Advice and Opinion

Funding SA’s infrastructure spending gap: why it is crucial to crowd in the private sector

Conway Williams, Head of Credit, Prescient Investment Management.

By Conway Williams, Head of Credit, Prescient Investment Management

Government is making critical headway in paving the way for private sector involvement in infrastructure investment, but there are outstanding factors that still need to be resolved if South Africa is to close its substantial infrastructure investment gap.

Just over a year ago, the Government’s Reconstruction and Recovery Plan identified infrastructure development as a key generator of poverty alleviation, job creation, and economic growth. In a similar timeframe, exacerbated by the pandemic, investment in South African infrastructure fell from an already dismal 18% in 2019/2020 to just 14% in 2020/2021, compared to the 30% ‘benchmark’ of our emerging market peers.

A step in the right direction, the establishment of the Investment and Infrastructure Office (IIO) aims to improve collaboration between all industry stakeholders such as development and commercial banks and financiers, as well as the private sector. Chaired by the President and supported by the Ministry of Public Works, it provides a coordinated approach to speed up the planning, implementation, and delivery of the country’s infrastructure projects.

But while the foundations have been laid, the government will only have the private sector’s full support once several stumbling blocks that still exist are addressed, including greater political and regulatory certainty and a credible, bankable pipeline.

How did we get here?

Until now, there has been a substantial underspend on national infrastructure, by all spheres of government, from SOEs to municipalities. This, in Prescient Investment Management’s view, can be attributed to a lack of national direction and scattered oversight and governance, which have led to local authorities being unable to deliver proposed infrastructure projects to a feasible state. Further to this, the lack of a credible infrastructure pipeline, understanding of the relevant roles and responsibility, and how risk sharing will work, has hindered the investment by relevant parties.

Combined with this underspend is the South African government’s current fiscal position, which affords limited capacity for the government to successfully carry out all projects on the table. The latest infrastructure plan outlines an investment of R2.3 trillion needed, with a funding gap of around half a trillion rand noted. In looking at the reported project pipeline presented to the market, the project numbers themselves reveal the dire consequences for the everyday South African, if not executed on.

Of 276 inter-provincial infrastructure projects in the pipeline, only 88 (32%) have reached post-feasibility phase. Taking this one step further, Prescient’s analysis shows that almost two thirds (64%) are priority type items that fall under three main categories of human settlements (housing), transport, and water and sanitation. These projects alone, if successfully implemented, will make a meaningful difference to poverty alleviation on a national scale, by attracting money into the economy, creating jobs, and improving access to basic services.

With the government hamstrung in its ability to deliver on infrastructure priorities, drawing on private sector investments is the only viable answer to an improved economic outlook. At present and based off recent Association for Savings in South Africa (ASISA) data, assets under management by members total c.R4.4 trillion, with exposure to unlisted infrastructure currently at a mere 2.3% (c.R102 billion) with a further 4% exposure to listed infrastructure bonds (R176 billion). Given the sheer size of this industry (more than R6.2 trillion, per ASISA figures), by addressing investor requirements to allow for further investment by the private sector, that a simple doubling of this meagre investment, a material amount of capital can be unlocked for the infrastructure ecosystem and will have a material economic and developmental impact.

The current state of play

For the private sector to take on a more active role, it must be confident that the government is moving in the right direction. A key change that engenders confidence is the single-entry point for all infrastructure initiatives in South Africa, created by the IIO. Eliminating the previously scattered approach, the idea is that the IIO builds a concentrated infrastructure pipeline and provides greater transparency on the ins and outs of projects i.e., their phases of development, how funding will be raised and how the process will work.

As mentioned above, one area that still raises concern for investors is the lack of a credible pipeline or a pipeline that has the appropriate governmental backing. While there is much talk about the total investment into the economy and the amount needed from an infrastructure perspective pre-and post-feasibility stage, the visibility of a credible and bankable pipeline has been a very slow-moving approach to date and still raises many questions. Further to this, additional legal and technical expertise are needed to assess projects from a feasibility perspective, as well as various frameworks, industry, and infrastructure bodies to facilitate an ease of doing business.

It is equally important that political and regulatory certainly follows suit. This means that an appropriate governance framework must be put in place to eradicate the negatives that have hindered the infrastructure rollout thus far. Private sector investors, and importantly, those with fiduciary responsibilities, have a duty of care when managing client funds. In Prescient’s view, investing without factoring in the stability of reliability of regulatory and legislative frameworks is tantamount reckless investing.

A blended finance approach is key

To make infrastructure investment more attractive to the private sector, Prescient believes that a blended finance approach that makes use of public finance, developmental financiers and private finance will go a long way in creating the much-needed certainty on roles and responsibilities, and on risk-sharing, for the private sector. Simplistically, this will compel all stakeholders to engage constructively, and in doing so, understand the roles and responsibilities of each party, including what sort of capital is to be provided, under what circumstances, who will take first losses should these arrive, and when.

Infrastructure development is fundamental to economic growth and poverty reduction. And for now, while the current infrastructure plan is enough to put the private sector’s initial fears to rest, the success of the next implementation stage is of critical importance. Where there is policy certainty and a framework that works, it makes it easier for the private sector to raise and invest capital in infrastructure and ultimately improve the lives of everyday South Africans.