A CRISIS OF CONFIDENCE

There is a significant appetite for infrastructure investment, but the risk issues must be addressed

SA’s infrastructure is under growing pressure, with the demand for services outstripping supply. Public infrastructure is at particular risk of failure, is not coping with normal demand, and is poorly maintained, according to the South African Institution of Civil Engineering’s SAICE 2022 Infrastructure Report Card.

The report notes that South Africans will be subjected to severe inconvenience and even danger without prompt action.

The country’s economic infrastructure with the exception of energy generation remains in a satisfactory condition, says the report.

But social infrastructure, which includes water, sanitation, hospitals, schools, and public transport, has degraded significantly since the publication of the last report.

Commenting on this deterioration, the report says: “Crime and nonpayment for services, as well as weak institutions lacking appropriate skills and accurate data, have contributed towards a further decline in the overall condition of infrastructure since the last SAICE Infrastructure Report Card published in 2017.”

Capital investment in public infrastructure continues its downward trajectory. Though the National Development Plan has set a target of 30% of GDP to be invested in infrastructure, in 2020 this figure was only 13.7%, two-thirds of which was from the private sector. The National Treasury has previously said the public sector needs to increase its investment to 10% of GDP.

The state’s budget allocation to infrastructure, however, is constrained by weak economic growth. “The dilemma facing the government is the affordability of new infrastructure projects in an economy that is not growing vs the challenge of fixing existing infrastructure,” says Chris Campbell, CEO of Consulting Engineers South Africa Cesa.

Persistent underspending of infrastructure budgets at the municipal and provincial level deepens the problem. “Ironically, infrastructure allocations frequently go unspent, with the result that the allocation is returned to the Treasury,” says Campbell.

He attributes this underspending to the scarcity of skilled public sector engineering practitioners and insufficient leveraging of private sector capacity, likely borne out of the trust deficit between public and private sectors.

Public sector expertise, says Campbell, can be commissioned to serve as “owner engineers” where there are capacity constraints to get project business cases in place and assist with the technical input required for the bid processes for the appointment of “implementing engineers”, defined as the design engineering teams required for the design and site supervision of appointed construction companies.

“Each of these parties should act independently of the other,” says Campbell, adding that any evidence of corruption in these processes would have to be swiftly and harshly addressed so as not to destroy the professional trust that needs to accompany this process.

Campbell says while there has been some acknowledgment at the national government level that the public sector is facing severe capacity constraints, there is less acknowledgment at some provincial and municipal levels, which still wrongfully assume that there’s sufficiently experienced capacity within their respective entities.

“It’s a cruel irony that infrastructure allocations frequently go unspent, with the result that the allocation is returned to the Treasury” – Chris Campbell, CEO of Consulting Engineers South Africa

 

There are exceptions, however, he says, including the City of Cape Town, the Free State Department of public works & Infrastructure, and the Northern Cape Department of public works & Transport, to name a few.

At the local government level, there is a pilot project to pool expertise through what is known as the district development model. Campbell says the model is a good strategy to address the continued skills shortages, particularly in rural municipalities.

The public sector’s lack of capacity to even appoint service providers is having a knock-on effect on service delivery. Overly onerous and highly bureaucratic procurement processes tend to lose sight of the strategic objectives of the entire process, says Campbell.

“If we could fast-track these procurement processes, without ignoring the governance element, we could be making stronger inroads into developing the infrastructure required for economic growth and alleviating high unemployment”

Campbell has long argued that a failure to appropriately maintain critical infrastructure is one of the biggest problems in the infrastructure space. He is not alone in this assessment: SAICE says maintenance neglect is the most persistent problem encountered in all four of its infrastructure report cards to date.

Eskom’s high levels of load-shedding are frequently blamed on the country’s aging fleet of coalfired power stations. However, as Campbell points out, a failure to conduct regular maintenance over a long period is more to blame than just the age of the power stations.

This is borne out by Eskom’s own energy availability factor EAF data, which reveals that breakdowns don’t always correspond with the age of the power station, with newer power stations, including Kusile and Medupi, typically performing worse than some of the older power stations.

Worsening low levels of energy available from the new power stations are inherent design flaws. “Whether any party has been or will be held to account for these design flaws remains to be seen,” says Campbell.

“As far back as 2008, the Construction Industry Development Board was party to advising on the need for maintenance. However, that guidance was ignored,” says Campbell, adding that a lifecycle ownership perspective needs to be applied for all public infrastructure for its entire designed lifespan.

SAICE’s Infrastructure Report Card agrees, pointing out that infrastructure that is built to last 30 years or more must be maintained for its entire lifetime.

The report’s authors say it is imperative that sufficient resources are allocated to operation and maintenance, which is of a much longer duration than for the initial construction.

A Critical Infrastructure Protection Act was promulgated in 2019 to ensure that public asset owners took reasonable measures to protect critical public infrastructure assets from vandalism, sabotage, and theft.

But despite the existence of this act, says Campbell, criminality, and vandalism of our existing infrastructure have become the norm, and offenders, either as part of organized criminal activities or as delinquent public asset owners, are not being brought to book.

“Cable theft is ongoing, steel components from pylons supporting high tension electrical transmission cables, as has happened on the West Rand in Gauteng and in the Tshwane area most recently, are removed, causing the failure of a series of these support structures,” says Campbell.

“Our railway network and operations remain a challenge, including restoring the infrastructure that was pillaged before and during the Covid pandemic as well as acts of sabotage which continue to plague the operations of the railway entity.”

The unintended consequence of the unreliability of rail, he says, has been a spike in long-distance road haulage, which not only shortens the lifespan of road infrastructure not designed for such frequent heavy road traffic volumes, but also the rate of catastrophic road accidents.

 

An appetite for investment in the right environment

The Association for Savings & Investment South Africa Asia estimates there is about R1 trillion available via its membership for investment into infrastructure. However, though there is significant appetite for infrastructure investment, the risk issues and political uncertainty need to be addressed before this investment will be realized, says Campbell.

‘Institutional investors need to ensure their investments are secure and that their investors’ money is not at risk,” he says. “They will want the assurance that their money is not at risk of corruption and that when criminality occurs, those responsible are brought to book.”

To date, only 40% of investments pledged between 2018 and 2022 at SA’s annual investment conference have actually been invested. Much of what has been invested to date is effectively replacement investments such as own generation capacity or maintenance rather than projects aimed at expanding the economy.

“Investment pledges are one thing, but investors have to be comfortable that they will receive a return on their investment before they actually make the investment,” says Campbell.

Poor levels of business confidence as a result of persistently high levels of load-shedding, logistics challenges at local ports and in the rail sector, and ongoing concerns about safety at construction sites are just some of the reasons for declining rates of fixed investment.

The mining sector has been one of the biggest losers when it comes to new investments, despite a recent commodity boom that saw metals and minerals prices reach record highs. The Minerals Council of South Africa estimates that mining operations have been running at 20%30% below capacity as a result of load-shedding, while poor transport logistics destroyed about R75bn of potential exports.

Investors say that onerous regulations are also holding projects back. The lack of an efficient digital mineral rights management system means lengthy delays of more than 300 days before prospecting and mineral rights applications are granted.

Campbell says that addressing these investor confidence issues would be a good start, followed by replacing cumbersome, bureaucratic processes that don’t deliver value for money with appropriate procurement mechanisms that support the delivery of infrastructure as a strategic investment, whether economical or social.

“The government needs to have the political will to adequately address these challenges instead of constantly kicking the can down the road, hoping the situation will miraculously self-correct,” he says. 

 

SOURCE : Financial Mail