By Tafadzwa Chibanguza is the Chief Operations Officer of SEIFSA.
Fresh off the Infrastructure Africa (IA) Conference hosted in Cape Town on the 16th and 17th of July 2024, one is enthusiastic about the character of the discussion and the appreciation of the fact that infrastructure development is paramount to unlocking growth in South Africa and on the African continent.
Insights about financing, regulatory reform, policy coordination and co-operation to achieve this end will be the topics of discussion for weeks to come. Particularly important is the role that infrastructure investment can play in unlocking demand for the Metals and Engineering (M&E) Sector which enjoys markets in the mining, agriculture, construction, automotive, logistics, water and the energy supply industry.
However, what is critical to highlight is that while multi-billion and long-term infrastructure investments are critical for industrialisation, there is an intermediate discussion that needs to be had. That is, that the massive scale industrialisation project that can be achieved through repairing the existing infrastructure that has continued to deteriorate due to under-investment and maintenance backlogs. This is a reality across most critical infrastructure areas namely: rail, energy, municipal services and increasingly worrying, water infrastructure.
While it is obvious to mention that the country’s poor economic growth outcome can be attributed to the bottlenecks in these respective areas, some of the immediate challenges faced by companies because of the infrastructure decay are as equally shocking as they are horrifying.
One recent example is of a multinational company operating in the East of Johannesburg that had to invest in a large-scale back-up fire suppression system at staggering capital cost of R12 million. This ‘investment’ was necessitated by the company partially failing an ad hoc insurance inspection because there was no water coming out of the grid-based fire suppression system. This spend presents an opportunity cost for the company’s capital allocation and by the same token the end consumer will regrettably bear this cost.
The South African Reserve Bank (SARB) has on numerous occasions highlighted its concern about the pace of increases in administered prices and their impact on general inflation. The administered price trajectory is largely a function of these inefficiencies in infrastructure. Year-to-date 2024, administered price inflation was recorded at 8.02%, against a consumer price index (CPI) of 5.2% over the same period. It is noteworthy that approximately 35%-40% of costs for companies in the M&E Sector are attributable to administered prices in one form or another. This should highlight the pressure that this line item contributes to input costs.
These are some cursory perspectives that highlight the need to fix the existing infrastructure. In this industrialisation framework the need to fix the infrastructure represents the demand-side of the equation.
On the electricity side, while praiseworthy progress has been made on the load-shedding front, a slight increase in economic growth will put pressure on the available electricity capacity and either choke the growth or tip the country back into load-shedding. Hence, the urgent need to expand the transmission and distribution network while concurrently adding additional generation capacity.
On logistics, expanding the rail network and fixing port operations is required to enhance economic efficiency and connectivity.
Water infrastructure requires the most urgent attention on water treatment facilities and pipeline repairs. All these investments amount to billions of rands and present an immediate off-take, demand-wise, for industry.
On the supply side of the equation, the M&E Sector comprises companies that supply products that are required in all these areas such as: transformers of all categories, transmissions lines, the supporting towers, equipment and instrumentation for substations, circuit breakers, capacitators and reactors for the electricity transmission network.
On logistics, rails (made of steel), locomotives, rail joints, signalling equipment, overhead wires and various pieces of port equipment including tugboats can all be supplied locally.
Lastly, for water infrastructure, valves of all types and sizes and steel pipes are manufactured and supplied from this sector.
Measured at an aggregated sectoral level, capacity in the sector is underutilised, recording 70% year-to-date 2024. The aggregate statistics, however, mask some crucial detail, for example a recent study of the electrical cable manufacturing industry (which is a sub-industry of the M&E Sector) revealed a volume adjusted capacity utilisation recording of 42%. This situation should not be allowed to persist because at these capacity levels, factories are just not sustainable.
The M&E Sectors production and employment trends which have contracted at a rate of 1.2% (CAGR) and 1.4% (CAGR), respectively, over the last 15 years are partly attributable to low demand and capacity utilisation levels. In this industrialisation framework companies in the M&E sector can quite easily increase production to meet demand with minimal investment required.
The last leg of this argument is the funding component. The extent of the historic under-investment and maintenance backlog, which runs into billions, coupled with the urgency to resolve bottlenecks requires that an urgent solution be found. Regrettably, the current state of the public purse does not allow for this. Therefore, it is crucial that the state look to crowd-in private sector investment, capability and capacity.
The reforms being considered by National Treasury about Public-Private-Partnerships (PPP) in the funding of public sector projects are commendable and must be fast tracked. Particularly crucial, is the category of projects that are referred to as low value (below R2 billion) that will enjoy the exemption of certain Treasury obligations thereby fast tracking the projects through reducing the administrative burden. On a micro-level, the projects that would be considered under this proposed framework would typically fall into this category.
The signing into law of the Public Procurement Act this week also presents a crucial milestone about the provisions that are made in the Act on preference for local production.
The intersection of these three crucial considerations, namely: the urgent demand that needs to be met, the under-utilised supply and the funding options under the PPP framework, present a sweet spot for a large scale and immediate industrialisation program.
