Infrastructure to drive South African economic recovery

Out-Law Analysis | 29 Jun 2020 | 4:13 pm | 6 min. read

The South African government must demonstrate that its new system of prioritising infrastructure projects is efficient and attractive enough to incentivise investment from the private sector, both domestic and foreign.

Private sector companies looking to invest in South Africa will welcome government plans to put new infrastructure at the heart of the country's economic recovery from the coronavirus crisis. However, despite bold plans being outlined to revitalise the country's infrastructure at the first Sustainable Infrastructure Development Symposium South Africa (SIDSSA), held virtually on 23 June, it is clear investors and lenders remain to be convinced about whether projects can be delivered quickly and offer a realistic set of bankable projects.

Changes to South Africa's system of infrastructure development have been made to help address these problems. A consistent long-term approach to policy, planning and regulation and achieving some early successes with the new approach would help too.

Political will

Government plans to address declining infrastructure investment in South Africa pre-date both the SIDSSA and the coronavirus crisis, with a substantial number of projects in the pipeline. However, the SIDSSA offered president Cyril Ramaphosa the chance to iterate his plan to link infrastructure investment and related institutional reforms to the government's wider efforts to drive sustainable recovery from the economic downturn which has been exacerbated by the Covid-19 pandemic.

To promote recovery, the president highlighted the need for projects that would provide for significant job creation and which are located in sectors that have the strongest economic multiplier effect, such as energy, water, transportation and ICT. Projects which are close to readiness and could break ground as soon as possible will be prioritised, he said.

The president's emphasis on private sector participation in infrastructure development and the boosting of investor confidence was heartening, and it is clear that there is an appetite to tackle existing roadblocks to infrastructure investment. These include the lack of a bankable project pipeline and the need for a coherent and uniform policy and regulatory environment.

These issues were further explored during panel sessions on potential funding models and how investment could be driven in sustainable energy infrastructure at SIDSSA.

Financing infrastructure

The funding session, chaired by finance journalist Bruce Whitfield, brought senior representatives from government and the Infrastructure and Investment Office (IIO) in South Africa together with Sygnia and Ninety One Asset Investments, representing the investment community, and lenders the Development Bank of Southern Africa (DBSA) and New Development Bank (NDB).

The funders and development finance institutions were clear that government needs to bring its current debt challenges under control to attract more foreign direct investment, including into new infrastructure, while deputy finance minister David Masondo highlighted the need for the private sector to co-develop infrastructure projects based on a 'user pays' model, which will lessen the burden on the state.

The DBSA's chief executive Patrick Dlamini acknowledged the role of development finance institutions in providing risk capital to assist with project preparation and the NDB's Leslie Maasdorp emphasised the need for a centralised infrastructure capacity in the state and a pooling of sectoral projects.

All participants agreed that the government should draw on the successes of programmes such as the Renewable Energy Independent Power Producer Procurement (REIPPP) and the toll roads.

The asset managers emphasised the willingness to develop new alternative funding instruments such as green bonds and leveraging funding from intuitional investors, but said that government needed to introduce legislative reform, like the section 12J tax incentives, to make the space attractive for investors.

It was clear from the discussion that the lending community is willing and able to invest in South Africa's infrastructure, but that it could only do so in an environment of policy certainty, coherent planning and a supportive regulatory environment. These core ingredients would provide the basis of a success infrastructure programme as a catalyst for economic growth.

Energy projects

The energy session was chaired by minister of mineral resources and energy Gwede Mantahse, and also featured new head of the Independent Power Producers Office (IPP Office) in South Africa. Other panellists included representation from industry, academia, and the World Bank.

In the session, minister Mantashe explained that the focus of South Africa's energy mix going forward would remain rounded, featuring significant renewables, but also new coal and gas projects, which the minister labelled a "game changer". Mantashe also reiterated the government's view that procurement of new nuclear capacity was an important step for supplementing a renewables-heavy generation mix.

Mantashe spoke about the role of IPPs and Eskom in the future, and the need for competition in the generation sector. To this end, the Independent System and Market Operator (ISMO) Bill is being revisited, previously shelved due to the absence of a true competitive market.

The Dutch and Chinese regulatory models were identified as sustainable models that South Africa could follow. These models comprise an unbundling of vertically integrated monopolies; the retention of state control over the transmission and distribution grids; a single buyer for energy which is produced competitively; and the introduction of an independent market regulator.

The role of energy in the economic recovery was also addressed, with the need to prioritise job creation, promote long term growth – focussing on high-tech energy infrastructure – and the need for a green recovery, which avoids using dirtier technologies to drive quicker recovery in a form of "revenge pollution".

There were also some updates from the IPP Office on anticipated timing around various IPP procurement processes. The request for proposals in respect of emergency generation capacity procurement is expected by the end of July 2020, representing 2,000 MW of generation from IPPs from projects that can be grid connected "as soon as reasonably possible".

For the second of the draft ministerial determinations, which gives effect to the generation mix set out in the IRP 2019 and covers around 12,000 MW from various technologies, the National Energy Regulator of South Africa (NERSA) concurrence process is still ongoing, and the IPP Office anticipates bringing procurement of this capacity to market in the first quarter of 2021.

Mantashe also confirmed that that "Bid Window 5 is open" for the REIPPP, although in practice there is still a requirement for Eskom to concur with its role as the single buyer under BW5 before any procurement documents could be issued. The timing therefore remains unclear.

Changes to new infrastructure development in South Africa

The existing mechanism for infrastructure promotion is the Infrastructure Development Act, which establishes the Presidential Infrastructure Coordinating Committee (PICC). In late 2019, president Ramaphosa established the Infrastructure and Investment Office in the Presidency (IIO). This body is responsible for developing the country’s infrastructure investment strategy and creating the structures, expertise and capacity within the government to drive infrastructure development. The IIO's work with the private sector resulted in the development of the "SIDS methodology", and establishes a new institution, Infrastructure South Africa (ISA).

ISA will take over the technical functions of both the PICC and the National Treasury's Budget Facility for Infrastructure in respect of project identification, preparation, packaging and promotion to create a comprehensive project pipeline. ISA will report to the PICC. This methodology is more fully set out in the Infrastructure Investment Plan approved by Cabinet on 27 May 2020.

Project evaluation will include private sector input through the Infrastructure Investment Committee which is being established as a public private coordinating body. Where projects are identified as being ready for funding, these will then be channelled through the existing mechanisms of the Infrastructure Development Act, whereby they will be identified as a Strategic Integrated Project (SIP) and published in the government gazette.

The SIDS process has, to date, already identified a number of bankable projects for the new comprehensive pipeline – 276 projects have been evaluated, with 93 being presented to industry in May 2020. The final list of 88 projects for presentation fall under six sectors, these being human settlement, transport, water and sanitation, agriculture, energy, and digital. Although it was stated that the full list would be published through the government gazette, it has not been made available yet, with only five "catalytic projects" being identified.

The first test for the government's renewed approach and methodology for infrastructure development will be:

  • whether the 88 projects to be gazetted following SIDSSA are of a sufficient quality and readiness to represent a genuine set of bankable projects for the market, which the government has not previously been able to put forward, and;
  • whether the government can move fast enough to keep its credibility with the private sector and signal readiness to the market through achieving quick victories – it is imperative that the first projects are banked as soon as possible, and a sensible starting point would be to issue the much awaited Bid Window 5 request for proposals of the REIPPP.

Co-authored by Reuben Cronjé, a projects expert at Pinsent Masons.