Significant increase in capital investment needed – Godongwana

The public and private sectors need to significantly increase capital investment to bolster SA’s economic growth and reduce unemployment and poverty, says Finance Minister Enoch Godongwana.

Speaking at the Consulting Engineers South Africa (Cesa) Infrastructure Indaba on Thursday, he noted that capital investment by the public and private sectors amounted to just 13.7% of GDP in 2020.

He said total investment was well below the National Development Plan (NDP) target of 30% of GDP – and it has been declining since 2015.

“Between 2010 and 2020, public sector capital investment averaged 5.8% of GDP while private capital investment averaged 11.2% of GDP.

“Over the past decade, weak growth, rising spending pressures and the financial support provided to state-owned companies have constrained the government’s ability to invest in new infrastructure,” added Godongwana.

This, he said, has resulted in capital investment being “adversely affected”.

Spending problem

However, Head of Infrastructure South Africa Dr Kgosientsho Ramokgopa said government does not have a money problem but a spending problem, with R43 billion per year currently underspent.

Ramokgopa said a reorganisation of the financing space in the public sector is currently taking place to generate a credible and robust project pipeline.

He highlighted the inability of the state to deliver infrastructure because of the lack of technical skills, particularly at local government level but also at provincial and national levels, adding that 220 municipalities do not have any engineers.

In addition, Ramokgopa said there is currently no pipeline of projects coming through and the engineering industry is the casualty of this.

“This is why it is critical that government invests in project preparation. The state needs to get the right people with the right skills in the right place.”

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Four key infrastructure challenges 

Godongwana highlighted four main challenges that need to be overcome to ramp up infrastructure investment and delivery:

• Government investment levels, including underspending of conventional infrastructure budgets by government institutions;
• Underprovision of maintenance budgets for conventionally procured infrastructure resulting in declining quality/quantity of services provided by that infrastructure;
• Considerable waste and corruption in the selection and execution of infrastructure projects, resulting in unnecessarily high costs of delivering infrastructure projects, and at the extreme, a failure to deliver infrastructure projects at all; and
• A steep decline in the delivery of public-private partnerships (PPPs), with executed PPP deals in the recent past also increasingly dominated by accommodation-type projects, the funding of which comes from the fiscus.

Godongwana said spending by the government on public sector infrastructure in the current three-year medium-term expenditure framework (MTEF), which started in April 2022, will increase by 30% to an estimated R812.5 billion from the R627.2 billion that was allocated in the three-year MTEF ending March 2022.

The minister noted that this is an important step forward in terms of moving closer to the NDP targets and signalling to investors, industry and society that “government is committed to ramping up infrastructure delivery”.

He stressed the need for government to ensure that it has a viable project pipeline, and that sponsor institutions have the requisite skills and support in project preparation and planning, to address underspending by government institutions.

Godongwana said it is critical that public infrastructure is well maintained to ensure that infrastructure investment is focused on new investments rather than replacing infrastructure that should still have a useful life.

He said the government has noted the underprovision of maintenance budgets by government institutions and is working on addressing this issue.

Corruption vs ‘minor transgressions’

Commenting on waste and corruption, Godongwana said government has initiated various interventions to improve state capability and reduce the scope for procurement corruption.

“We acknowledge it is important to differentiate between corruption and minor transgressions of the rules of policy prescripts that are audited as irregular expenditure.”

He added: “In this regard, National Treasury is engaging with the Auditor-General to continue to ensure transparent disclosure of minor transgressions, but outside the financial audit process. This should allow accounting officers to take decisions without the fear of unintentionally undertaking irregular expenditures.”

Godongwana said government has also noted with great concern that the value of PPPs has steadily declined in recent years from an estimated R10.7 billion in 2011/12 to R5.6 billion in 2019/20.

He attributed this partly to onerous approval processes, especially for small projects, and the poor capacity of departments to estimate risk-sharing with the private sector and the lack of clarity about the effect of the user-pays principle on the cost of state guarantees.

Public-private partnership review

“A PPP review concluded by the National Treasury has emphasised the need to simplify approval and compliance requirements, and reform the policy framework to assess and prioritise PPPs,” he said.

“To address this, we aim to create a centre of excellence for PPPs, as well as introducing an expedited approval process for projects below a predetermined value. This centre of excellence will be a direct interface with private financial institutions for investments in critical government infrastructure programmes,” he added.

Godongwana said consulting engineers and other experts in the field of construction are vital to the government’s infrastructure drive and stressed that years of infrastructural decline in the country, alongside prolonged and slow economic growth, “is a recipe for social instability and even further economic stagnation”.

Cesa president Olu Soluade told the Infrastructure Indaba that South Africa cannot continue to give lip service to infrastructure development and needs concrete action.

“For this we need to partner for development. Engineering excellence is a key factor in ‘Engineering the Future Now’ and to achieve this we need all hands on deck as we all work together with government and the private sector.

“Engineers should be given a seat at the table and not be on the menu when government is planning its infrastructure rollout aimed at underpinning economic growth,” he said.

This article first appeared on Moneyweb and was republished with permission. Read the original article here.