R800 billion for infrastructure, but who will ensure its execution?

Government plans to spend R800 billion on infrastructure over the next three years, but is said to be lacking the capacity to put projects out to tender, writes UDO RYPSTRA.

When he delivered his Budget Speech in parliament last month, Finance Minister Pravin Gordhan said Government and state-owned enterprises would spend more than R800 billion on infrastructure over the next three years. This is good news for the construction industry and the transport industry that provides it with essential transport services. But, have the government, and especially provincial and local government got the capacity to spend all that money?

This was the question posed by Dr Azar Jammine, director and chief economist at Budget Econometrix a few days after the speech. “I don’t think so,” he said.

A week or so before the speech at a media breakfast meeting in Johannesburg, the same question was posed by Zulch Lotter, president of Consulting Engineers South Africa (CESA). Lotter commented on a statement made over a year ago that government would be spending R849 billion on infrastructure, and illustrated by way of graphs that not much of the R849 billion seemed to have come through. Lotter referred to earlier statements by Gordhan that several billion rand had not been spent by the public sector. He said the reported R12 billion unspent budget by municipalities during 2010/2011 equated to a “loss” of 100 000 jobs, “a situation that cannot be tolerated in a country with extremely high unemployment and below-average growth rate even in Africa.”

He added, “We are all aware that there is a crying need to implement new, as well as to maintain existing infrastructure. The reason for under-spending can be ascribed to the inability of public sector officials to procure the necessary professional contracting services due to lack of capacity, or because of inappropriate procurement models. As CESA has repeatedly stated during 2010, the key overriding obstacle in the public sector is the lack of skills and technical resources. The number of technical professionals in government has shrunk from 5 500 to fewer than 1 800 over the last 10 years.”

While no details were provided last year on how the R849 billion would be spent, Gordhan did give details on how the R800 billion would be spent − on dams, new power stations, road networks, water supply pipelines, schools, hospitals and port facilities.

“This builds on the steady progress made over the past decade which saw the contribution of government and public enterprises to gross fixed capital formation rise from 4,0% of GDP in 2000 to 8,6% in 2009,” he said.

Major projects underway include the Medupi power station, which will generate 4 700MW at a projected investment cost of R125 billion rand; the R23 billion Transnet multi-product pipeline that will secure inland fuel supplies, and the R21 billion rand freeway improvement scheme. He said these investments were largely financed through borrowing, with costs received from future electricity consumers and road-users.

Gordhan said the transport sector itself would receive an additional allocation of R10,3 billion over the next three years to improve infrastructure and services. This would support efforts to improve national and provincial road maintenance, rail signalling and rolling stock, and public transport infrastructure. The SA National Roads Agency would get an additional R2,7 billion of which
R1,8 billion would go towards the maintenance of 2 156 km of roads used for hauling coal, and R950 million for maintenance of the national road network.

Gordhan said R1,5 billion had been provided, through the new provincial roads maintenance grant, for provincial road maintenance and weighbridges. The move forms part of the wide-ranging job creation drive on road maintenance projects announced by Transport Minister Sibusiso Ndebele earlier last month. Through this initiative, government plans to create more than 70 000 permanent jobs through projects such as pothole patching and general road maintenance. An additional R2,1 billion has been set aside for the coal haulage network in all provinces. Maintenance to the coal haulage road networks would be financed from the increased levy on electricity collected from Eskom, said Gordhan.

He said the Passenger Rail Agency of SA had been allocated an additional R1,1 billion to upgrade and replace 16% of Metrorail’s signalling infrastructure. Some R350 million has been set aside for the upgrade and refurbishment of 40 motor coaches and 277 trailers. Twelve municipalities are earmarked to receive an additional R2,7 billion through the public transport infrastructure and systems conditional grant. This money would be used to plan, upgrade and expand integrated public transport. “The funding will allow bus rapid transport services to increase peak-hour passenger loads  from the current 30 000 to 110 000 in 2013/14.”

Gordhan said consolidated government transport spending would total R66 billion next year, rising to R80 billion by 2013/14, and that R800 million has been set aside over the next three years for green economy initiatives. Additional allocations for research into energy efficient technologies are also proposed with R2,2 billion allocated to environmental employment programmes over the medium term.

Government expects expenditure on energy to be markedly lower over the next three years in comparison with preceding years due to the final tranche of the Eskom subordinated loan having been paid in the 2010/2011 financial year. Medium term spending was expected to focus on universal access to electricity through the integrated national electrification programme, which will grow to R3,2 billion in 2014.

Over the three-year period, the Department of Energy has allocated an additional R367,9 million, of which R66 million is for the establishment of the South African Energy Development Institute. Research conducted by the institute is said to be aimed at supporting government’s energy efficiency objectives.

Meanwhile, vehicles are not only getting more expensive to fill up, thanks to fuel and RAF levies increasing by 18c a litre, but they’re also getting more expensive to buy, due to an increase in the excise tax rate on motor vehicles over R900 000 being increased to 25% from 20%. This additional tax on consumers is mentioned in  the budget review document released along with Gordhan’s budget speech in a section dealing with ad valorem excise duties: “Passenger cars and light commercial vehicles are subject to a ‘luxury’ excise tax that increases with the price of the vehicle,” the document states. “Government proposes to increase the maximum nominal ad valorem excise tax rate on these vehicles from 20% to 25%.”

Commenting on this at the Econometrix breakfast session, director and senior economist Tony Twine said the increase, which includes 8c/l for the Road Accident Fund, was not as steep as the increase of more than 40c/l in 2009/2010 and 25,5c/l in the 2010/2011 financial year. However, it would yield a high revenue of R1,9 billion for a small inflationary impact.

The Budget provides for job creation initiatives in a number of ways over the next three years. This includes a R9 billion job fund to co-finance innovative public- and private-sector employment projects; over R20 billion to Setas; R5 billion to the National Skills Fund; R14 billion to further education and training colleges; R73 billion to the expanded public works plan; R20 billion in tax incentives renewed for manufacturing investment with a focus on job-creation potential.

To finance the proposed National Health Insurance scheme it was looking at several options, including an increase in VAT, a payroll tax and a surcharge on individual’s taxable income. Where will the money come from? According to Jammine, about 1,2 million individuals already contribute more than 70% of tax revenue and they will pay more come April when, according to Twine, the fuel levy and Road Accident Fund Levy, based on an oil price of $111 a barrel, will add 68c a litre to petrol costs.

Now add an increase in toll fees. Under these circumstances, it is going to be mightily difficult to create 500 000 jobs per annum – it will be a costly exercise getting to work!