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Infrastructure Bill


Is It Fast-Tracking Project Development? By Nelendhre Moodley
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One year since the promulgation of the Infrastructure Development Bill (IDB) in May 2014, experts present mixed views as to whether it is too soon to question the progress and the impact of the bill.

The South African government has outlined a number of initiatives aimed at progressing infrastructure development including the New Growth Path, the National Development Plan, and, most recently, the IDB.

The bill, which provides a legal enablement for the Presidential Infrastructure Coordinating Committee (PICC) to do its job, has been well received.

So far, the sentiment surrounding the bill has been positive, with industry leaders, such as City of Johannesburg Mayor Parks Tau, indicating [from a municipal level] that the bill aims to improve interaction with national government.

However, DeBuys Scott, KPMG global infrastructure major projects: head of infrastructure advisory, says that, although the bill gives the PICC access to legal routes to force stricter compliance for all the Strategic Infrastructure Projects (SIPs) to achieve their intended objectives and implementation, it is probably premature to assess whether the bill is delivering on its specific objectives.

“Nor is it to be expected that the bill and its legislative powers will simply be deployed so quickly either. It needs some time to allow the strategic SIPs a proper opportunity to deploy the specific SIP’s action plans before we need to resort to the legal enablers to force action. It is often forgotten how long it takes to develop and implement any mega infrastructure project,” he explains.

Nicole Hall, project manager at Frost & Sullivan Africa, believes the bill is a positive step towards promoting infrastructure development, but notes that the implementation of programmes and initiatives that support the bill is critical.

This is also reiterated by Gibb’s GM for integrated infrastructure, Sean Molloy, who believes that, while the principles of the bill are good, more action is needed. “So far there has been little visible impact within the industry since the Bill was passed,” he states.

“Neither the government nor the private sector can deliver nor fast-track infrastructure projects on their own,” explains Molloy. He stressed that there must be a meeting of minds between the two that is focused on what can be achieved as a team.

“The little dialogue that occurs is focused on what each party needs or would like to see in the short term. There is mistrust and no common purpose. For example, the government may have perceived immediate political targets based on the next elections, while the commercial sector is looking to realise shareholder value in the current financial year.”

Molloy advises that only when all parties involved commit to a shared vision for the long-term future, and understand that the needs of both parties can be met without destroying value for the other, will lead to trust and an effective partnership.

However, Scott cautions on a disadvantage of fast-tracking projects, which may often lead to projects that are not properly thought through, done in haste and likely to yield implementation shortcomings as a result.

“The continent needs to use the best global practices available to ensure the lessons learnt by other developing countries can be of benefit to us – this often requires using globally based advisors as early as possible. The current reluctance to use advisors because they are too ‘expensive’ is, in my opinion, one of the principal reasons why some of the mega-projects on the continent struggle.”

But Molloy believes the way forward is that to procure and manage the implementation of large-scale projects well, government needs to build technical capacity. This can be done by using local engineering capacity in the private sector and the skills that exist within the country, advocates Molloy.

“This,” he says, “can be done first by using the private sector to provide the capacity to carefully plan the execution of projects to meet the intended goals, second, using the private sector to empower individuals within government, and, lastly, appointing highly skilled technical people to positions of authority and trust within government.”

Molloy goes on to cite China as an excellent example of an economy that has become a powerhouse. “This was done by using highly skilled technocrats in positions of authority within their government. These people led a revolution on how China did business and grew the economy to the benefit of all citizens.”

 

Challenging circumstances

It is clear that, despite the current economic crisis, a number of large-scale projects are under way; however, it is by no means smooth sailing.

Delivering his inaugural budget speech in February this year, Finance Minister Nhlanhla Nene highlighted the infrastructural struggles faced when he said: “We have all been reminded of the importance of infrastructure investment and maintenance over the past year. It is not just an inconvenience when the lights go out, there is a cost to the economy in production and income and jobs foregone. Many South Africans regularly experience other kinds of infrastructure failure: unreliable water supplies, roads that are impassable when it rains, trains that break down or poor telecommunication linkages. These are large, long-term and costly challenges.”

He added that the primary challenge was to deal with the structural and competitiveness challenges that hold back production and investment in the economy.

