Edition: November 2018/January 2019
Editorials

FIRST WORD

Patient recovery

Stimulus plan is a bandage, to staunch the bleeds, until the conditions are met for private-sector institutions to help get major infrastructure projects up and running. Important role for pension funds.

Like the charge of an elephant, the approach of bankruptcy focuses the mind. When the money runs out, it’s run out. What applies to businesses and households applies equally to governments; in this instance, to the SA government.

It cannot succumb to defeat, cowering in a corner until the International Monetary Fund rides to the rescue. It had to show a face, to the rating agencies as much as anybody else, that virtually intractable problems are within its ability to reverse. And it had to so in advance of the jobs and investment summits, or they’d have been destined for despair.

Unable to create money from mist – the SA Revenue Service is seriously behind in its collections and state-owned enterprises are on tenuous life support – it has still to stabilise the economy and begin attempts to generate job-creating growth. Thus it comes up with an “economic stimulus and recovery plan” where, aside from bites at low-hanging fruit, pride of place is the infrastructure fund.

But how to fund an infrastructure fund, into which will go R400bn to be spent over the next three years, when government has no funds? Simple. You rejig amounts already provided but remaining unspent, by lethargy or logjams on the part of bureaucracies tasked with implementation, and you call on the private sector for more money that will bolster the fund over periods beyond three years.

But who in the private sector, such as banks and life offices and pension funds that are custodians of other people’s money, will jump to the call unless they can be assured of market-competitive returns?

Clearly, in making his announcement of the proposals, Ramaphosa was confident that the private-sector response will be positive. He must have good reason. It implies that, in the background, an agreement between chiefs for the willing participation of financial institutions had already been sketched.

Note that there’s been not a hint about the possibility of prescribed assets, the blunt instrument that the representative bodies of the banks and life offices would certainly have resisted. Where volunteerism failed, the application of force – with all its damaging impacts – loomed as the measure of last resort to keep the heads of broken state-owned enterprises above water (TT Aug-Oct).

Instead, there must be a game-changer from the conditions that previously caused the institutions to preclude consideration of lending and investing even on the strength of government guarantees. Futuregrowth, which openly led the charge, had reiterated as recently as August that it wouldn’t resume the purchase of Eskom bonds until high standards of governance were evident.

As a bare minimum, government’s plan spells the imminence of wholesale clean-outs in the state-owned enterprises. It also spells an acceleration in the pipeline of bankable long-term infrastructure projects, for which institutions have been pleading, and the introduction of capacity within relevant agencies to make them happen.

At a blush, reading the Ramaphosa statement for intent, this promises a sea change from reticence to practice in private-sector collaboration. Pragmatic reality, cutting through state centralism and cadre dependence, has given it hard urgency.

The private sector will be invited to enter into “meaningful partnerships” with government in the infrastructure fund. - Ramaphosa

The private sector will be invited to enter into “meaningful partnerships” with government in the infrastructure fund, Ramaphosa said. The contribution to the fund from the fiscus over the medium-term expenditure framework would exceed R400bn “which we will use to leverage additional resources from developmental finance institutions, multilateral development banks, and private lenders and investors”.

Nene
Short circuit avoided

In effect, it seems, the fund will really be a platform to align operations of such state bodies as the Development Bank and Industrial Development Corporation with the objectives of privately-run savings and investment institutions. If the phrase “meaningful partnerships” means anything, it must be agreement on the ground-rules inclusive of competent systems and personnel for efficient project management within defined time horizons.

These are the critical elements that the National Infrastructure Plan, launched in 2012, clearly lacked. Supposed to have injected growth and promoted job creation, it didn’t. Revival of the NIP, appropriately reengineered, not only gives it hope of lift-off but also explains the funding from the fiscus.

The R400bn amounts to less than half the R834,1bn that had been planned by the NIP for public-sector infrastructure spending over the following three years. Of the R834,1bn, public-private partnerships have accounted for only R18,5bn or 2,2% of the total (TT Aug-Oct).

Further, according to the 2018 Budget Review, last July national departments were asked to submit proposals for large infrastructure projects designated as national priorities by the Presidential Infrastructure Coordinating Committee. Proposals for only 64 projects with an estimated funding requirement of R139bn were submitted. Of these, a mere 38 met the initial submission criteria. Cash-strapped provinces and municipalities, also desperately needing infrastructure, aren’t in this mix.

So, until the private sector comes to the party, there’s a new plan without new money to stimulate it. Finance Minister Nhlanhla Nene will take R50bn from underperforming programmes (“redirecting resources into health and education”, said Ramaphosa) while the R400bn will be from a reworked and possibly renamed NIP.

That’s refreshing but hardly inspiring. The excitement will come with public-private partnerships, the paragon of which is the Independent Power Producer Programme where over R200bn has been invested in renewable energy. Once resisted by Eskom, it will now be primed because of Eskom.

The economy is dependent on Eskom, strained even to buy coal and pay salaries. Moreover, electricity demand is decreasing as companies come off the grid – they cannot sustain Eskom prices, operate under threat of outages and anyway prefer environmentally-friendly renewables – while Eskom supply is increasing with two large coal-fired power stations eventually to come on stream at huge cost.

That dividends aren’t in prospect destroys Eskom’s investment case, as does the reliance on fossil fuels diminish it. A token of relief is that lifestyle audits of executives suspected of corruption should help to alleviate protests from disruptive unions.

On the Ramaphosa approach to “work with what we have”, there must be some kind of deal to keep Eskom operational. Presumably it involves quiet acceptance of government guarantees to funders for the completion of Medupi and Kusile, to provide baseload, while the IPPP gathers steam.

Being undertaken, said Energy Minister Jeff Radebe earlier, is a “detailed analysis of the appropriate level of penetration of renewable energy in the SA national grid to better understand the technical risks and mitigations required to ensure security of supply is maintained during the transition to a low-carbon future”.

The more likely the IPPP model is emulated, the better for the boost from infrastructure; for the private sector to have direct lines of sight into projects from conception to implementation so that projected long-term returns, eminently suited for pension funds, can realise their job-creation potential.

There’s a slightly lighter mood in the air, not only because prescribed assets are off the table and the nuclear build is dead. Then to shake out SA Airways and the other tax-draining dogs as well. The wheels are in motion.

Allan Greenblo,
Editorial Director