Budgeted public sector infrastructure spending of roughly R845 billion is planned for from 2012/13 to 2014/15 of which R300 billion is targeted to the energy sector and R262 billion in transport. While funding would appear to be sufficient to support South Africa’s infrastructure investment requirements, there are some challenges to address. We examine some of the key issues ahead in our Overview.

1. slEconomics
Economics Consulting in Utilities and Infrastructure
Infrastructure Development in South Africa
Overview
In the state of the nation address for 2012 President Jacob Zuma highlighted the importance of
infrastructure development to South Africa’s economic growth, and which has been a focal point for the
Government’s three planning period to 2014/15, and beyond.
Macroeconomics drivers Public sector infrastructure investment
Against the backdrop of the global economic Budgeted public sector infrastructure spending of
downturn, the South African economy has roughly R845 billion is planned for from 2012/13
averaged about 3 per cent growth a year to 2014/15 of which R300 billion is targeted to the
since 2009.* energy sector and R262 billion in transport.
• GDP growth was roughly 2.7 per cent in To 2020 R3.2 trillion is expected to be invested in
2011/12. 43 large scale projects in areas such as:**
• There was a modest recovery in job
creation during 2011/12 but the • Adding 11,719 MW of power generation
unemployment rate remains high at 23.9 capacity and 6596 km of high voltage
per cent. transmission lines.
• The national government’s budget deficit • Replacing 6405 km of rail freight, coal and ore
for 2011/12 was 5,2 per cent of GDP and lines increasing rail network capacity by 149.7
public sector borrowing requirements at million tons, and procuring 1317 new
7.1% GDP. locomotives and 25,000 new wagons.
• Total (gross) loan debt was R1.1 trillion as • A R100 billion port expansion at Durban.
at 31 December 2011, equivalent to • Refurbishment and strengthening of 13,125
38.6% of GDP. km of fibre optic cable.
*Source: Quarterly Bulletin March 2012, South African ** Source: Minister Malusi Gigaba - Public Enterprises Budget
Reserve Bank. (NB 1 Rand = AUD$ 8.41 as of 19/06/12) Vote Speech 16 May 2012, and other material.
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2. South Africa’s approach to funding public sector infrastructure
South Africa’s public sector infrastructure programme is expected to be funded from a range of sources:
• A combination of internally generated surpluses and borrowings from capital markets by public
enterprises such as Eskom, Transnet, South African National Roads Agency (SANRAL), and Airports
Company South Africa (ACSA).
• Direct private sector investment such as the Department of Energy’s 3,625MW renewables
Independent Power Producer Procurement Programme currently underway.
• Mixed shareholding, such as that for Telkom South Africa (listed – with Government retaining 38%
shareholding) and Airports Company South Africa (non-listed shareholding of roughly 75% retained
by Government).
• Direct government contributions for entities such as Passenger Rail Agency South Africa (PRASA) in
providing services to low income communities.
In regard to sourcing external capital markets, public enterprises have relied on local corporate debt
markets, as well as domestic and multi-literal Development Finance Institutions. E.g.
• Enterprises such as Eskom, Transnet, SANRAL, and ACSA have made use of corporate bond markets
and short term commercial paper facilities.
• Multi-lateral institutions such as the African Development Bank; Development Bank of Southern
Africa; the World Bank; and the French Development Agency have provided loans to South African
public enterprises recently.
• Local institutions such as the Industrial Development Corporation and Public Investment
Corporation similarly invest in a range of public sector projects.
While the source of funds would appear to be of sufficient depth to support South Africa’s infrastructure
investment requirements, there are some challenges to address.
The regulatory environment
Public enterprises’ ability to generate surpluses and re-invest earnings is fundamental to the
Government’s approach to funding infrastructure development. Earnings growth is needed to enhance
the balance sheets of key public enterprises, otherwise sovereign guarantees will be required to obtain
loans.
However, the regulatory environment in which pricing is determined for many of these enterprises is
still developing and has not generally supported a strong profile of earnings for regulated public
enterprises. Indeed regulatory decisions have contributed to loss making years for entities such as
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3. Eskom (2009) and ACSA (20011). In Eskom’s case allowed tariffs have not been sufficient to maintain a
stand-alone investment grade credit rating in light of its capital programme, and Government has
therefore needed to provide some R350 billion in explicit government guarantees in funding Eskom’s
medium term capacity expansion.
Moreover, while Government policy is to apply user pays principles across a range of sectors –
implementation is sometimes uncertain. As a recent example, on a complaint brought before the High
Court by constituents an interdict was provided stopping the implementation of tolling on SANRAL’s
Gauteng Freeway Improvement Project (subject to legal review). Moody's Investor Services has
subsequently downgraded SANRAL’s credit rating to Baa2 with a negative outlook, with further actions
potentially leading to default on loan covenants and potentially requiring government to step in to make
payment on SANRAL’s borrowings.
In one commentator’s view, “the court order has put the state's ability to implement its policy of "the
user-pays" as a preferred model for infrastructure development under the microscope and has raised
questions in the minds of investors about its ability to execute and implement policy in other critical
infrastructure”.1
Skills and capacity to build - a precondition for success
With the proper policy and regulatory settings put into place one might be reasonably confident in the
Government’s ability to achieve its investment plans. Certainly South Africa’s overwhelming success in
developing infrastructure needed for hosting the FIFA 2010 World Cup provides clear evidence of the
county’s capabilities. Nevertheless, as pointed out by the Minister for Finance in his 2012 budget
speech:
“We are aware of several weaknesses in the state’s infrastructure capacity. In the past, spending
has lagged behind plans. Our estimate is that in 2010/11, R178 billion was spent out of a
planned R260 billion, or just 68 per cent. We have to do better than that – state enterprises,
municipalities and government departments all need to improve their planning and
management of capital projects.”
This would seem to suggest a role for the private sector – both local and global - in assisting with
capacity building across the range of entities highlighted above by Minister Gordhan. This might be in
the form of advisory, engineering, procurement and construction contracts; long term service
agreements; joint ventures; or concession arrangements.
There is also the potential for leveraging these types of opportunities across the continent. South Africa
is well placed as a hub for economic development in a variety of sectors, and indeed cross-border
initiatives are currently a focal point for both government and the private sector.
While the physical landscape of South Africa is rather similar to Australia’s, those with an understanding
of the broader commercial and policy landscape may very well find a range of areas in which to
contribute to the development of infrastructure in South Africa and the surrounding region as a whole.
1
Nicky Smith I-net Bridge 12 June 2012.
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4. slEconomics
Economics Consulting in Utilities and Infrastructure
slEconomics is a boutique economics consulting firm providing specialised advice to
governments, regulators and corporate clients in the area of utilities and infrastructure. We
are based in Sydney Australia and have an international network of associates to bring global
experience to local initiatives.
ASABA lunch address – 20 June 2012
Contact details
Dr Stephen Labson
Level 32, 101 Miller Street
North Sydney NSW 2060
slabson@slEconomics.com
www.slEconomics.com
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