07 Dec 2021

Private sector capital: Turning a R440bn backlog into an investment opportunity

Richard Wainwright

CEO of Investec Bank Limited

How to turn the infrastructure wheel in South Africa

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There’s an unfortunate narrative that portrays private sector capital as a bottleneck to infrastructure development in South Africa. This growing pool of capital, the story goes, is sitting idle in the bank accounts of businesses and corporations who are unwilling to fund productive infrastructure projects that could improve lives and drive economic growth. That narrative is deeply flawed.

To begin with, private sector savings are not growing. In real terms, taking inflation into account and net of depreciation costs, non-financial corporate savings are significantly lower than they were a decade ago. And because of this real depreciation of savings over time, companies are actively seeking investment opportunities. Their capital represents a ready source of funds for infrastructure development. But in the absence of an enabling environment and a reasonable prospect of fixed investment projects generating returns within defined and predictable timeframes, there is no incentive for this money to move.

The need for such an enabling environment could not be more urgent. Fixed investment growth has been waning rapidly since 2010 and the consequences are painfully evident. Electricity shortages, inadequate transport networks and ailing civil infrastructure have, for too long, been a binding constraint on South Africa’s economic growth and thus on our ability to reduce desperately high levels of unemployment and poverty.

In the absence of new government-led infrastructure projects, private sector investors are growing increasingly sceptical. With every project that gets delayed or snarled up in red tape, the investment case deteriorates. There’s a very real threat that the pool of private finance potential will dry up – partly because of natural seepage, as our economy continues to drift, and partly as investors grow impatient and seek opportunities elsewhere.

But there is still a narrow window of opportunity to reverse the trend. As new infrastructure comes on stream, so the environment should become more conducive to productive investment, resulting in accelerated and inclusive economic growth.

This is not a pipedream. We know it’s possible because we’ve done it before. In the first decade of our democracy, sensible economic policies, combined with strong political will and a willing private sector, helped to reverse the fortunes of a functionally bankrupt state.

So how do we get back to the promise of that era? Case studies in this and other countries suggest that there are four prerequisites for success:

1. Authorised leadership and alignment within the public sector.

Time and time again, projects that start out with clear objectives land up mired in conflicting agendas, overly burdensome regulation and excessive bureaucracy. What’s needed is a sponsoring Cabinet minister responsible and accountable for delivery of infrastructure. That minister should have the unqualified support of the president, as well as the backing of every relevant government department and parastatal.

This is not to say that the interests of other government stakeholders should fall by the wayside. It is rather a commitment by these public officials to the overarching goal of infrastructure development; understanding that achieving this objective will require hard work, innovative thinking, and compromise.

It cannot be the responsibility of private sector participants to secure this alignment or to clear political bottlenecks. Unless all participants buy into the project objective – a road, a dam, a functioning power station – that project is destined to fail.

2. Competent government functionaries, capable of structuring investable projects.

Unfortunately, most of the projects tabled at the 2020 Sustainable Infrastructure Development Symposia are simply not structured to attract private sector investment in their current form.

A lack of technical capacity is now evident in local, provincial, and national departments. Some are seeking out private sector expertise to plug these gaps – and some very capable people from the private sector have been seconded to contribute. But I’d propose that we go further. Government should scour the globe for international talent with hands-on experience in setting up concession arrangements and other public private funding models. We are not the first country to face this challenge and there is no need to reinvent the wheel.

These local and international experts will know long before projects are brought to market whether they are bankable or not. And private sector bidders will have the confidence that projects have been properly thought out, with due regard to feasibility, environmental impact, stakeholder alignment and, critically, the investment risks relative to the prospects of financial returns.

3. A clear, efficient, and transparent policy framework

If we keep on leading projects using cumbersome, confusing, and antiquated policy frameworks, we’re likely to keep getting the same results. Investors won’t deploy capital in an environment where policies are conflicting or subject to change.

It was encouraging to hear President Ramaphosa recently acknowledge that the current legal and policy framework for public infrastructure is fragmented, with overlapping institutional roles and poor accountability. This is something the private sector has been saying for some time now.

Policy reform is needed urgently, and we look forward to seeing and contributing to the amendments that the head of the investment and infrastructure office in the Presidency, Dr Kgosienthso Ramakgopa and his team will be proposing to the Infrastructure Development Act and the existing private public partnership regulations. Hopefully these amendments will have the effect of appropriately balancing the allocation of risks on specific infrastructure projects, thereby making them more attractive to government, project developers and private sector investors.

Here again, international best practice should be our starting point. But I would caution that in drafting new policy we don’t fall into the trap of setting benchmarks that are impractical in an emerging country like ours.

4. A track record of success

The president has on several occasions called infrastructure the “flywheel” of economic recovery. The thing about a flywheel is that once it gets turning, it gathers its own momentum. So, let’s get it turning. Not with 62 projects, or even 50, but with three or four. Because once investors can see the wheel turning – once they can see evidence of strong sponsors, alignment within government and a workable framework for realising financial returns – that’s when our R440 billion infrastructure funding backlog will begin to look like a massive private sector investment opportunity.

This article originally appeared in BusinessLive.

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