still has to come from the big pipe to the little pipe in my bathroom.
What happens with the final mile or the last mile?
How do they put it?
You're quite right.
The water has slipped between the reservoir and the tap.
The bulk water supply we've spoken about, the problem is municipalities and distribution
systems.
And we know that that is in quite a bad shape.
So what has happened is that the government has put up a water office in the development
bank.
It is modeled on the IPP office, the Independent Power Producers Office, that did quite good
work around renewable energy, basically copying that copy and paste.
And the idea with the water office is that they must help municipalities, which as we've
seen earlier is quite a big spender.
They've got to help municipalities to fix their water affairs.
Now the head of the water office is Mr. Johan Libbe.
And he had a very interesting interview.
He said the water office has begun to mobilize private sector financing for water projects
in Etiquini, Mangahung, Buffalo City, Nelson Mandela Bay and Twane for the replacement
of leaking municipal water systems, which are resulting in high levels of non-revenue
water.
We're all aware of the problem of non-revenue water and for that you've got to fix leaks.
To fix the leaks you need money.
So that's where the water office comes in.
But Johan Libbe warns, he says it takes time.
It is not something that happens overnight.
On the larger projects it takes 12 to 18 months to properly structure the projects.
You don't want to rush through a project and then put it out to the market and then the
private sector shoots a full of holes.
So it takes time, but the institutional infrastructure is there.
The people are there.
It should lead to an improvement over time, particularly in the big metros.
What difference will it make to involve the private sector?
Well, the private sector by definition brings discipline.
There's money that is advanced.
That money must first of all...
And it's their money, it's not tax money.
It's not amorphous tax money.
That money must earn a return and it must be repaid.
So you immediately have financial discipline, which we clearly don't have in a lot of our
municipalities.
And this notion of financial discipline was given a huge boost last week.
Got very little notice in the media, but what happened was that Treasury has agreed to withhold
payments to municipalities of their equitable share.
Equitable share is simply the money which is allocated from the national budget to help
municipalities.
They will hold back those equitable share payments from municipalities who have debt
with water boards.
Now that's a very, very encouraging development.
Imagine if we can do the same thing with electricity.
Now needless to say, the municipalities affected will be up in arms and it will ruffle their
feathers, but it is clearly the right thing to do.
And as I've said, if one can repeat that arrangement with electricity, it will lead to a big improvement.
The Department of Water and Sanitation must get the credit here.
They lobbied for this change.
They've been lobbying for the last year and Treasury has now agreed.
So it's a step forward.
So we've now talked about projects initiated by the public sector, even if it's not fully
paid for by them.
What about the private sector?
What about private sector investment?
I've said it so many times, I sound like a broken record or a stuck CD or whatever
the modern equivalent will be.
But mining 100 years ago was the investment frontier.
That is what made South Africa modern.
Now it is energy.
And if one looks at the numbers, they are really quite astonishing.
If we can just take an overview of energy generation, up to date, we've got 8,000 megawatts
of new capacity, most of it renewable capacity, which have been contracted to sell to the
grid and that brought an investment of 270 billion.
It's a huge amount of money.
That's the past.
That's behind us.
What is going on right now as we talk is a bit window.
Bit windows is something which is driven by the government.
It carries a government guarantee and you work through official processes.
So it's basically a 10 that the government puts out.
Bit window 7 for 5,000 megawatts, a bit window for 650 megawatts of batteries and then a
bit window for 2000 megawatts of gas, presumably in Richards Bay.
The estimated investment here is 180 billion grand plus, according to the budget review.
But what has happened since 2022, since President Ramaphosa deregulated the electricity market
is that there's been a huge swing from public procurement to private procurement.
Private procurement simply meaning private companies doing their own thing, putting up
a solar farm, putting up a wind farm, entering into contracts to buy power from people who
have a solar farm or buy power from people who have too much power.
That deregulation of the industry really made a huge difference.
What we currently have on a table or should I say in the pipeline is 22,500 megawatts
of projects with an estimated investment value of 390 billion grand.
We're talking huge amounts of money here and this will carry on.
I mean, essentially we're building a new electricity system in South Africa.
You know, we mustn't forget that ISCOM has already determined way back that of the 14
coal-fired power stations, eight will close down by 2034, 2036.
And is that still true in spite of political opposition?
Yes, yes.
Some units in some power stations were given permission by the government to close down
later.
So they will close down later, but it's still within the 2034 timeframe.
So just think about it, you've got 14 power stations serving the country now without load
shedding.
You close eight of them down.
You've got to replace that capacity.
It's going to be a huge investment.
And that is just all on the generation side.
If you move to transmission, a very similarly bullish picture emerges.
What do we know?
We know that transmission is a problem for generation.
We know that it's a choke point.
So what is needed to fix generation?
Well, depending on what timeframe you talk about, it's between 200 billion and 390 billion
depending whether you talk five years or 10 years.
So the National Transmission Company, which has now been taken out of ESCOM and is a self-standing
company has got 112 billion around earmarked over the next five years specifically to build
new infrastructure, transmission infrastructure.
Now to unlock more funds, same story again.
So that's from the budget?
Well, it's basically from the ESCOM balance sheet.
Yeah, it's from the ESCOM board, in this case the transmission company balance sheet, with
probably some help from the budget.
