January 24, 2018

Infrastructure spend – myth or magic?

 

 

Dave van der Merwe

 Driving around South Africa over the December holidays, there are visible signs of infrastructure investment. These include new wind turbines, completed roads, housing developments, rural clinics, railway construction, bridges and power stations). It would therefore appear as if infrastructure spending is happening and is not a myth.

So why do we read headlines or hear radio commentary that the government expenditure is not happening?

A valid question could be whether the public is just being misled.

It is often heard or quoted that if only government would start spending on the billions quoted in both the South African National Budget and the Medium Term Budget Policy Statement, then we would see both dramatic growth in job creation and increased spend in the construction industry.

The 2014 budget speech refers to public infrastructure investment of R847 billion over the next 3 years under the heading of infrastructure investment. The medium-term expenditure framework (MTEF 2014) does not mention a specific amount for infrastructure investment, but this spend is included under headings such as economic infrastructure, housing development, education, health, water supply and transport

From the MTEF and the budget we understand that the infrastructure spend includes both government consolidated expenditure and the spend from state owned enterprises such as Transnet and Eskom. The specific types of infrastructure spend includes for example power stations, Metrorail coaches, locomotives, dams, schools, housing, roads and hospitals to name but a few

The MTEF 2014/5 splits the economic classification of the consolidated government expenditure, and from this we learn that circa a third ( about 34%) of government expenditure is on compensation of employees

According to Stats SA, meanwhile, the revenue for the construction industry in 2013 was about R302 billion.

The annual infrastructure investment is about R282 billion. Included in this value is

    • Imported equipment (e.g. locomotives and coaches)
    • Under-spent budgets (noted as a concern in the budget and the national development plan)
    • Compensation for the government portion of the infrastructure investment spend

I will make an indicative assumption that the real impact on non-government jobs and the construction industry is approximately R140 billion.

The conclusion is that spending is less than 50% of the annual construction revenue as indicated by Stats SA. And that infrastructure investment spend is already included in the revenues of the various construction companies (public or private).

Using the current infrastructure investment levels and indicative assumptions it is apparent that:

  • The impact on job creation (either through the expanded public works programme or the construction industry) will not show dramatic growth
  • The impact on the construction industry in South Africa is not as material as it is made out to be, and is unlikely to dramatically increase in the medium term

It is apparent that for either dramatic job creation or domestic construction growth to occur, a fundamental step change is required. Given the various pressures on the consolidated government expenditure, the 2015 national budget is unlikely to be the panacea that everyone is hoping for.

In conclusion, there is no myth, but similarly no magic. The South African construction industry and related manufacturers will have no choice but to expand elsewhere into new markets. Look north, Africa beckons.

Sources

South African Treasury http://www.treasury.gov.za/documents/

Stats SA http://beta2.statssa.gov.za/?page_id=1854&PPN=P0021&SCH=6085

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