Infrastructure-led growth as a tool for economic transformation

Transcription

1 Infrastructure-led growth as a tool for economic transformation Presented by: Xoliswa Jafta: Senior economist Industrial Development Corporation BMF Gauteng Policy Conference 19 May 2017

2 Background and context: Economic and social imperatives for infrastructure development Without the railroad, the Congo is not worth a penny. (Henry Morton Stanley an explorer, at the end of the 19th century). Without access to sufficient, quality and reliable energy, every social and development activity is critically constrained. (ECA,2007) These statements still resonate even today: Although there have been notable increases in infrastructure investment and financing over the past few years, which have been reflected in increased capacity and access to various infrastructure services such as electricity and water as well as better transportation networks, huge investment gaps remain. 2

3 Background and context: Economic and social imperatives for infrastructure development (cont.) Power failures, bottlenecked ports, congested roads, structural deterioration of dams, polluted water supplies, amongst others underscore these deficiencies in infrastructure networks. These, in turn, contribute to high production and transaction costs, as well as to lower growth (with estimates of about 2 percentage points) and productivity. Inhibit production capacity and trade capability, hinder value addition and compromise compliance with international standards. African formal sector firms (typically with expensive back-up generators) report sales losses in the order of 5% due to frequent power shortages. Infrastructure-related constraints to doing business across Africa, particularly in lowincome countries, have been estimated to depress firm productivity by about 40% (Escribano & others). 3

4 Background and context: Economic and social imperatives for infrastructure development (cont.) Infrastructure is critical to: Promote balanced economic development; broaden the economic base and thus raises growth potential. Unlock economic opportunities Promote mineral extraction and beneficiation Address socio-economic needs and challenges Promote job creation Some benefits of reliable, quality infrastructure networks: Access to markets: integrated and efficient transportation systems, reliable communication networks. Competitiveness: infrastructure development provides a strong foundation for future economic activity, efficiency gains and global competitiveness. Investment in infrastructure plays a catalytic role in the promotion of industrial development, as it has the potential to remove bottlenecks that hinder economic expansion 4

5 South Africa s infrastructure development Globally, demand for increased levels of investment in various types of infrastructure has escalated. Trillions of dollars are invested on an annual basis to meet the economic and social development objectives of fast industrialising and developing economies, particularly continuous expanding needs of businesses and rapidly growing and urbanising populations. South Africa has been no exception. As such, South Africa has embarked on a massive infrastructure build programme aimed at: o o addressing existing backlogs and capacity constraints in its physical infrastructure; creating a solid foundation for increased private sector fixed investment to expand its productive capacity. Infrastructure development enjoys pride of place in most of the key national economic policies, particularly the National Development Plan 2030 (NDP) and the National Infrastructure Plan (NIP) and is often seen as playing a key role in SA s economic transformation. 5

6 South Africa s infrastructure development Major players Infrastructure development has been a key driver of South Africa s economic growth for a number of years, having been a catalyst for the expansion and sustainability of production and services activity in many sectors of the economy. As such the expansion of infrastructure is crucial to ensure sustainable rates of economic growth and development. It is in this regard that government and public corporations play an invaluable role by facilitating and propelling the investment process through creating a conducive and investor friendly environment. The financing of infrastructure development in South Africa is largely carried out by the three spheres of government as well as a number of state-owned enterprises, particularly Eskom, Transnet, PRASA, SANRAL and, among others, the DBSA and, to a lesser extent, the IDC. 6

7 Per cent SA investment within a global context However, from a global perspective, SA is under-performing with respect to fixed investment spending. As share of GDP, total investment spending in SA is well below that of China and India, as well as a number of other emerging and fast-growing developing economies. 50 Total investment as % of GDP China India Brazil Russia South Africa Source: IDC, compiled from IMF data 7

8 Percentage SA investment public and private sector The public sector has made an increasingly larger contribution to overall fixed investment activity over the past decade through its massive infrastructure investment expenditure. By 2016, the public sector (government and SOEs) accounted for 39% of overall fixed investment, compared to around 26% in As share of GDP, the public sector contribution has risen to 7.6% in 2016, from 4.3% in Over the past 3 years (2014 to 2016) the private sector s share averaged 12.7% of GDP Gross fixed capital formation (GFCF) as % share of GDP Private sector Public corporations General government Source: IDC, compiled from SARB data 8

