Only one way out for state-owned companies in South Africa

South Africa’s state-owned companies have seen serious declines in fixed investment over the last decade, with public-private partnerships seen as the only way of increasing investment.

STANLIB Economist Ndivhuho Netshitenze said that fixed investment in South Africa has fallen by an average of 1.3% over the last 10 years.

Although South Africa has a good core national economic infrastructure network, this infrastructure has deteriorated massively over the last few years, and new networks have not been adequately developed and expanded.

The National Development Plan, created in 2012, looked to address the issue by setting an ambitious target of increasing fixed investment spending to 30% of GDP by 2030.

However, in Q3 2024, fixed investment in SA was a mere 14.8% of GDP, with the private sector making up the bulk of this investment, at 10.6% of GDP

This is not only below the policy target but also low by historical standards.

“In effect, SA has missed a generation of capital investment in roads, rail, ports, electricity, water, sanitation, public transport, and housing,” said Netshitenze.

“To ensure sustained economic growth and improved services, public sector infrastructure investment needs to increase significantly from its current levels.:

“Given that SOEs are tasked with providing economic infrastructure, at least half of this responsibility rests on companies like Eskom, Transnet, Trans Caledon Tunnel Authority (TCTA), and SANRAL.”

However, significant constraints under SOEs from achieving their target.

The investment shortfall is far too large, and SOEs lack the funds and capacity to meaningfully ramp up infrastructure spending.

From its post-democracy peak in Q4 2013, fixed investment by SOEs has fallen by almost 50%.

To get investments back to their peak levels, SOEs would need to increase their current investment spending by R134 billion (based on 2023 GDP levels).

That said, SOEs would still be well below the R240 billion increase to reach the required 5% of GDP target.

“This level of investment would have to be maintained for about five years to ensure sustainable economic growth,” said Netshitenze.

“This means SOEs alone would need to spend R1.75 trillion over five years to address SA’s infrastructure problems.”

This is further complicated by the fact that the balance sheets of the country’s important SOEs have deteriorated over time, with many in serious financial distress.

Many are unprofitable, leading to a rise in unsustainable debt accumulation followed by a need for major government bailouts.

The debt levels for the 10 biggest SOEs increased by R313.6 billion between 2012/13 and 2022/23, with the government having to fork out a similar figure in bailouts.

Thus, there is little room for additional debt or government help to close the fixed investment expenditure gap.

What to do

The government has, however, committed to ramping up the level of infrastructure spending over the medium term, with the intention to scale up private sector participation.

National Treasury is implementing recommendations to improve the policy, legal and regulatory framework of public-private partnerships (PPPs).

It recently introduced changes to its public finance laws that will reduce the red tape for projects valued at less than R2 billion where a PPP is involved.

There has been an increased uptake of PPPs in 2023/24, with 15 projects at the inception phase and 19 at the feasibility study phase. Ten projects are ready to start the procurement process as well.

“While this is a welcome statement of intent by the government, it is not enough to plug the investment shortfall,” said Netshitenze.

“In addition, the delivery of infrastructure projects by the government is often hampered by a lack of coordination within the public sector, poor cooperation with the private sector and high borrowing costs.”

Although the government has pledged greater use of PPPs, they still only account for 2% of the total planned infrastructure spending over the medium term at R19.1 billion.

This means that most of the infrastructure spending plan rests on the public sector’s already-strained balance sheet. 

South Africa needs more fixed investment to increase the long-term growth trajectory, but the public sector, especially involved SOEs, does not have the financial capability to implement the investment plans needed to build infrastructure to the required scale.

“Given the constraints, the only option left for the government is to crowd in private investment more aggressively,” added Netshitenze.

“This can be done through greater use of PPPs, along with ensuring policy certainty and improving business confidence.”