JAMES FORMBY: Building hope: infrastructure plans need fresh skills and finance models
There has been some progress towards the rollout and repair of SA’s planned infrastructure and existing infrastructure, but it is worryingly slow. We must see the acceleration of infrastructure development in 2022 or face further economic headwinds.
The Infrastructure Fund, announced by the president in 2018, was laudable in its goal of jump-starting infrastructure-led growth in SA as the country struggles to emerge from the effect of the Covid-19 pandemic. But in the three and a half years since, there has been lots of talk and planning but limited construction.
A highlight has been the Renewable Independent Power Producer Procurement Programme aimed at bringing additional megawatts onto the country’s electricity system through private sector investment in renewable energy, which is back after a six-year hiatus. Round five drew bids of nearly 13,000MW and awarded 2,600MW at an average tariff of 46c/kWh — by far the lowest tariff ever.
Municipalities can now buy electricity from sources other than Eskom. Companies can now self-generate up to 100MW of electricity without the need to apply for a generation licence. Self-generation is expected to add 10%-15% capacity over the next few years, taking pressure off the grid.
While these developments are positive, energy procurement is still too slow and mired in red tape. It is also encouraging to see the government come to market with requests for information for various government infrastructure programmes.
These include Transnet for private sector participation in the Durban and Ngqura container terminals; the department of public works for the Integrated Renewable Energy and Resource Efficiency Programme, which seeks to improve the energy efficiency, water and waste management of government-owned buildings; and the first of the various phases of the Student Housing Infrastructure Programme, which aims to provide about 300,000 beds over the next 10 years.
But despite the growing political will and plenty of capital available from the private sector, infrastructure projects have been hamstrung by a severe skills shortage within the government. Experts have been seconded into the government, but it is not a sustainable solution; the government needs to attract, retain and grow the right permanent talent. Ideally, we need to create a centre of excellence within the government to build the institutional knowledge to help progress large projects. The scarce skills within the government are still too fragmented, which makes co-ordination complex.
Developing a project from concept to approval stage requires a diverse mix of skills. Major skills gaps in any discipline prevent the development of a project plan of sufficient quality to get to a stage where it can be brought to market. Financial skills appear to be in particularly short supply.
Increasing the use of public-private partnerships (PPPs) will be fundamental to SA’s infrastructure development success. The focus of the National Treasury to simplify PPP regulations will help reduce the time from concept to shovel. We need to promote blended funding structures, which don’t necessarily require government underpins, to promote speedier implementation and take pressure off the fiscus.
Further, the Public Finance Management Act and Municipal Finance Management Act were not designed for the procurement needs of large, complex state-owned companies and municipalities. We need to consider simplifying these acts and provide exemptions for state-owned companies while drawing from international best practice.
It would also be more effective to aim for fewer infrastructure build projects and get them delivered, rather than have too many projects at varying stages of progress. While there is ample capital once a project business case is well developed, a key constraint is that projects struggle to attract sufficient funding for early-stage evaluation and feasibility studies. We need to tap the skills of development finance institutions to assist, and the National Treasury should allocate more funding for this activity with a view that the benefits will come.
The government also can do more with the infrastructure we already have. While investing in new projects is important, maintaining the infrastructure we already have is equally so. Examples of neglect include municipal electricity and water infrastructure. The potential solution is to create a simple mechanism for municipalities and metros to enter into long-term contracts with private sector operators.
The Municipal Finance Management Act restricts municipalities from entering contracts that impose financial liabilities beyond three years without entering into a PPP or protracted procurement process. The three-year cap is too short to recoup the significant cost of upgrading infrastructure, which requires a much longer repayment period that better matches its useful life.
The start of a new year is an opportune time to accelerate the delivery of infrastructure and develop clear long-term growth plans for different sectors. With the right focus, SA can get this done.
• Formby is RMB CEO.
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