SA has big development plans, but infrastructure projects are stalled – why?
The South African government has said, repeatedly, that it's major focus over the next few years is going to be the National Development Plan, a plan which includes a whole bunch of infrastructure projects. However, while the country is now rich in plans to improve its roads, ports, electricity grid, and communications networks, it remains poor in actual projects to do so. According to Deloitte's JP Labuschagne, government seems to be struggling to bridge the gap between ideas and implementation. In this interview, Labuschange addresses a range of issues affecting government's infrastructure plans, including the collusion problems in the construction industry, issues financing the projects, and the government's struggle to raise tax revenues.
GUGULETHU MFUPHI: Presenting his medium-term budget speech finance minister Mr Pravin Gordhan said that more funds will be channelled into a number of priority infrastructure projects in the transport, communications and energy sectors. However, a new concern that seems to be emerging is that despite the funding, projects are not actually getting off the ground. Joining us now to share his views is JP Labuschagne, a public/private partnership specialist at Deloitte. JP, thanks for your time today. But looking at it, as mentioned just a few moments ago, that these projects are not getting off the ground, we know that we have the national development plan in place, Transnet as well is said to also spend rather large sums of money with regard to infrastructure spending, but what happens to be the delay?
JP LABUSCHAGNE: I think there's just a delay in getting from the project conceptualisation to actually get into procurement. So I think the government has identified a lot of projects, the NDP is quite specific. If you look at the strategic infrastructure programs a lot of things are on there but a lot of them are still in idea space and I think it's that shift, getting from ideas through to a pre-feasibility study, into a proper feasibility study and into construction is the delay. So I think it's from concept to a real bankable project is where the problem lies.
ALEC HOGG: And the trust? We've had a construction industry that is getting pillared even by Kokkie Kooyman just a few moments ago saying that the construction industry colluded and they're bad boys. If you're a government, do you give them any work?
JP LABUSCHAGNE: Who else is going to build it?
ALEC HOGG: I agree with you. I think that it's been horribly overdone but it's not you and I who make these decisions. It's government who makes the decision on whether or not to allow the local construction industry to have a share of this R4 trillion cake. And I'm asking is that not perhaps one of the reasons, this lack of trust?
JP LABUSCHAGNE: Possibly. I think the Competition Commission has been… I think the work that they've done was necessary. I think there were a lot of, always allegations floating around, I think there was a lot of talk before the World Cup, people were very busy between the World Cup, between the famous Gauteng highways, the Gautrain; there was a lot of business going on in construction so people were busy and had jobs, I'm not saying weren't appreciated but there was a lot of comfortable work with good margins, so I think they became fat. And I think it was important to have done that investigation and to prove what I think a lot of people suspected. But at the end that is construction in South Africa. We haven't really had a lot of overseas contractors being involved in the country, not like the rest of Africa where you've had major players by Chinese contractors, by a lot of Brazilian firms, not just in the former Portuguese colonies, but the South African industry has been relatively self-contained and possibly the question of trust is out there. But I think that's why the Competition Commission was an important thing to go through. I did see Kokkie debating; did they fine them enough? That's a different debate.
ALEC HOGG: Gugu likes the big numbers you see; she likes these billions and billions of fines. Do you know how much money R1.5 billion is? My goodness. It wipes out a lot of profits for quite a long time.
JP LABUSCHAGNE: I think especially at the moment when the construction industry is suffering. As you said, they have banked a lot of the big numbers.
ALEC HOGG: Well they've distributed to shareholders but you can't go back to shareholders and say hey, give us your money . But JP, the real story here was that we did it before 2010. The government said my goodness, all these comments about moving the FIFA World Cup to Australia, we need to take it seriously, we need to build our stadiums, and we did it three months ahead of time. Now we say we need to get the infrastructure in the ground but we're stuttering. What's the difference? Where's the hold-up? Are we not taking it seriously enough?
