The National Development Plan (NDP) is an effective plan and its fixed investment target of 30% by 2030 is an ambitious one, however it will be challenging to meet. This is according to Old Mutual Investment Group’s Senior Economist, Johann Els and Head of Infrastructure, Jurie Swart, presenting at its Q2 Media Briefing, who believe that to effect the investment roll-out, it is vital to build capacity.
Fixed investment makes up 19% of South Africa’s Gross Domestic Product (GDP), with private fixed investment contributing 63% of the country’s total fixed investment, while public corporations make up 21% of the total (mainly consisting of ESKOM and TRANSNET spending) and Government fixed investment constituting 16% to the total (mostly from roads, schools and hospitals).
Els says that this makes the private sector a significant factor in the NDP’s target. “Private sector fixed investment needs low interest rates and strong economic growth to thrive, with a strong Government infrastructure drive helping boost this growth,” he explains. “Currently we’re seeing low interest rates, but sluggish and unexciting growth and while some replacement investment is happening, the economy is simply not strong enough to drive significant new private sector investment.”
The New Growth Path has announced its intention to create five million jobs by 2020; however it has identified structural problems in meeting this target. Therefore certain employment creation sectors and markets have been identified as part of this drive.
Swart, who heads up the Infrastructure division of Old Mutual Investment Group’s Alternatives boutique, emphasises that infrastructure is top of this list as a significant driver of jobs creation forming the basis for higher growth. “Government’s response to the challenge of economic growth and job creation was the formation by Cabinet of the Presidential Infrastructure Coordinating Commission (PICC),” he explains. “The thinking behind the establishment of this commission was to coordinate, integrate and accelerate the implementation of infrastructure projects across the country. Its mandate is to ensure systematic selection, planning and monitoring of large projects, and the development of a 20-year pipeline.”
However, while the confidence levels of some construction sectors and contracts have improved recently, according to the Building & Construction confidence survey conducted by the BER, this is not translating into capacity levels. Both Swart and Els believe SA infrastructure investment is facing significant capacity challenges when it comes to the availability of its architects, engineers, project managers, financial managers at a local government level.
“Government has a good infrastructure plan on the table, but the bottom line is that they need more infrastructure specialists,” says Swart. “If you look at Government’s labour force in the infrastructure arena, engineers are in shortest supply, followed by technologists and technicians, compared to the number of superintendents, foremen, artisans and operators. Labourers outnumber all of these specialist and middle management roles.”
Els believes that when it comes to fixed investment and infrastructure in particular, investment indicators are not looking very exciting either. “These include factors such as machinery imports as an indicator of machinery investment, the passing of building plans as an indicator of building fixed investment, and commercial vehicle sales as an indicator of transport fixed investment,” he says. “The days of Government’s huge infrastructure boom between 2004 and 2007 are over and while there are still billions of rand to be spent over the next few years, the growth rate has dropped sharply compared to what we saw during that period.
Old Mutual Investment Group views infrastructure as a distinct long-term savings class, says Swart, although it is still too small at this stage. “Old Mutual established its infrastructure investment capability in the mid-1990s, although the Renewable Energy Programme has attracted broader investor attention recently,” he explains.
The Old Mutual Group’s infrastructure investment and commitments currently total R10 billion in equity investment and R15.6 billion in debt investment.