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Over the past decade or so, Thuso Partners has witnessed the South African economy trapped in a cycle of low growth, coupled with recessions. Already in a fragile state, it has been brought to the verge of collapse by the Covid-19 pandemic. The few stable areas of the economy that were holding things up (such as tourism) were immediately shut down as the country tried to stem the tide of a deadly disease.
As is the case with many advanced economies around the world, South Africa is expected to experience a major recession this year. Estimates suggest that the economy will shrink by at least 6.4%.
If the past few months have taught us anything, it’s that South Africa cannot afford to revert to business as usual. The economy needs to be radically restructured and money should flow to where it’s needed most. That doesn’t just apply to state-funded projects but to private investment too.
And when it comes to making investments with impactful returns, we at Thuso Partners know there can be little doubt that infrastructure is probably the best place to start.
A necessary investment
It’s no secret that South Africa has fallen behind on infrastructure building and maintenance. As far back as 2018, the South African Institute of Civil Engineers (SAICE) released a report saying that overall, the country’s key infrastructure – including transport, electricity, water supply, education and health – is at risk of failing.
In fact, Chief economist at Economists.co.za, Mike Schussler has estimated that fixing South Africa’s road infrastructure could cost almost R3-trillion over the next 20 years.
Additionally, there is a major backlog of sufficient government investment in energy; water and sanitation; roads and bridges; human settlements; healthcare; education; digital infrastructure and public transport infrastructure projects in South Africa which could potentially provide increased opportunities for stimulating the economy.
On 24 June, the Presidential Infrastructure Coordination Commission Council issued a Government notice designating the following as Strategic Integrated Projects (SIPs):
- Water and Sanitation;
- Energy;
- Emergency Power Purchase Procurement Programme (2000MW);
- Small Independent Power Procurement Programme (100MW); and
- Embedded Generation Investment Programme (400MW);
- Transport;
- Digital Infrastructure;
- Agriculture and Agro-processing; and
- Human Settlements
Many of the new identified large projects have been delayed for implementation and municipalities are also battling to provide water services. There is also a crisis in ageing infrastructure, which requires maintenance, refurbishment or replacing.
A major economic boost
Infrastructure is the keystone of the modern economy. Economic infrastructure assets permit transportation and circulation of goods and essential commodities such as water and energy, as well as people and information; social infrastructure assets provide structures, like hospitals, for services that society needs.
Additionally, infrastructure plays a key role in economic growth and reducing poverty.
At an investment conference at the end of October 2019, President Cyril Ramaphosa announced that SA will receive a surge in investment of more than R290bn over the next five years from local and international companies. R400bn in investment pledges were also announced. This comes after Ramaphosa set an ambitious goal of raising US$100 billion over the next five years in April 2019.
The investment pledged is expected to support long-term economic benefits for SA, including stronger real GDP growth, the creation of jobs and generation of additional tax revenue.
Further ground was made with the signing this August of a Memorandum of Understanding between the Development Bank of Southern Africa, the National Treasury, and the Department of Public Works and Infrastructure to establish and manage the country’s infrastructure fund.
According to a PwC report released in 2019, the R290-billion influx in investment will add R338-billion to GDP over the next five years, create 165 000 direct and indirect jobs per year, and will generate an estimated R59bn in additional government revenue.
The report also estimates that the investment would enable about R468.8-billion in potential production from 2025 to 2035 which would then add an estimated R505-billion to the country’s GDP, create and/or sustain an estimated 116 000 direct and indirect jobs per year, and generate an estimated R133-billion in government revenue.
In April 2020, President Cyril Ramaphosa said the investment initiative was a response to the drop in total fixed investment in SA from 24% of GDP in 2008 to 19% of GDP in 2018, and foreign direct investment (FDI) inflows dropping 77% in rand terms over the same period.
This is indicative of the fact that the South African economy needs significant investment stimulus and investment in infrastructure projects can be utilised as a catalyst for GDP growth. The aforementioned data is further proof that our mission is aligned with the needs of the economy, to create a stronger future for South Africa.
The National Development Plan aims for total fixed investment to rise from below 20% of GDP at the start of the current decade to 30% of GDP by 2030.
Private investment
Now more than ever, however, it’s clear that the state cannot bear the burden of infrastructure investment alone. Nor are other traditional funding sources likely to be available in the near future.
The Covid-19 pandemic has caused unprecedented shifts in global markets and created extreme fluidity all over the world. Therefore, new trends are not yet fully established, but there is a notion that the “new normal” will be very different from the past.
Solutions to the current turbulent market challenges impacting infrastructure will increasingly have to come from innovative financing solutions developed by the government working collaboratively with companies like Thuso Partners, in the private sector, and with different financial sources.
In this respect pension funds could be used to finance infrastructure projects, if Regulation 28 of the Pension Fund Act is amended. Finance Minister Tito Mboweni says pension funds or retirement savings should be used to finance infrastructure projects. The Financial Sector Authority Conduct is working on a policy document in this regard. The prescription of assets is a policy whereby the state obliges institutions such as pension funds and insurance companies to have a specific holding in certain assets. This reality came a step closer after being included in an economic reconstruction and recovery plan drawn up by the cabinet's economic cluster.
Of the two, working with Thuso Partners within the private sector, comes with the fewest risks. South Africa does, after all, have a history of successful public private partnerships (PPPs). Three is no reason why, with the right guarantees in place, the strategy couldn’t be expanded to address the country’s pressing infrastructure needs. Additionally, if prescribed assets are put in place, it would be far better to do so off the back of proven PPPs as test cases. That is, if pension funds can see private sector investors making solid returns from infrastructure projects, they’re far more likely to invest in them themselves. Indeed infrastructure investment can offer solid returns for investors, especially as risk can be mitigated in several ways.
Time for change
No room for hesitancy
It’s clear, however, that South Africa cannot afford to delay on infrastructure investment. Covid-19 has created a jobs bloodbath across the country. If the country is to have any hope of recovery, new ones need to be created fast. And we at Thuso Partners understand how to do this.
Investing in infrastructure is one of the most powerful ways of doing that.
We already where the money needs to be invested and what it needs to produce. All that remains is to ensure that the opportunities for investment are there and that they’re allowed to make the very real difference they have the potential to.