9 Index: 2000 = 100 Public sector was a key driver of fixed investment in recent years Gross fixed capital formation by type of organisation Total investment General government Public corporations Private sector Source: IDC, compiled from SARB data Substantial infrastructure investment spending by public corporations (e.g. Eskom, Transnet) since mid-2000s. In real terms, investment spending by public corporations rose by 190% since However, as some of the major investments are nearing completion (e.g. Medupi), the rate of expansion has been moderating. Government s investment spending has been rising robustly over the past number of years, mainly through a strong increase in the roll-out of economic infrastructure.. Private sector maintained a cautious approach to investment spending in a difficult and uncertain economic environment. 9

10 Percentage Public sector was a key driver of fixed investment in recent years (cont.) Contribution to growth in gross fixed capital formation Private sector (% contribution to GFCF growth) Public corporations (% contribution to GFCF growth) General government (% contribution to GFCF growth) Total Gross Fixed Capital Formation - GFCF (% change year-on-year) Source: IDC, compiled from SARB data Since 2014, the public sector has been the driving force behind fixed investment activity in the country. General government continued to invest in much needed economic infrastructure, whilst maintaining sizeable investments in social infrastructure, such as schools, hospitals and clinics. Public corporations witnessed a substantial growth moderation, with a 1.6% contraction in 2016, with sluggish demand resulting in the postponement of some of their investment plans. The private sector continues to be affected by factors such as low business confidence, surplus production capacity, rising operating costs, as well as subdued demand conditions. 10

11 Future spending on infrastructure investment Public sector spending on infrastructure development is set to total R947.2 billion over next 3 years to 2019/20, including PPP projects such as the REIPPP projects, with expenditure projected to rise significantly in water infrastructure. Transport and logistics will be the largest capex item (R327.7 bn over MTEF) and also the fastest growing (6.5% p.a.). Investment spend in water and sanitation is also planned to rise at a fast pace (4.8% p.a.). The large capital outlays in the energy sector are expected to start declining in nominal terms from 2019/20 onwards, although in real terms spending is already falling. This presents major opportunities for local suppliers of goods and services, as the SA government is pursuing a localisation strategy. Public sector infrastructure spending 2016/ /20 Investment area 2016/17 Estimate R billion MTEF forecasts R billion 2017/ / /20 Average annual growth (%) MTEF Total R billion % of total Transport and logistics % % Energy % % Water and sanitation % % Human settlements % % Other social services % % Education % % Other economic services % % Health % % Administration services % % Total % % % change on previous year 5.9% 2.5% 3.8% Source: IDC, adapted from the Budget Review

12 Number ('000) Public sector infrastructure investment: Employment creation impact According to the IDC s Economy-wide Impact Model, some direct jobs are estimated to be associated with infrastructure spending by the public sector on an annual basis over the three year period to 2019/20. However, through strong inter-industry linkages (multiplier effects) with various supplying and supporting industries in South Africa, the ultimate employment impact associated with such a substantial capex programme could indeed be much higher and is estimated at people economy wide Employment associated with public sector infrastructure investment (average number of jobs per annum) Direct Indirect Total Source: IDC calculations 12

