South Africa’s growing investment crisis threatens growth and infrastructure: Katzenellenbogen

Key topics:

• Investment in South Africa is critically low and continues to decline

• Poor state spending and red tape hinder infrastructure and private investment

• Without major reform, growth will stay weak and infrastructure will decay

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By Jonathan Katzenellenbogen*

Investment in South Africa is critically low and falling, and this will increasingly depress our already almost flat economic growth rate. Despite government promises, prospects are bleak for investment in infrastructure and other forms that are key for future growth.

Late last month, the Reserve Bank reported further drops in investment over the past three quarters.

With low rates of investment and massive backlogs because of years of neglect, there are signs that South Africa is in for a long decline. We certainly see it in Johannesburg, where there is pervasive decay, pavements are neglected, and roads are riddled with potholes. Most robots do not work.

South Africa’s problem has not only been the low overall level of investment as a share of GDP, the output of goods and services in our economy, but also the poor quality of state spending. Our gross fixed capital formation, a key investment type which drives growth, was below 15 percent of GDP.

Fast-growing emerging markets invest at multiples of this rate.  In recent years, China has invested at a rate of between 40 and 45 percent of GDP. India tends to invest at around 30 percent of GDP. Even Turkey with its economic problems invests around 25 to 30 percent. 

Without a far higher level of gross fixed capital formation, we have no chance of substantially pushing up our growth rate from its current miserable level of around one percent a year to anything substantially higher.

Gross fixed capital formation is the investment in fixed assets that can be used for production such as machinery, buildings, all sorts of infrastructure, and software. If this is insufficient, growth potential declines. And if projects are poorly selected and badly managed, debt is built up to finance these, but there is a strong chance of later repayment problems.

South Africa suffers from massively insufficient levels of gross fixed capital formation and poor spending by central and local government and state enterprises. The IMF has for years pointed to the decline in our growth potential due to the drop in our total factor productivity: the combination of labour and capital productivity.

Magic source of growth

This is the magic source of growth. The reasons for the drop are largely mismanagement of investment projects by the state-owned enterprises, and too much red tape and bad regulation.

The contribution of gross fixed capital formation to GDP in SA has been mostly on the decline since the late 1970s.

On the back of strong gold and commodity prices, the ratio of gross fixed capital formation to GDP in 1976 was more than 32 percent. With the fallout from the Soweto uprising and international economic sanctions, the country did not have full access to international capital markets, and with that, investment began a long downward trajectory. The state borrowed heavily abroad to finance the expansion of Eskom. That paid off until about 2008, when the result of poor maintenance and insufficient power capacity became apparent.

By 2002, gross fixed capital formation as a share of GDP had more than halved, to little more than 15 percent. After the longest business-cycle upswing on record and an upsurge of more than seven percent in investment, the ratio rose to nearly 24 percent. Then in 2019 the ratio fell to below 18 percent, and by 2021 during the Covid epidemic it slumped to just 13 percent. There was a slight recovery over the next two years, but then a slump returned last year, and the outlook for this year does not look good

The private sector, responsible last year for about two-thirds of this sort of investment, has lost confidence. Central and local governments are big on talk, but small on implementation. Big listed South African companies are sitting on about R1.5 trillion, about 20 percent of GDP, in near cash, much of which they could use for investment. But they worry that red tape, general difficulties in doing business like bottlenecks in the transport system, particularly at ports, and low growth will undermine returns for shareholders.

In recent years there has been massive investment in solar panels and generators, to make up for the failure of Eskom. But until recently manufacturing investment has been through a long decline, highlighting our gradual de-industrialisation.

Minimal reform, extensive corruption, and the activities of various mafias across the country make it difficult to invest in many sectors, and reduce returns for business and the contribution to growth.

Surrounded by decay

Many state-owned enterprises are in distress. With qualified audits on their annual reports, we do not really know the reality of their financial state. Without this sort of growth-generating investment, much of it a state responsibility as compared to investment in the stock or bond market, we will face transport and port bottlenecks, roads with potholes, collapsing bridges, overcrowded schools, and a future surrounded by decay.

In his Ten-point Economic Action Plan to revive growth and tackle unemployment, unveiled after the ANC National Executive Committee’s special meeting over the weekend, President Cyril Ramaphosa promised, “a year of renewal.” The plan is aimed at spurring growth and lowering unemployment. It includes a R1 trillion (about 14 percent of GDP) infrastructure investment drive.

In the national Budget presented earlier this year, there was also a massive investment drive. The problem is that the state has again and again demonstrated big ambition, but little ability in actually implementing infrastructure programmes.

There has been a considerable underspend, and when there is big spending, there is also big corruption and big implementation problems. The ANC has forever been big on plans, but far short on action, particularly on infrastructure investment.

Allowing private-sector investment in power generation is making a significant difference, and this is the largest reason for the absence of power cuts, rather than improvements in Eskom alone. The private sector must also be allowed to invest in and run the railways and ports, not on a type of pilot-project basis as at present, but adequately. But the ANC just won’t let go, and if it does not let go, we will continue to be hamstrung.

Investment-recovery policies

South Africa’s better think tanks, economists and opposition parties should soon be turning their minds to investment-recovery policies for a post-ANC dominated coalition. That just might happen at the next national election.

After more than 30 years of ANC rule, the country has an enormous infrastructure backlog which needs to be addressed, if we are to grow at an even reasonable rate.

Thinking through an investment plan for reconstruction from ANC devastation should become a priority.

*Jonathan Katzenellenbogen is a Johannesburg-based freelance journalist.

*This article was originally published by Daily Friend and has been republished with permission.