The South African government’s US$100bn infrastructure investment programme is seen as crucial to help the economy pull out of its first recession in nearly two decades, but who will finance it? Shannon Manders reports.
The South African government’s R787bn (US$96.68bn) public infrastructure development programme is central to the country’s efforts to bounce back from its first recession in nearly two decades. The three-year programme is aimed at increasing capacity in the country’s overburdened transport and energy systems, and also at encouraging counter-cyclical economic growth.
“The only way to drive the economy at the moment is to push forward with the infrastructure projects that have been communicated and planned,” says a global head of trade finance at one of South Africa’s most prominent local banks.
According to government plans, this year’s budget would add a further R6.4bn for public transport, roads and rail networks; R4.1bn for school buildings, clinics and other provincial infrastructure development; and R5.3bn for municipal infrastructure and bulk water systems. Roughly half of the total amount would be capital spending by state-owned enterprises.
In addition, the government is spending R12bn (US$1.5bn) on constructing nine new stadia for the 2010 Fifa World Cup, which South Africa is hosting, with billions more on transport linking the stadia.
The planned infrastructure spend is for shovel-ready projects – projects that are already in the implementation stages. This reduces the risk of launching large new projects in a global market where there is little appetite for risk and limited credit availability.
In early June, finance minister Pravin Gordhan told parliament that in general, the major projects forming part of the infrastructure programme are on track and are being funded. “The National Treasury is working with Eskom, Transnet, the National Roads Agency and our water authorities to ensure that these enterprises can borrow the required funds in the capital markets with state support, where necessary,” Gordhan said.
At a business debate in late July, Gordhan noted that the fact that the country started this fiscal expansion with a low debt burden does not mean the country can engage in limitless borrowing. “The slowdown in revenues will require us to borrow more, but our expenditure decisions must continue to be guided by sustainability considerations.”
Gordhan added that in the course of the year, he will table proposals to a committee of ministers overseeing the country’s development finance institutions to consider how the government can draw private sector financial institutions into appropriate co-financing and risk sharing arrangements in support of infrastructure development and broader access to credit.
This infrastructure spend, together with the South African government’s other responses in dealing with the recession, are heavily dependent on measures agreed to before the crisis began. In truth, the infrastructure plan was hatched five years ago, during former President Thabo Mbeki’s tenure.
But it may take another five years for the programme to roll out. The government may shift to planning its budget over five years instead of three, former finance minister Trevor Manuel said in July at the release of the government’s medium-term strategic framework for the next five years. It may also draft separate budgets for capital projects that span several years, to enable it to plan more effectively, he said.
The situation is one that only adds to the challenges facing Jacob Zuma, the country’s new president, who was elected on promises of material improvement for South Africa’s poor. South Africa’s trade unions are preparing to go on strike if their demands for higher wages are not met. Meanwhile, violent demonstrations are being staged in protest against the government’s failure to provide basic services. The new government faces a difficult balancing act – between alleviating poverty and delivering services, and keeping the economy afloat in tough economic times.
Infrastructure ‘catch up’
According to Ato Gyasi, infrastructure financing, at Rand Merchant Bank (RMB) in Johannesburg, in the last six to 12 months, there have been more PPPs [public-private partnerships] come to the market than in the last three to four years, in the form of new roads, prisons, hospitals and accommodation.
“The ANC government has always worked on construction as a backbone for driving growth and creating employment opportunities. It is not something that’s just been generated to coincide with this crisis. It is part of a wider strategy and is largely outside the World Cup”, he says.
Such is the rate of new deals, that Gyasi suggests there may be a financing shortage. “There are a lot of projects out there, but they take a long time to come through the pipeline,” he says. “If they all came though, we would have a major problem, but I don’t see that. I think it’s working reasonably well.”
Gregory Havermahl, fixed income, currency and commodities at RMB in Johannesburg, agrees: “There are a lot of infrastructure projects going on, which were started just before the crisis began, two to three years ago, when they started the planning and the building up of the transactions. And those are all continuing, so there are very good signs.”
Gyasi believes that South Africa remains somewhat immune to the crisis, because there appears to be liquidity in the market. “Having said that, there are some projects, such as Eskom’s rollout, that are going to be challenging.”
Developments in the power sector continue to be driven by Eskom’s expansion plans in response to severe power shortages in early 2008 and years of underinvestment. In May this year, the company signed an agreement with seven European banks for €530mn. A portion of this loan will be put towards the 4,800MW coal-fired Medupi power plant.
The plant is currently under construction, with the first units due to come online from 2012. The cancelled initial plan for a second nuclear power plant in South Africa had new life breathed into it in May 2009, when a plan for the environmental impact assessment was released to the public. The plan includes a timeframe for the 4,000MW plant – due to be completed in 2018 – and proposed locations.
South Africa’s ports are also getting an upgrade. Durban and Richard’s Bay are both being improved as part of the state transport company Transnet’s R80bn, five-year plan to upgrade rail services, pipelines and ports.
With infrastructure deals coming to market as such a fast pace, there is a question mark over who will finance them. Western banks’ appetite for long-term infrastructure risk, particularly in emerging markets, has fallen since the credit crunch, and local banks are also looking to defend their capital ratios.
Development finance institutions, particularly the Development Bank of South Africa (DBSA) and the Industrial Development Corporation (IDC), say they can step into the gap.
Speaking at the Infrastructure Project Finance Conference in Johannesburg in July, DBSA’s CEO, Paul Baloyi, said that South Africa’s total funding gap for infrastructure projects is approximately R150bn, but that the DFIs could contribute up to half of that if “properly leveraged”.
However, the DFIs’ ambition to become more leveraged comes at a difficult time, just as rating agency Moody’s put both IDC and DBSA on review for possible downgrade of their A2 foreign currency ratings. Moody’s has said that such a move would not be because of a perceived risk at these institutions, but rather part of their strategy to realign the ratings of government-related FIs with the sovereign ratings.
Some commercial banks, meanwhile, complain that the DFIs are crowding them out of deals.
“For example, when the government issued a PPP for a hospital in Lesotho, who won the bid? It was the DBSA. Because pricing-wise, they are just more competitive,” a South Africa banking head tells GTR.
“A classic role they should be playing is when a commercial bank gets into a deal, there’s still a need to satisfy the BEE [black economic empowerment] equity holding, which is a difficult portion of financing to procure from commercial banks. You wait longer periods before you get your returns to pay back the funding, and to make a return back to the black shareholders. This is where they should be coming in because they’ve got the luxury of those long-term concessionary financings,” explains GTR’s source.
Another point of controversy is the effect of the government’s support for state-owned companies on the country’s own ratings.
In July, Moody’s aligned South Africa’s local and foreign currency ratings at A3. The foreign currency rating was upgraded and the local currency rating was downgraded, the latter due largely to the medium-term debt related to the country’s large infrastructure spending. Moody’s pointed to the “significant widening of the fiscal deficit and rising public debt ratios” in the country.
One banking source says: “If government does support its parastatals – such as Eskom and Telkom – and a lot of their infrastructure developments, how would that affect the South African sovereign and other ratings? Because then they’d have guarantees, and effectively, you’d look at the government as if it was a company.
“At the end of the day, it has a balance sheet, and it has an income and assets. It has a certain degree of obligations that will be considered in their ratings. So they have to be very careful they don’t get downgraded in their ratings, and as such be careful of how much support they give and where.”