“The most important of these is the security and reliability of energy supply. Electricity holds back growth in manufacturing and mining, and also inhibits investment in housing and raising costs for businesses and households. For this reason, our projected economic growth for 2015 is just 2%, down from 2.5% indicated in October last year. We expect growth to rise to 3% by 2017. Higher growth is possible if we make good progress in responding to the electricity challenge or if export performance is stronger.”

KPMG’s Scott also highlights a few key ‘immediate pressures’ negatively impacting the market, which, he says, includes South Africa’s overall risk rating from Moody’s and S&P, which is virtually equivalent to junk bond status.

“This will ensure certain potential participants, investors and financiers simply being precluded by policy,” he says, adding that the turmoil with major state-owned entities, such as Eskom or SAA, ‘creates a highly negative impression of the prospects in dealing with South Africa’s government’. The low growth rate in the country and labour issues, including the link to strikes, remain key challenges.

“Infrastructure projects are long-term in nature, financing structures reaches the longest tenures possible and equity investors need reasonable certainty of stability, sovereign leadership support on a general investor-conducive environment. South Africa is probably faced with some of its most serious challenges ever,” he states.

 

Not all ‘doom and gloom’

However, despite the challenges, there are a number of large-scale projects currently under way that cannot be discounted.

“It is not all ‘doom and gloom’ but that is unfortunately the picture being portrayed by South Africa to the global market. It is necessary to market to the country and world the mega-projects on the go and their impact in the short to medium term. This includes projects such as, the Passenger Rail Agency of South Africa’s (Prasa’s) metro rail replacement programme and Transnet’s freight rail programme, which will, to a certain level, remove freight trucks from our roads. The creation of these projects and their positive impacts will make a significant difference to the general man in the street, in five years. The same applies to the Medupi and Kusile power stations and renewable energy programmes,” says Scott.

Government will spend R813bn on infrastructure development over the next three years. In the 2015/16 financial year, government’s capital expenditure programme is R274bn with its substantial infrastructure injection in the medium term expenditure framework period. This includes the R1.1bn upgrade to Moloto Road in Pretoria to improve safety and mobility; Prasa’s R53bn, 10-year renewal programme; over R80bn allocated to over 220 water and sanitation projects and for local roads; R105bn on housing and associated bulk infrastructure; over R18bn in electrification funding to provide for 875 000 households to be connected to the grid or to receive off-grid electricity; and R1.1bn for broadband connectivity in government institutions and schools.

Scott injects more positivity to the aforementioned when he refers to the Department of Energy’s coal baseload programme, which recently went to market – the first baseload programme in terms of the Integrated Resource Plan, SAA’s intended aircraft fleet replacement programme and the MOZISA transmission line programme between Mozambique, Zimbabwe and South Africa that will be the first tri-party development of this magnitude in the power transmission industry.

The private sector too continues to lend its finance and muscle to infrastructure development, with key projects including the R84bn investment by Chinese developer Shanghai Zendai into the development of residential, industrial and commercial space in Modderfontein, eastern Johannesburg; the multi-billion rand Steyn City Lifestyle Resort development located in Fourways, north of Johannesburg; the Waterfall Estate Development in Midrand; and the recent announcement by Coega Ridge developers on plans to break ground on another of South Africa’s large mixed-use residential developments, located just outside Port Elizabeth, by 2018.

Moreover, South Africa’s banking institutions are by no means taking a back seat in infrastructure development, with Nedbank reporting that its African infrastructure focus continues to increase, in particular sub-Saharan Africa, where it currently has a strong pipeline of projects under development – in excess of R2bn, says Mike Peo, Head of Infrastructure, Energy and Telecoms at Nedbank Capital.

“Nedbank Capital is involved in a large number of large-scale infrastructure projects, which are at various stages of development or completion. Recent successes include the 300MW Lake Turkana Wind Project. in Kenya (the largest wind project to date in sub-Saharan Africa), the 450MW Cenpower combined cycle power project in Ghana, the Mamaba Cement Plant (a one-million ton per annum cement manufacturing facility in South Africa); and public-private partnership project focused on new accommodation for the Department of Statistics in South Africa. In addition, we continue to be the leading funder in the South African Renewable Energy Independent Power Producer Procurement Programme, having closed more than a third of all of the projects to date.”

 

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