South Africa: Gordhan’s Trillion-Rand Splurge

For the first time ever, South Africa will spend more than R1 trillion ($150bn) in its 2012/2013 budget year. The trick is in how to raise the money to pay for it, and it seems the country’s wealthy will bear the brunt while the middle to lower classes will feel some relief.

Finance Minister Pravin Gordhan will also turn words into action by spending R4.5 trillion ($600bn) over the next 10 years on infrastructure projects, as much to get the country in better physical shape as to create the 5m jobs in five years pledged by President Zuma a year ago. The R1-trillion budget high-water mark, together with a R4.5-trillion infrastructure price tag for the coming decade, caused worries of a debt tailspin, but Gordhan mollified South Africans and rating agencies with the assurance that the deficit would be capped at a comfortably manageable 4.6% of GDP, against an anticipated 5.2%, even with such splashing out.

The Finance Minister says the state also intends increasing the role of such development finance institutions as the Industrial Development Corporation (IDC) and the Development Bank of Southern Africa. The IDC, meanwhile, intends strengthening its balance sheet by releasing some of its shares in listed entities. Other funds will be sourced through new borrowings, loan repayments and profits.

While the budget unfolded to the customary groans from smokers and drinkers facing steeply increased sin taxes, and income tax stealthily edged up a few notches for the better off, the national focus fixed on the big economic development push bankrolled by an avalanche of cash to roll out new energy projects, transport initiatives and communication innovation.

The most breathtaking development in monetary terms is a string of new nuclear power stations, probably along the cold-water Atlantic coast on South Africa’s western flank, reckoned to cost R300bn ($39.7bn). Together they will generate 9,600MW, just under 25% of the additional energy South Africa needs to power its economy for the next 30 years. The installations are scheduled for commissioning in 2029, and are the biggest infrastructure programme ever undertaken by the government. A worksheet of around 40 other infrastructure projects includes a new oil refinery, two additional universities slated for provinces that have none, namely Mpumalanga and the Northern Cape, and an extensive agenda of modernisation of Transnet, the state-owned railway operation.

Over the years, the rail network has lost about half of its business to the road transport industry, which cashed in on the railways’ dismal delivery record. New locomotives and rolling stock, additional routes, more adept management and highly skilled technical staff will make Transet a force to be reckoned with, say transport department officials. The government will be hoping to improve on its 2010/11 performance that was riddled with delays, cost overruns and an infrastructure build underspend of nearly R90bn ($569m). “We shall step up the quality of planning, costing and project management so that infrastructure is delivered on time,” Gordhan pledged. “We have the money within the system and we will find money if the government has the will and the ability to implement.”

Problem not financial, but human, capital

In so saying, he hit the nail on the head as far as economist Vince Musewe is concerned. He is not at all starry-eyed at the prospect of trillions of rands being thrown at the infrastructure build. “It will not necessarily lead to economic growth underpinned by economic transformation,” maintains Musewe. “South Africa’s main problem is a deficit of human capital.”

He points out that while the infrastructure spend South Africa undertook for the 2010 World Cup created temporary jobs, it has not led to any significant changes to the economy. “Money was made, but for whom?” he asks. He notes that international studies show that infrastructure spend does lead to economic growth, eventually, and concludes that infrastructure development is not necessarily a cause of economic growth but is rather result of a growing economy. “In other words, infrastructure is not an input to growth but a symptom of a growing economy.

“The growth of China, for example, is simply due to the development of human capital and the critical role played by private entrepreneurs and SMMEs. There must also be high levels of savings, a skilled and flexible labour force and a work ethic.

“The management of resources in the public sector must be in place before we pour billions into public expenditure. One just has to look at the massive waste by provincial governments due to corruption and greed and the inefficiencies of local authorities.”

“What about us?” asks big business

The private sector as a mainstream contributor to the national infrastructure development offensive was conspicuous by its absence. This caused a clamour from big business wanting clarification on where it fits in to the Big Build Agenda.

Business Unity South Africa (BUSA) called on the government to create opportunities for the private sector to participate in infrastructure development through sound public-private partnerships (PPPs).  
The issue was picked up by other commentators in the private sector mainstream. Christelle Grohmann, director at Grant Thornton Advisory Services, remarked on the lack of clarity in the role the private sector. “We agree with the Minister where he emphasises that business should invest in our future,” she says. “He alluded to 43 planned public infrastructure projects of which transportation and logistics, social infrastructure and energy were the main focus areas, yet he provided no clarity or role for the private sector or on PPPs in general.”

For Mike Peo, head of Nedbank Capital’s infrastructure, energy and telecommunications, this year’s budget “seems to be the first to address not just allocation but also spending on infrastructure with a much stronger commitment to ensuring infrastructure allocation does not remain on the books but is used where it should”.

Financial sector in minister’s sights

Gordhan also took a swipe at the banking sector by saying he is concerned “about market conduct in the financial services industry”, highlighting the fact that costs are not transparent, products that are not appropriate and do not encourage people to save and the sometimes criminal activity that goes on at the expense of the saver or investor.

The banks had apparently anticipated the broadside and had a prepared response. “We note the Minister’s comments on the financial sector,” rejoined the Banking Association of South Africa, but maintained that conditions peculiar to South Africa contributed to high banking fees, highlighting expensive broadband costs, the price of protecting cash in crime-wave conditions and the high cost
of compliance.

The Minister, however, is not convinced that the financial sector is trying as hard as it could. “Costs in the financial sector are mostly not transparent,” he says, “which doesn’t encourage South Africans to participate in the products that are out there. We still have largely first-world products and haven’t had sufficient empathy for all sections of the South African population and the context in which they find themselves.”

If South Africa is to develop its economy more fully and accelerate the uplifting of its 50m people, it must attend to the desperate need of a complete infrastructure makeover. It has demonstrated that it has the funds to do so on a grand scale but will its capacity to get the job done be found wanting?