13 Select opportunities Public sector spending: Opportunities for local suppliers of designated products A wide range of products have been designated for procurement by public sector entities (national, provincial & municipal government departments; state-owned companies). This provides a considerable source of demand for the respective products manufactured by local companies. It also opens up opportunities for the expansion of existing production capacity or investment in new domestic manufacturing capacity. Various: Minimum threshold for local content Rail rolling stock and components: Minimum threshold for local content Buses (bus body) 70%-80% Diesel locomotives 55% Textile clothing leather and footwear 100% Electric locomotives 60% Canned / processed vegetables 80% Electric Multiple Units (EMU) 65% Set top boxes 30% Wagons 80% Electrical and telecom cables 90% Assembly of locomotives and EMU 100% Valves products actuators 70% Car body 100% Conveyance pipes 80% -100% Bogie 100% Coupling equipment 100% Electricity infrastruture related: Suspension 100% Steel power pylons 100% Heat ventialtion and air conditioning 60% - 70% Monopole Pylons 100% Braking system 70% - 80% Steel substation structures 100% Alternators 90% - 100% Powerline hardware 100% Traction motors 65% - 80% Street light steel poles 100% Electric systems 80% - 90% Steel lattice towers 100% Canned / processed vegetables 80% Furniture products: Office furniture 85% Pharmaceutical products: School furniture 100% OSD tender 70% (volumes) Base and mattress 90% Family planning tender Public sector procurement: Industries, sectors and sub-sectors that have been designated for local production with minimum local content thresholds 50% value Working vessels/ boats (all types): Solar water heaters: Vessels / boats 60% Solar Water Heater tanks / geysers 70% Components 10% -100% Solar Water Heater collectors 70% Transformers and shunt reactors: Residential electricity meters: Class 0, 1 and 4 10% - 90% Prepaid electricity meters 70% Components and conversion activities 50% - 100% Post-paid electricity meters 70% SMART meters 50% Source: the dti 13

14 Select opportunities (cont.) Green economy SA is committed to investing in the greening of its economy, focusing on: Renewable/alternative energy; Energy efficiency; Emissions / pollution mitigation; and Natural resource management. SA is rolling out an integrated resource plan to address energy requirements going forward, including electricity and liquid fuels. Anticipated investment in renewable energy (RE) alone is estimated at USD 45 billion up to Wind and solar technologies have been attracting the most interest due to their relatively mature stage of development, SA s enormous solar resources and related land availability, which are translating into opportunities to roll out Concentrated Solar Power (CSP) and Photovoltaic (PV) Solar Power. Investment opportunities in the green economy include: Roll-out of RE and energy efficiency technologies, in the process leading to increasing demand for numerous components. Although SA s industrial base can accommodate some of the procurement needs, new industries are being / will be established to cater for rising demand, including the production of items such as: o Solar energy technologies and components (solar panels, solar water geysers, geyser timers etc.); o Wind turbines and components; Pyrolysis/gasification, anaerobic digestion; Biofuels: production incentive announced in 2013 to support the infant biofuels industry, and it will work through fuel levy; and, among others, Recycling activities (plastics, paper, glass, e-waste) 14

15 Select opportunities (cont.) Manufacturing SA has a well developed and diversified base of manufacturing industries ranging from petro-chemicals to metals fabrication, machinery and equipment, food processing, beverages, paper and pulp, cement, automotive and components manufacturing and many others. Select development opportunities include: Capital / transport equipment & metal fabrication Components for rail infrastructure (incl. rail-tracks & slipways, locomotives & components); electricity generation, transmission & distribution infrastructure (incl. cables & overhead transmission lines, pylons); water distribution & treatment (incl. pumps, valves, meters); gas infrastructure (incl. for future shale gas extraction). Forging and casting. Various machinery and equipment items; engineering products (e.g. for ship and oil rig repair services). Aluminium and carbon fiber for automotive industry. Scrap metal recycling, incl. e-waste (esp. platinum). Motor vehicles, components & accessories Expand local capacity for assembly of passenger vehicles, medium, heavy and commercial vehicles, busses, taxis and trailers. Expand components manufacturing, incl. auto-plastic components. Diesel particulate filters. Components for alternative fuelled engines. Chemicals, plastics & pharmaceuticals Polypropylene and poly-viny lchloride beneficiation, incl. a variety of plastic products (e.g. auto-plastics, tubes and pipes). Composite materials, incl. bio-composites. Fluorspar beneficiation. Titanium oxide pigments. Pharmaceuticals, incl. ARV active ingredients, vaccine production. Certain types of fertilisers, crop protection products and animal health protection products, incl. organic fertilisers. Chemicals for use in water treatment, oil and gas extraction. Speciality and fine chemicals production. Advanced manufacturing Fuel cells industry (variety of applications, incl. motor vehicles). Set-top boxes, digital televisions. Speciality materials. Medical devices. Additive manufacturing, incl. 3D printing (various applications). Forestry related products Furniture manufacturing for schools, office, household use. Packaging materials and products. Paper recycling. Clothing, textiles, leather Industrial textiles. High-value textiles and clothing items. Automotive leather and textiles. 15

