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Stagnant Development for Bottlenecked SA

Brindaveni Naidoo

“Forecasted growth in South Africa’s construction sector will remain positive – averaging 3.9% in real terms annually over the coming decade. However, it will be stagnant and risks are weighted to the downside." - Saijil Singh, lead analyst at Coface.
The successful Blue Train project. The successful Blue Train project.

Infrastructure development growth in South Africa is expected to remain stagnant over the coming years, as the industry as a whole remains exposed to four crucial challenges, states Saijil Singh, a lead analyst at Coface, an international credit provider.

These challenges are the potential of an ongoing power crisis; further strikes by unionised workers; the slowdown in the Chinese economy; and macroeconomic headwinds, such as the ‘increasingly hawkish’ stance of the South African Reserve Bank.

Predictions Made By Coface

Investor sentiment is impacted by the electricity crisis and its political fallout, which is also constraining the government’s ability to invest in new infrastructure. This environment will also weigh on the non-residential building sector in particular. “It will also impact private sector sentiment and inhibit investment in new capacity.”

However, for 2015, Singh says that Coface forecasts real growth in the construction sector of 3.4%.

“With 2014’s real growth coming in slightly below our estimate of 3.1% – at 2.9% – and the South African economy under pressure from weak exports and a depreciating rand, Coface is highlighting downside risks to its long-term construction forecasts.

“South Africa’s potential for growth is significant; however, long-standing issues when advancing significant infrastructure and housing plans under President Jacob Zuma’s National Development Plan will remain. Coface’s forecasts indicate growth will improve over the medium term as various measures under the Infrastructure Bill take effect, but it will not have a huge impact owing to subdued private investment.”

Challenges In The Mix

Financing continues to be a major obstacle, explains Singh. Adding that several challenges require attention, including the critical shortage of skills, a complex intergovernmental system, high levels of corruption, weak lines of accountability, inadequate legislative oversight and a long history of blurring the lines between party and state.

“These are difficult issues, requiring honest reflection, careful planning and decisive leadership,” he advocates.

Big complexities too start to impede big projects, he says. “Moving megaprojects from the drawing board to the ground is challenging for a multitude of reasons, with the skills challenge at the project management level a key issue. While global construction firms have internationally experienced project managers at their disposal, their on-the-ground knowledge of African conditions might be limited. Even in South Africa, with construction giants venturing ever further north into the continent, skills development remains a pressing concern.”

Given the country’s divided past, leaders often advocate positions that serve narrow, short-term interests at the expense of a broader, long-term agenda. “It is essential to break this cycle and to have leaders who are willing and able to take on greater responsibility to address South Africa’s challenges.”

Citizens, too, he believes, have a responsibility to dissuade leaders from taking narrow, short-sighted and populist positions. “More work needs to be done to emphasise the responsibilities that citizens have in their own development and in working with others in society to resolve tensions and challenges. They refrain, ‘sit back and the state will deliver’ must be challenged – it is neither realistic, nor is it in keeping with South Africa’s system of government.”

One of the biggest challenges that the infrastructure sector faces today, is the cost of importing material, Singh believes. “There are several micro- and macro-economic components that may influence or negatively impact the cost of materials, including the exchange rate or strength of the rand against other currencies and inflation.” For example, he refers to the immediate concerns for the infrastructure sector, which are focused around a constrained government budget.

The Role Played By Government

“Elsewhere, in the face of growing strength of opposition parties, the government will do all it can to achieve policy priorities ahead of next year’s ballot. Coupled with this, the financial burden of dealing with the electricity crisis will divert funding away from investment; Eskom has an estimated funding gap of $18.4bn, and government has suggested it will inject cash into Eskom to help deal with this. In this context, we expect growth in the transport infrastructure to outpace that of the energy and utilities sector.”

Singh believes that the energy sector will continue to experience positive momentum. “However, although not directly under the control of Eskom, which increases the likelihood of project realisation, the momentum in this sector could flag concerns about the power utility’s ability to pay for both power purchase agreements in the traditional power generation segment and the Renewable Energy Independent Power Producer Programme (REIPP).”

Government, Singh believes, is clearly taking steps to strengthen planning and implementation capacity at all levels. “The success of the REIPP is a good starting point, as it can be heralded as the most successful large-scale procurement programme ever undertaken between the private and public sector in South Africa. That is, some 66 renewable energy projects banked within 24 months, at a project value in excess of R150bn.”

Foreign Investments

The Overseas Private Investment Corporation (Opic), the US government’s development bank, will invest up to R5.4bn in a solar thermal plant in South Africa. The project is financed by R5.6bn in debt and R2.4bn in equity from both local and international lending institutions, according to Solar Reserve’s website. Opic is part of Power Africa, which is an initiative founded by President Barack Obama in 2013 to support the growth of energy access in Sub-Saharan Africa. The financial institution has pledged to provide $1.5bn of financing and insurance to energy projects across the region by 2018.

South Africa has set a target to build 3.7GW of clean energy under its REIPP. The Redstone solar project will provide electricity to over 200 000 homes during peak demand once complete, explains Singh.



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