JP LABUSCHAGNE: I think possibly. I think everyone knows about the demand. The need is there, the demand is there, the planning is there, so all of those big picture things that government needs to put in place has been put in place. But as you said, it's now, what's the driver? I think the World Cup was wonderful because it was a real driver, unification, part of it was proving to the rest of the world that we didn't need a plan B and it wasn't going to go back to Germany, which is what everyone is saying about Brazil at the moment – what's plan B? Is South Africa now plan B? I suppose that's also helping them focus the mind because you can't afford to fail on something that big because there's a deadline that it will start. And I think with a lot of the other infrastructure projects, there's not a specific deadline, it has to be done by this day. I think maybe that helps distract people or doesn't force people to focus on what is the day it must start? We don't have that at the moment.
GUGULETHU MFUPHI: So let's get the Olympics maybe, a motivation force. But with the infrastructure spend naturally comes the need for revenue with regard to that. I understand there is already pressure with regard to tax revenue in the country, our BOD inflows are not so solid and we're losing our foreign investment appeal. Where is this money going to come from and will it be enough?
JP LABUSCHAGNE: I think the revenue one is a big challenge. I think the most depressing sign I see on the highways, SARS sign in Midrand that says 3.5 million people have paid their taxes. That's horrible. Out of 52 million people, that's all the people that are paying tax and actually I think 80% or something live in Gauteng. That's a very low tax base. Granted, it's not corporate but if that's individual taxpayers, that is a problem.
ALEC HOGG: It's a silly marketing campaign because we all pay through the fuel levy, we all pay VAT. It's just the income tax base which… I think they need to fire their ad agency but… I'm getting as bad as you. Fine them more in construction!
GUGULETHU MFUPHI: Thanks Alec, I think I'll take over now before you get us into trouble. Just with regard to public/private partnerships, are we seeing enough of that going forward?
JP LABUSCHAGNE: Yes, in certain sectors. The whole renewable energy, independent power program is a public/private partnership process. That has been incredibly successful. We have international investors, we've had a lot of growth, I think that's, quite frankly, going to be keeping the construction industry ticking over for quite a while. There are a lot consulting engineering firms involved. So yes, as a PPP, that particular program has been incredibly successful. Some of the other big things, hospitals; we've been talking about Chris Hani Baragwanath for years.
ALEC HOGG: The smaller hospitals are doing okay.
JP LABUSCHAGNE: I know the little one in Newcastle for instance – which was a provincial hospital, now Mediclinic are running it far better than in the past.
ALEC HOGG: There's been a lot of debate about what should the private sector's role be in hospitals. We have a whole private sector healthcare industry that does really well. I think it's cheaper staying in five star hotels than in intensive care.
JP LABUSCHAGNE: But that has not been translated into government effectiveness. So there are five or six hospitals identified for public/private partnerships, Chris Hani Baragwanath, George Mukhari, Limpopo, New King Edward and of course I'm going to forget the other one that I quoted, but that program is just dragging and I think this government is not quite sure how to involve the private sector.
GUGULETHU MFUPHI: JP, before we let you go, why does it seem as though this infrastructure development is, we see a lot of it taking place in the special hubs, we know Sandton, Alec mentioned just a moment ago that there are expansion projects with regard to the Sandton area, Sasol is moving its offices here. It seems as though Sandton and Rosebank, where the area is already congested, why not move out into other areas? The Gautrain is going as far as Boksburg, coming to the south in Naledi as well as Mamelodi in Pretoria. Why don't we see more development in these areas?
JP LABUSCHAGNE: I think if you look at Midrand, a lot of development is happening there. Waterfall Office Park has created a new space, a new growth area but these are just signed up by pure private sector supply and demand with no government interference or no tacit interference; there might be ineffectiveness through regular bureaucracy but it's been driven by the private sector.
ALEC HOGG: When you get it wrong you go bust. How good is that? If you get it wrong in government you say oops, sorry, wrong mistake, I'm going back to do something else tonight, maybe… you're not allowed wine anymore in government, remember? They've cut that. Pravin cut that out. But if you make mistakes in the private sector you pay heavily for it. If you make mistakes in government…
JP LABUSCHAGNE: I think one of the best industries for making mistakes and being fine is the football industry. Those managers come and go with performance and I think that's almost a direct responsibility to a team's performance.
ALEC HOGG: The free market at work. Well, it's been terrific talking with you. Thank you, JP. That was JP Labuschagne.