Infrastructure Construction Challenge

Posted On Wednesday, 28 March 2012 02:00 Published by eProp Commercial Property News
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Ten years ago, the construction sector was moving at half speed after two decades of reduced activity levels, ever since the great 1970s infrastructure boom had ended

Infrastructure ImageAccording to Cees Bruggemans, Chief Economist FNB, this is a strange situation to find ourselves in, and that for the second time in a decade. He elaborates:

Ten years ago, the construction sector was moving at half speed after two decades of reduced activity levels, ever since the great 1970s infrastructure boom had ended.

There was clearly a backlog in public infrastructure maintenance, replacement and new capacity additions building up, but the new political dispensation since 1994 had been more concerned with social delivery and paying higher public sector wages than increasing the physical delivery of infrastructure.

After all, there was so much spare capacity, and with the economy growing only very slowly, what’s the rush?

And then, rather unexpectedly, for few apparently saw it really coming, having been in the doldrums for so long, in less than six years the annual outlay on real fixed investment in construction works (a SARB term) tripled, led by World Cup soccer projects and electricity.

Is history about to repeat itself?

If anything, the infrastructure backlog today is far worse than a decade ago. There are no more spare capacities, indeed the infrastructure shortages are becoming overwhelming and the country’s growth rate is clearly being held back by electricity, export rail and road bottlenecks, while water is a structural problem.

But given the decision delays of the past two years, and the apparent limited manpower capacity in the public sector to sustain a full infrastructure construction load, the pace of construction has scaled down anew.

The industry has reportedly great difficulty believing a vigorous turnaround is just around the corner.

Yet the needs are there, in electricity these next three decades, in rail export capacity, in dam and road capacity, aside of the social needs in education, health, security, municipal and provincial.

President Zuma threw his considerable weight behind key strategic rail, road and dam projects in his state of the nation speech last month. Energy awaits a whole slew of strategic decisions, on long-term electricity generation, gas utilisation and refinery issues.

When the Minister of Finance unveiled his budget last month, he choose to highlight the entire wish list of the country’s futuristic infrastructure needs, but limiting the next three years to a mere quarter of it – some R845bn.

Even so, the three-year capex budget had its surprises, effectively showing stagnant real fixed investment expenditures for the next three years, even though in recent years there had been a steady real increase in such public spending.

Were the Zuma initiatives in addition to, or part of, the three-year infrastructure budget? If part, why didn’t it show a jump in real investment intentions and financing requirements? Indeed, why flat earth and no real increases worth the name (when deflating the projected budget numbers with appropriate price indices)?

The budget certainly had one intention, and that was to show financial markets and rating agencies a faster rundown in fiscal deficit and national debt than so far mentioned. Anything in these globally troubled times to get a bill of good health and lower market rates to pay.

Meanwhile accelerated public infrastructure ambitions were mentioned, but not incorporated in budget numbers qua financing needs or in projected GDP growth. It is as if nothing new will happen at all these next three years.

It may well be that this is the base case. It takes time to prepare the ground, and especially to address the public sector manpower issues. Besides, it doesn’t now suit to go to market, or even to start explaining about future investment needs.

Markets want to hear about frugal governments cutting back budget deficits and debt. Growth issues are for another day.

Nothing prevents government to humour markets with their short-term preoccupations while laying the groundwork for the infrastructure investment acceleration that is needed and being planned for when market preoccupations are a little less short-term oriented.

Besides, it isn’t as if future financing needs will only come through the budget and or be leveraged off parastatal balance sheets. There will be some of that, but there is also taxation (user charges), import/export financing and perhaps non-traditional borrowing (China for instance, linked to participation in the actual construction effort?).

The Minister of Finance may not now have painted anything in the budget that will be earmarked for accelerated infrastructure spending, but nothing prevents such numbers to be shown next year, and if not then, the year thereafter, or whenever suits best.

Meanwhile, user charging is proceeding steadily in the case of electricity (massive annual tariff increases for as far as the eye can see?), and is about to be resumed in road usage if the tolling saga proceeds as scripted.

Philosophically, it probably suits that this comes at the expense of middle class conspicuous consumption, for the country requires saving and fixed investment far more than the frivolous types of consumption.

Thus one is left wondering whether the developmental state concept of forced saving and narrowing consumer choice is coming in here via the backdoor.

And then there is the eventual allocation of contracts. One knows the Chinese are extensively engaged with power station, rail, harbor, refinery and dam building, and they have a lot of potential concessionary finance available.

It isn’t as if everything needs to be allocated to them, but one can see the mosaic of financing options shaping. User charging (forced saving), own finance by government (limited) and public entities (to the hilt), and foreign financing options (import/export linked and/or outright Chinese financing).

And this is before considering more local private public partnerships with local institutional participation, something the Finance Minister hinted, but which may not be equally welcome elsewhere in government?

The Finance Minister did mention accelerated infrastructure spending AFTER 2014, when the bulk of new outlays could be coming into view. That wouldn’t prevent a buildup of new activity in 2012-2014, but it might still be modest compared to what could follow post-2014.

Just because we haven’t seen it in any numbers except wish lists during 2009-2012 doesn’t mean to say another infrastructure construction wave isn’t building.

The needs are certainly dire enough, it isn’t as if there are no imaginative financing options even in these dire times when austerity is supposedly the defining new fashionableness, there appears to be political buy-in (the economy is growing far too slowly, for very obvious reasons having little to do with either the previous regime or business), the capacity to undertake a much bigger construction effort exists, especially if Chinese piggy-backed. It is a no-brainer, really.

Except we have heard it all before, with no follow-through. But while it is realistic not to be fooled easily, allow an open mind for the obvious, and a stretched timetable to get there.

We will probably be in the midst of another major infrastructure construction expansion by mid-decade. Its composition, however, may differ somewhat from earlier waves. This time far more user charging (increased tax burdens) and foreign participation while shielding the government balance sheet, keeping it in strategic reserve for future global crises.

 

Last modified on Monday, 28 October 2013 16:03

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