Infrastructure development will be key to reach NDP targets
One of the issues that remains a perpetual bugbear in South Africa is the perception that there is not enough investment in key infrastructure projects which would drive economic growth. After many years of deliberations, the National Development Plan (NDP) was finally approved in 2012 and sets specific growth targets that the country hopes to achieve by 2030.
Insurance stalwart Old Mutual describes the NDP as an effective plan which will try to achieve a fixed investment target of 30% by 2030, which sees as is an ambitious target which will be challenging to meet.
This is according to Old Mutual Investment Group's Senior Economist, Johann Els and Head of Infrastructure, Jurie Swart who believe that to affect the investment roll-out, it is vital to build capacity.
The role of the private sector in achieving this goal
Fixed investment makes up 19% of South Africa's Gross Domestic Product (GDP), with private fixed investment contributing 63% of this total fixed investment. Public corporations make up 21% of the GDP total, which mainly consists of spending on Eskom and Transnet as well as government fixed investment constituting 16% to the GDP total, which is mostly from roads, schools and hospitals.
Els says that this makes the private sector a significant factor in the NDP's target. "Private sector fixed investment needs low interest rates and strong economic growth to thrive, with a strong government infrastructure drive helping boost this growth,” he explains. "Currently, we're seeing low interest rates, but sluggish and unexciting growth and while some replacement investment is happening, the economy is simply not strong enough to drive significant new private sector investment.”
The New Growth Path has announced its intention to create five million jobs by 2020. However, it has identified structural problems in meeting this target. Therefore, certain employment creation sectors and markets have been identified as part of this drive.
Swart, who heads up the Infrastructure division of Old Mutual Investment Group's Alternatives boutique, emphasises that infrastructure is top of this list as a significant driver of jobs creation forming the basis for higher growth.
"Government's response to the challenge of economic growth and job creation was the formation by Cabinet of the Presidential Infrastructure Coordinating Commission (PICC),” he explains. "The thinking behind the establishment of this commission was to coordinate, integrate and accelerate the implementation of infrastructure projects across the country. Its mandate is to ensure systematic selection, planning and monitoring of large projects, and the development of a 20-year pipeline.”
What are we so confident about?
However, while the confidence levels of some construction sectors and contracts have improved recently, according to the Building & Construction confidence survey conducted by the Bureau of Economic Research, this is not translating into capacity levels.
Both Swart and Els believe South African infrastructure investment is facing significant capacity challenges when it comes to the availability of its architects, engineers, project managers, financial managers at a local government level.
"Government has a good infrastructure plan on the table, but the bottom line is that they need more infrastructure specialists,” says Swart. "If you look at Government's labour force in the infrastructure arena, engineers are in shortest supply, followed by technologists and technicians, compared to the number of superintendents, foremen, artisans and operators. Labourers outnumber all of these specialist and middle management roles.”
Els believes that when it comes to fixed investment and infrastructure in particular, investment indicators are not looking very exciting either.
"These include factors such as machinery imports as an indicator of machinery investment, the passing of building plans as an indicator of building fixed investment, and commercial vehicle sales as an indicator of transport fixed investment,” he says. "The days of government's huge infrastructure boom between 2004 and 2007 are over and while there are still billions of Rands to be spent over the next few years, the growth rate has dropped sharply compared to what we saw during that period.”
Taking a step to making a change
There is a significant skills shortage in South Africa. And one can argue that building a huge infrastructure project without the skills to run it or maintain it would be tantamount to producing a proverbial white elephant. But to also have all the skills to run these projects, with no projects to do, is like getting all dressed up with nowhere to go.
Government is looking like it is finally getting its house in order when it comes to the Medupi power project, but we have heard that a number of times in the past, and there is considerable cash being allocated towards the infrastructure development of Transnet's rail line which will hopefully rectify the bottlenecks which have been the bane of coal mining companies since forever.
Swart points out that the Old Mutual Investment Group views infrastructure as a distinct long-term savings class, although it is still too small at this stage. "Old Mutual established its infrastructure investment capability in the mid-1990s, although the Renewable Energy Programme has attracted broader investor attention recently,” he explains.
The Old Mutual Group's infrastructure investment and commitments currently totals R10 billion in equity investment and R15.6 billion in debt investment.
Editor's Thoughts:
One of the most effective ways to achieve growth targets is to invest in infrastructure projects. This is what made Russia a dominant force during World War II and the Cold War, and more recently the rising star of China. But this needs dedication and an investment mind set of in order to make money one has to spend money. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