16 % Share Imports as % of GDE Increased localisation efforts Source: IDC, compiled from SARB data Composition of the merchandise import basket Capital goods Source: IDC, compiled from SARS data South Africa's import penetration ratio GDE = Gross domestic expenditure (or domestic demand) Intermediate goods Raw materials (incl. Crude oil) Consumption goods Strong rise in imports despite a sluggish economic growth performance over the past couple of years. Large portion of the import basket comprises of intermediate goods, as well as capital goods (machinery and equipment), with the latter having taken a 21% share in overall merchandise imports in SA economy is well-known for its high import intensity associated with fixed investment activity. Important to expand the production capabilities of existing companies in this space, whilst there is also a need to support new production facilities to meet an increasing portion of domestic requirements for capital goods. Roll-out of public sector capex should be planned in such a manner so as to have continued demand over an extended period of time. 16

17 Policy levers/mechanisms in support of investment and the expansion & diversification of production capacity in the SA economy SA government is using various levers to leverage on public sector capital expenditure so as to develop new industrial and technological capabilities domestically or expand existing production capacity: Sector/product designation / local content requirement; National Industrial Participation Programme (NIPP); Competitive Supplier Development Programme. Industrial Policy Action Plan (IPAP) sectoral support: Several economic sectors benefiting from IPAP strategies and support measures, including substantial financial incentives (e.g. Manufacturing Investment Programme (MIP); Automotive Production and Development Programme (APDP)). Government support includes: Manufacturing development incentives; Clothing and textile industry production incentive; Critical infrastructure programme; Export market development incentives; Special economic zones, etc. 17

18 Policy levers/mechanisms in support of investment and the expansion & diversification of production capacity in the SA economy (cont.) Special economic zones: Unlocking long-term development potential of several regions. R4.2 bn for strategic projects in SEZs and industrial parks, including associated infrastructure. This support programme entails: Revitalisation of state-owned industrial parks across the country and associated critical infrastructure as well as development of infrastructure in SEZs. Special focus for industrial parks on underdeveloped and marginalised regions in the Eastern Cape, North West and Mpumalanga. Manufacturing: R9.6 bn for the Manufacturing Incentive Programme (APDP and MCEP included) to upgrade facilities, processes and products, as well as to upskill workers. The MeerKAT radio telescope project allocated R2.2 bn, with a 75% local content requirement, supporting domestic advanced manufacturing. Steel Development Fund - R95 million allocated to the IDC, earmarked for improving competitiveness of foundries and steel fabrication. 18

19 Policy levers/mechanisms in support of investment and the expansion & diversification of production capacity in the SA economy (cont.) Business support programmes: Black Business Supplier Development Programme - small business finance support of R3.9 bn to improve competitiveness, promote entrepreneurship and advance local content. Preferential procurement - revised preferential procurement policy regulations, effective 1 April 2017, aimed at enhancing transformation and including: Compulsory subcontracting of at least 30% for tenders above R30 million to designated groups; Bids up to R50 million will be evaluated in terms of the 80/20 preference point system (previously R1 million), which will help smaller, black-owned firms to compete; and Support for procurement of locally manufactured goods. Strengthening export capabilities of emerging exporters, SMMEs and black industrialists, through facilitating their participation in trade missions and at national pavilions R681 million. 19

20 Policy levers/mechanisms in support of investment and the expansion & diversification of production capacity in the SA economy (cont.) Development finance: Industrial Development Corporation (IDC): Funding numerous sectors of economic activity (manufacturing, incl. agro-processing, mining, high-value agriculture, several services sectors); Africa-wide mandate. Development Bank of Southern Africa (DBSA): Principally but not exclusively focused on infrastructure funding; southern African mandate. Land Bank: Financing the agriculture sector in SA. 20

