In a sobering update on the state of South Africa’s financial status quo this week, finance minister, Enoch Godongwana, blamed the country’s weak economic outlook on power cuts, poor performance of the logistics sector, high inflation, rising borrowing costs and a weaker global environment.
With a 4.2% growth rate, the construction industry was amongst a handful of sectors to show positive signs of growth in the first half of 2023.
The minister stated that investing in infrastructure is central to supporting higher economic growth and better access to basic services and announced government’s plans to facilitate a quantum shift in the quantity and quality of delivery in the infrastructure industry by mobilising private sector financing and technical expertise at scale.
He did, however, note that the infrastructure ecosystem is beset by challenges that undermine its efforts to fast-track delivery, including a lack of a credible pipeline to attract funding, lack of sustainable financing arrangements to crowd-in private finances, and poor contract and project management to manage cost and schedule overruns.
“While talk of a quantum shift in infrastructure delivery is good news for the construction industry, boosting investor confidence and getting projects off the ground, requires proof that funds will be invested effectively and result in value for money,” says GVK-Siya Zama CFO, John de Sousa.
He says growth in the industry over the past six months can largely be attributed to it coming off a low base, and taking into consideration that the industry has been in decline since 2016.
“The construction sector is one of the largest creators of employment in our country, and for our economy to start recovering and growing, it is imperative that this sector continues to grow. While government spend does continue, it is at a slower pace than is ideal. Notably, the private sector has also picked up, especially in respect of renewable energy projects.
“That said, we know that treasury must maintain a delicate balance between spending and debt. However, continued focus by government on infrastructure spend, as well as private sector investment, is the only way the sector can thrive and help turn the economic tide in South Africa.”
He says the industry also welcomes government’s plans to amend Treasury Regulations and key elements of municipal legislation that are aligned with recommendations emanating from the completed review of the Public- Private Partnerships (PPP) framework.
“It is clear from the current medium term budget update that government alone will not be able to fund the required infrastructure spend. For a long time now there has been much talk about PPPs as a mechanism for government, in conjunction with the private sector, to unlock projects that have been held up, either through funding or the required expertise on the ground.
“We previously suggested that the regulatory framework relating to public private partnerships needs reform. It is too early to say what these reforms will look like, but it is clear that government now realises this is the only way forward in terms of keeping up with the growing infrastructure requirements in the country,” adds De Sousa.
He says government’s intention to widen the scope for concessional borrowing by creating new mechanisms for private-sector investors and multilateral institutions to co-invest with government on selected infrastructure projects could be a feasible solution to addressing the cost of borrowing, which has reached new highs because of the country’s credit downgrade – assuming it can result in a win-win for both parties.