By Tshepo Mahloele (Group Executive Director of Harith)
It has been deeply encouraging and inspiring to see the immense task of rebuilding the country from the ravages of the Covid-19 pandemic beginning to take form over the past few weeks. SA is entering a pivotal phase in its history as it tackles the challenge of a mega-infrastructure investment programme to stimulate growth and put millions of jobless South Africans back to work.
The ANC has tabled a wide-ranging set of proposals aimed at creating mass employment, driven by an increase in infrastructure development and maintenance. This includes proposed regulatory reforms and a new role for the SA Reserve Bank in mobilising funding for projects and financial institutions. The ANC has made it clear that it sees the state’s role as guiding the development process and steering investments.
Business For SA (B4SA) has also released plans for economic recovery, but warned that the immense amount of capital required will be raised only if SA presents a compelling investment case to domestic and international investors. B4SA estimates the funding required to implement the plan would be split between the public sector (R2.4-trillion) and the private sector (R1-trillion).
Similar infrastructure shortages globally may be part of the reason large US and European infrastructure funds have been raising record amounts of money recently. The manner in which funding is deployed in SA, and whether any of it will be deployed at all in SA or the rest of the continent, will depend on how deals are structured so that effective control and risk mitigation is not taken away from investors. We know SA’s fiscal position is such that infrastructure of this scale cannot be funded by government alone. We also know that less than 2% of public infrastructure in SA is now financed by the private sector, compared with 50% in the UK. Increasing the private sector’s share of this pie is no longer “a nice to have” — it is now critical if our economy is to recover.
That means we will need to revisit the tried and tested public-private partnership (PPP) model, which has delivered signature projects such as the Gautrain, the renewable energy-driven independent power producer (IPP) programme and the N3 and N4 toll roads. The potential for the public and private sectors to work together to deliver complex, high-value pieces of economic infrastructure that make a real difference to job creation and growth is truly immense. But if we are to succeed as a country in meeting this challenge, we will need to work towards a model that focuses on value for money and delivering infrastructure affordably, without ordinary South Africans being forced to pick up excessive bills. This requires us going back to the most basic investment principles: effective risk mitigation in search of reasonable risk-adjusted returns for investors.
There is an extensive and well-read playbook of methods to structure PPPs, and that suggests structuring these vehicles needs to be done the right way from the very beginning. If we are to generate returns that are sufficient to attract private capital and avoid falling into the trap of having the end user pick up the tab for massive project cost overruns via higher effective tariffs for power or the use of toll roads, the private sector needs to be presented with a good balance between risks and returns.
The Eskom infrastructure build programme is a case in point. In 2007 alone, Eskom approved 13 projects worth more than R200bn that it said would boost electricity output 56% by 2017. The flagships were two mammoth coal-fired power stations, Medupi and Kusile, that were both expected to be finished by 2015 at a total cost of R163.2bn. The expected price tag has since ballooned to R451bn, including the costs of interest during construction and fitting the plants with equipment needed to meet environmental standards. Not only does this pose consequential risks to SA’s overall fiscal position, but the burden of exorbitant electricity tariffs will be shouldered by millions of end users for many decades to come. This has been to the severe detriment of the productive economy in SA and has spiralled into millions of lost job opportunities.
When the initial procurement of a project is not done correctly, investors are unable to balance the risks and rewards effectively. Investors need to know all the key risks are properly ring-fenced and allocated to the parties best placed to mitigate them. For example, cost overruns and delays are often inevitable in mega projects, so before any private investor commits capital they will need to know who pays for the overruns. An effectively structured PPP will have turnkey contracts in place that ensure most of the risks attached to construction delays are paid for by the engineering procurement construction (EPC) contractor. Shareholders need to provide financial and management support where appropriate, meaning the private sector will need to know it has effective management control over projects it invests in.
However SA’s new infrastructure projects are funded — via debt or equity, or as in most cases, a mix of both — any private sector investor will need to know that the project risks are effectively structured. But how will SA achieve this daunting objective? We have many strengths to draw on, but we need to start with building the relationships and capacity to collaborate between the government and the private sector. The government has an important role to play in awarding concessions or licences, and with clear and appropriate regulation and parameters creating an enabling environment for the private sector to bring its capital, skills and experience to bear. It is critical that governance is placed at the centre of project delivery, and that roles and responsibilities are absolutely clear.
SA is also in the privileged position of benefiting from a rich pool of skills to draw on in executing PPPs. Leveraging skills in this specialised area of finance within companies involved in structuring PPPs — banks, law firms and developers — and matching their skills with experienced infrastructure investors will be key to releasing this immense potential.
It has been demonstrated globally that building connectivity infrastructure such as roads, railways and telecoms drives higher GDP growth. SA will need to do this as efficiently and affordably as possible, allowing a wide range of private sector investors to get involved in funding and structuring their construction.
Pairing international best-practice processes, procedures and strategies to the unique understanding skilled investors have of SA risk will be the only way to ensure effective risk management and solid returns, and allow us to build an economic future out of the ashes of the pandemic.
• Mahloele is CEO of pan-African fund manager Harith General Partners and chairs Arena Holdings, which owns Business Day.