21 IDC as a financing partner The IDC, as a driver and catalyst of industrial development, champions the development of critical industries in South Africa and throughout the continent. Supports the expansion, diversification and transformation of various economic sectors, such as manufacturing, services and mining sectors, including its beneficiation capabilities. Played a critical and leading role in the development of South Africa s growing green economy, particularly the rapid expansion of the renewable energy segment supporting projects in the Renewable Energy Independent Power Producers Procurement Programme. Our role in de-risking the sector has allowed greater participation by other funders. The IDC has also contributed to generic infrastructure development to support resource extraction and beneficiation projects. This has been achieved by: Focussing on early stage project development. Developing specific funding interventions (e.g. IDC/KfW s Green Energy Efficiency Fund). Supporting and development of emerging industries at various levels. Following a value chain approach, with emphasis on industrial development (including localisation), job creation and the development of long-term sustainable industries. 21

22 IDC as a financing partner (cont.) In line with government s objectives, our Industrial Infrastructure Strategic Business Unit has a specific responsibility to unlock infrastructure development opportunities and investments to stimulate and foster South Africa s economic growth and regional integration. To that effect, its funding and project development activities encompass: New and/or upgraded (incl. maintenance) power infrastructure that can ensure reliable, cost effective and sustainable security of electricity supply in South Africa and integration in the rest of Africa. Reliable, efficient and sustainable logistics infrastructure networks, including road, rail and ports that enable local industries to access new markets and/or suppliers in the rest of Africa, and also be globally competitive. Support development of water infrastructure in response to the water constraints and provide strategic inputs into SIP 18; and Technologically advanced broadband infrastructure networks that will increase high speed broadband penetration in South Africa and reduce the costs associated with broadband, with a focus on infrastructure sharing, new technologies and increasing competition. 22

23 Concluding remarks Public sector s capital expenditure plans, totaling R947.2 bn over the next three years, of which more than 70% is directed towards transport, energy and water infrastructure should, with effective implementation of procurement and localisation measures, benefit existing businesses and create new opportunities, particularly contributing to transformation objectives. Considering the fairly large domestic content associated with such infrastructure spending, it should undoubtedly have a substantial impact on the South African economy in generating additional demand for goods and services, thereby underpinning real GDP growth, whilst simultaneously also creating and/or supporting much-needed employment in various sectors in the domestic economy. Spending on civil engineering works and building construction are characterised with a fairly limited import leakage, thereby having a stronger impact on domestic economic activity. However, spending on plant and equipment, as well as on transport equipment tend to have a substantial demand for imports, thus having a somewhat more limited impact on the affected industries supplying such capital goods. Moreover, considering the challenging domestic economic climate along with the fact that many industries are currently operating below design capacity, it is quite likely that much of the potentially affected jobs associated with this public sector capex spending may indeed pertain to the prevention of job losses instead of new permanent jobs actually being created. 23

24 Concluding remarks The anticipated deterioration of the domestic economic environment will impact adversely on investor and business confidence, in the process also affecting investment decisions. Facing lower than budgeted revenue collections and higher debt servicing costs, government is projected to cut-back on its capital expenditure plans, while several SOCs could either postpone or even cancel some of their planned investment activity. Access to, as well as the cost of funds are expected to be a major deterrent to the investment cycle, whilst an uncertain economic outlook will further impact on private sector investment decisions Given the history of cost-overruns and delays often associated with the infrastructure sector, a relentless focus on better project selection, planning, and execution is critical. Importantly, a new financing facility is being established for multi-year large infrastructure projects. It is aimed at addressing shortcomings in the planning and execution of infrastructure projects, particularly as they relate to life-cycle budgeting, operations and maintenance costs. The facility should help government build a pipeline of projects that have undergone rigorous technical analysis. (National Treasury, Budget Review, 2017) Opportunities for import substitution / localisation are expected to emerge in various industries as the weaker currency provides a degree of price competitiveness. The IDC welcomes the possibility of partnering you in exploring and potentially exploiting such opportunities. 24