Government is relying heavily on an increase in infrastructure spending to lift the economy beyond its present moderate growth rate and halve the unemployment rate by 2014.
Ever since President Thabo Mbeki committed his second five-year term to rapid economic progress, various government departments have announced infrastructure investment plans to meet the challenge.
Over the next five years government wants to double its fixed investment spending in real terms - an extremely high target, given that it has declined steadily over the past two decades. Public-sector capital spending used to be 15% of GDP in the early 1980s. In 2000 it was less than 5% and has remained so since. Finance minister Trevor Manuel now aims to increase government investment spending to 9% of GDP by 2010 and hopes this will stimulate an increase in private fixed investment from the present 12% to 16% - bringing total fixed investment to 25% of GDP (see graph).
This has huge implications for government spending. In the next three years alone - the period covered by government's medium-term expenditure framework (MTEF) - this implies that R322bn of the budget will be allocated to capital spending. A further R260bn is earmarked in the 2008/2009 and 2009/2010 fiscal years.
The spending plans and the rhetoric are challenging and determined. Yet bankers, businesses and economists inevitably meet them with scepticism.
In a recent analysis written for Engineering News, Peter Perkins, of the University of the Witwatersrand school of economic & business sciences, described the 25% investment target ratio by 2010 as "ambitious".
He says: "If the economy were to grow by 3%/year between 2004 and 2010, real fixed investment creation would have to grow by more than 7%."
The ANC government's track record over the first 10 years suggests that these targets will not be met. Government departments have consistently undershot their capital spending budgets, particularly at provincial and municipal levels where the bulk of social delivery is supposed to occur.
The amount of regulation and red tape involved in government's capital expenditure programme is notorious and does not lend itself to quick delivery.
With a renewed focus, though, and a push from the presidency, there are early signs that the latest infrastructure spending programme might prove recent history wrong.
Crucially, government appears determined to make the huge five-year R165bn capex implementation work. The bulk of this plan is being carried out by public enterprises, particularly Transnet and Eskom, and they have been given a new lease of life since last year's election. (See page 60)
Public enterprises minister Alec Erwin told parliament in April that the infrastructure package was slowly taking shape. In a clear message to both financial providers he asked: "Are you ready to bring more capital into our infrastructure than has ever been done in the economy before?"
But perhaps most significant is the president's continued message of better delivery both in terms of social services for the poor and improving the economic infrastructure, so the private sector can conduct its business more efficiently.
This would be good news for the corporate & merchant banking industry, which has been waiting for a long time. " The deal flow is just not coming through," says Sollie Nortjé, head of project finance at Absa Corporate & Merchant Bank (ACMB).
Like other merchant banks, ACMB says it has sufficient funding available to meet the infrastructure requirements set by government. "Funding is readily available. At Absa alone we have billions of rand available for project and public financing," says Nortjé.
When high-level projects are announced - such as the R7,2bn Gautrain fast-speed rail link between Johannesburg, Pretoria and Johannesburg International Airport - banks scramble to provide various levels of funding.
Rand Merchant Bank (RMB) infrastructure finance head Werner van Oudenhove says - as do many of his competitors - that the infrastructure funding environment has, until recently, been characterised by "limited deal flows and high levels of competition". Bankers are not only concerned about the lack of transactions - they also believe government should make use of private-sector expertise in the formulation of infrastructure projects.
"The biggest obstacle in boosting infrastructure spending is the ability to turn ideas into bankable projects because of the lack of resources at public-sector level," says Nortjé's colleague Ben Pretorius, ACMB's specialist on public sector finance.
"We at Absa and the banking industry in general have those skills and are prepared to assist in preparing deals for the market," Pretorius says.
Underlying the lack of banking involvement is what Jonathan Wood, project finance director at Standard Bank's corporate & investment banking arm, calls "an element of mistrust of the private sector.
"There is a fear by some public servants that they will lose control if they involve private-sector players, though we stress that they call the shots through the terms of the concession agreement," says Wood.
Pretorius also notes that in some infrastructure projects government, through its public-sector corporations, is also taking on the bulk of the risk. He cites the R2bn Berg River dam project in the Western Cape, where the state-owned Trans Caledonian Tunnel Authority adjudicated the bid and, through a bond issue, raised a large share of the funding for the project.
"Government got good pricing," says Nortjé. "We participated as a banker in the R2bn loan, but we are also prepared to participate in the risks of the underlying project."
Government's planned R320bn three-year capex plan is almost equally split between social and economic infrastructure. The latter - R156bn over the three-year period - is driven mostly by Transnet, with its rail, port and pipeline operations, and power utility Eskom.
The parastatal investment expansion is likely to rely heavily on cashflow and bond market funding, so the private sector's best hope will be funding the noneconomic infrastructure such as the vast social backlog in schooling, health and housing.
As it is, financial institutions are obliged in terms of their commitment to the financial sector charter to channel a significant amount of funds - R124bn by 2008 - into a range of empowerment and infrastructure projects at less costly rates of funding than previously.
Two groups of projects are directly linked to the current capex plan by government: R42bn on affordable housing and R25bn on so-called transformational infrastructure. And R50bn has to be spent on black economic empowerment (BEE) transactions.
But a look at how the public sector plans to meet its infrastructure spending targets explains the continuing concerns about the lack of private-sector involvement in the state's implementation plan.
The MTEF for the next three fiscal years shows that the three spheres of government will continue to be responsible for the bulk of social infrastructure investment, with a noticeable emphasis on increased spending by provincial and local governments (see table).
The allocation to municipalities includes the municipal infrastructure grant (MIG) whose allocation over the three-year period now amounts to R21,2bn, according to the 2005 Budget Review. In addition, the provincial infrastructure grant, which funds provincial roads, schools and clinics, will receive R17,4bn over the three years, with a further R3bn dedicated to community infrastructure work.
In most of these cases, government will use "normal" procurement and financing methods, namely funding projects through the budget allocation and issuing tenders for contractors to bid on.
Other financing methods listed in the budget include extra-budgetary public entities, notably government-controlled development finance institutions such as the Development Bank of Southern Africa (DBSA) and the Industrial Development Corp. DBSA, in particular, has emerged as the largest funder of municipal infrastructure projects in SA, financing projects at a far cheaper rate than commercial banks. Over the past five years alone, the bank has disbursed about R16,5bn in the region .
It has been the predominant lender to local municipalities for the past 10 years - more than half of its funding goes to the municipal sector - and it has also taken on substantial but calculated risk in infrastructure projects in neighbouring countries. Its R550m bridging finance to Sasol's natural gas project in Mozambique provided the comfort for commercial lenders to come on board.
Behind this strategy, says Lewis Musasike, DBSA executive manager of private sector and international investment, is a developmental approach to funding. "We are looking for a developmental return, while ensuring the long-term financial sustainability of the bank," he says.
Because the bank funds itself predominantly from the capital markets, the pricing of its lending reflects capital market rates to which margins for overhead costs and the risks associated with the projects are added. It therefore does not charge a specific margin as would be the case for commercial lenders.
But the funding method that has got bankers most excited is the use of public-private partnerships (PPPs). The Budget Review puts the budgeted deal flow for PPPs at just more than R12bn, but this could increase now that local governments have been given the go-ahead to embark on PPPs (see story "New mechanism for delivery").
