Infrastructure meant to reduce, not raise, costs

Rhodes>Perspective>2012 Archives

It is clear the government sees the announced public sector infrastructure spending programme of R845bn over the next five years as the key driver of economic growth and job creation in SA.

Higher public sector fixed investment was a key part of the 2006 AsgiSA policy framework. The economy was at that stage growing by 5% a year, but lack of infrastructure capacity hampered growth in important areas such as iron ore and coal exports. Thirty years of inadequate public sector investment meant that much of SA's infrastructure was old, inefficient and costly. AsgiSA announced a substantial public sector investment drive to relieve this "binding constraint" on growth. More efficient infrastructure would "drive down the cost of doing business", improve our global competitiveness and create opportunities for growth.

Electricity blackouts at the beginning of 2008 confirmed the urgency of this new focus. Eskom's failings at a time when private sector fixed investment had reached new heights was especially embarrassing for a government that places great emphasis on the state's role in the economy.

There are, however, important differences between AsgiSA and the current view of infrastructure investment. The most important is the way in which such investment now is to be funded. AsgiSA aimed to "drive down the cost of doing business". But the current approach, seeing investment as important in its own right, seeks to raise the capital needed through much higher user charges. This may have the opposite outcome - to raise the cost of doing business.

In competitive markets, firms cannot fund their investments by raising prices. But infrastructure in SA is provided by state-owned monopolies which can pass on to their customers whatever costs they choose. The size of the planned investments by parastatals such as Transnet and Eskom way exceeds their financial capacity to borrow. They have no choice under the current model of infrastructure provision but to fund a substantial portion of investment out of current earnings and are raising their prices to do so.

Electricity prices have already risen dramatically and will rise further in real terms. It seems likely that Transnet will need to raise prices to fund 70% of its planned R300bn investment programme. This means user charges will increase. So the urgently needed infrastructure upgrade can only be achieved by increasing the cost of doing business in SA rather than reducing it. This will handicap the new job-creating businesses, which better infrastructure is supposed to unleash.

A second difference arises when infrastructure investment is itself perceived as the driver of growth. Pressure to invest more and more for its own sake becomes inexorable. The argument becomes, "If R845bn will raise growth and create millions of jobs, then surely higher levels will achieve even more?"

The Treasury reflects this view when it reveals that the R845bn approved public sector investment is only part of R3,2-trillion for large-scale projects "under consideration or in progress". The list includes R1945bn for electricity, R583bn for transport and R213bn for liquid fuels. These are colossal sums, equal to six years of annual fixed investment, 15 years of current public sector investment, or 60% of all existing capital stock in SA!

The scale of what is envisioned is simply too large for the state-owned enterprises charged with making these ambitious projects happen. This is what is causing the delays. As a result, much of what is trumpeted today as the driver of growth is the same investment that AsgiSA looked at in 2006. Far from removing the "binding constraints" on growth, these projects have not yet been completed.

The cost of the projects also way exceeds the financial capacity of the enterprises that must implement them. There are three possible ways to address this. The first is for the state to inject large amounts of equity into the enterprises. It is unwilling to do this, because it needs to fund its own ambitious investment plans. It is also concerned about a soaring burden of debt servicing squeezing out other critical areas of government spending.

A second option is to share the costs of investment with local and foreign partners - public-private partnerships; or state enterprises could sell off some existing assets to fund new projects. The government seems unwilling to contemplate either option.

The third alternative is what is currently happening - existing users are carrying the burden of capital raising through higher charges. Recovering interest costs from users is one thing, but making them fund both interest and capital costs up front is excessive. We are placing at risk our global competitiveness that better infrastructure is supposed to enhance.

Better infrastructure is essential for SA to grow. But it must reduce costs, not increase them. Achieving this requires an urgent rethink of the current approach.

  • Professor Gavin Keeton is with the economics department at Rhodes University.

This article was published on the Business Day website.