To unlock further funds, government has authorized the independent power producers office to
wonder drove the renewal program to run a pilot program to procure the first private
independent transmission project.
So it's completely new terrain for us in South Africa.
You've got a transmission line, it serves a number of producers and consumers, but it's
built by not by the state monopoly, it's built by a private entity.
Sounds a bit like a toll road.
Yeah, I think that's a good comparison.
It's a good comparison.
Now a new credit guarantee vehicle, which was developed with the help of the World Bank,
will support this pilot project.
What it basically means is that the private sector that comes in to provide the money
will enjoy some guarantee on their funds that they advance, but the state will not be on
for a 100% guarantee, which is still the case with the older generation projects, and one
wants to move away from that.
You want to move away from state guarantees where people must assess the risk and take
it and collect the profits, but also live with the losses.
Nevertheless, this transmission pilot project provides for a credit guarantee, which balances
between the private companies and the government, and that should help to generate many more
funds, much more funds for building transmission projects.
If we just look at where we are, I've already said that the National Transmission Company
is looking at 112 billion rands worth of projects over the next 10 years.
Currently they have 31 projects in construction now, which will release about 16,000 megawatts
of connection capacity, and then by 2034, six years later, they want to do another 30
projects to connect 40,000.
So you're looking at 56,000 megawatts of transmission capacity over the next 10 years.
That's a significant investment.
It is a significant improvement that will come to the transmission grid.
I don't know if this works, but how does that compare with the whole system at the moment?
No, it's substantial.
We haven't invested a lot of money in transmission in the last 10 years and even longer.
In fact, I think, if I remember correctly, last year, less than 100 kilometers of transmission
lines were built.
The numbers that we're talking about here, you're talking about 1200 to 1400 kilometers
of transmission lines per annum.
So it's a huge step up in terms of building new capacity.
You've been saying green is the new gold.
So you still see that happening?
Oh, absolutely.
You know, if we try and pull all these numbers together, because they're all over the show,
basically we need 1.5 trillion rand for the next.
The official timeframe is five years, but let's make it five to seven years, 1.5 trillion
to execute all these projects and help with the energy transition.
And then in the period after that, the next decade, we will need 3 trillion rand.
And these are enormous amounts of money, if you think of the size of our economy.
Where will that money come from?
Well, we've discussed that before.
It'll be a combination of public money, private money, philanthropic money, aid assistance
from the developed world, and so on.
But people that I speak to generally do not see money as the big problem.
The much bigger problem is having bankable projects that can be executed that are credible
on which you can put money and take a wager.
That is where the bigger problem lies.
The problem doesn't lie with money.
And that's human capital.
That's human capital, it's skills.
That's why things like the budget facility are important, things like infrastructure
South Africa.
We've got to build up the skills base that can again underpin a huge infrastructure drive.
If we get to sow what in the first place, there has to be more investment, it sounds
like.
If we want to turn the country into a construction site, yes.
Turning the country into a construction site is the political ambition.
The current 15% of GDP being spent on investment is not enough.
We've got to get that number up.
How do you get the number up?
You can only get it really up by involving more capital from the private sector.
And here I think the change in government attitude that we've seen since about 2018-2019
is a very important change.
Government used to work with the concept of pre-scrub assets, not government so much,
but ANC.
There's been a distinct move away from that.
The emphasis now is on involving private money, linking it up with public money, and thereby
enlarging the pool of funds.
That is happening and I would expect that trend to continue over the next couple of
years.
The important thing is, as I've said, a pipeline of projects.
That's what it's all about.
And that's why the work of the budget facility and the work of infrastructure, SA, are important.
They're building up more and more projects.
I'm quite sure not enough.
One year complaints from the financial sector that there are not enough of these projects,
but there's certainly more than what there was.
And I think that's the trend to watch.
And the other trend that you highlight in your So What?
Is the diminishing role of SOEs in the context of this shifting political atmosphere.
Yes, absolutely.
Look, the SOEs, it's a simple reality of state capture that they are now in a bad shape.
ESCOM basically can't undertake any investment projects.
Neither can Transnet.
Transnet will probably have to get some support from the FISCUS, like ESCOM is getting.
So they're not going to have huge infrastructure projects.
And that's why that number has come down from two-thirds, one-third to 72%, 28%.
I think that's the reality.
And then the question is, so who will take their place?
And the answer is the place will be taken by joint public and private partnerships and
financing.
And how would you summarize that, the So What about the practicalities of making it happen?
Well, as I've said, it's all about a credible pipeline, which we see is being built and
will probably the pipeline will get bigger and bigger as we go on.
And what that will do, quite apart from money, is it should help with discipline and it should
help with better management, as we've seen with toll roads.
When money flows and there's somebody responsible for collecting it, but also responsible for
performance, there's accountability.
And that I think will help to change the public infrastructure in South Africa.
And of course, the more you change the public, the more confidence there is in the private
sector.
The more confidence there is in the private sector, the more they're willing to put in
another machine or put up another factory or undertake some kind of an expansion somewhere.
These things feed on each other.
And of course, we wouldn't have been here.
That's one of those big South African ironies.
We wouldn't have been here if we didn't have the pain of load shedding and the pain of
water shedding.
Load shedding and water shedding is helping to push our body politic towards involving
more private sector and involving more money and more expertise from the private sector.
Thank you very much.
Fascinating.
Thank you.
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