Private SA companies are increasingly addressing the most pressing challenges faced in the energy, transport and power sectors, among others. What are the key considerations as deregulation paves the way for this trend to continue?
executive summary
The private sector will increasingly make supply chains more resilient. Infrastructure projects impact human resources because solving complex problems requires specialized knowledge. This is not only about finance, but also about good citizenship.
As the government continues to seek meaningful solutions to South Africa’s most pressing infrastructure problems, such as electricity, water and roads, it is inevitable that private companies will come to solve the country’s problems.
That’s already happening, for example, as electricity regulations and fuel regulations are eased.
However, we will inevitably see more privatization as further deregulation of state-owned services such as transport, water and waste paves the way for the private sector.
The private sector will provide increasing resilience to both private and public sector supply chains, improving the income collected from services, thereby ultimately delivering more community services overall.
SA government debt continues to rise as the revenue base is expected to decline and public spending to come under pressure in the coming years. Governments are also working on how to access, spend and manage international finance in terms of more subsidies, blended finance and other social spending. Infrastructure costs are estimated to exceed R500 billion by 2040, with energy and transport accounting for over 70% of this.
Public sector infrastructure spending is estimated to exceed R250 billion in 2022 alone and R400 billion by 2033, a 60% increase on current spending.
It is clear that the private sector has a big role to play, not only in finance, but especially in providing expertise in the implementation of much-needed infrastructure projects. An expanded role for the private sector will benefit both the private and public sectors. These include energy transition, financing and improving project profitability.
Not only do private organizations have the skills to develop a pipeline of “investable projects” with government funding, but more responsible companies are more attractive to investors. This is not just a financial issue. Public projects must be competitive to attract top talent, which increases consumer confidence and increases revenue through increased consumer spending, operational efficiency, lower costs, and higher profit margins.
The more confidence people have in a service, the more they will spend and the more funds will be available to further improve the service.
Increased private sector participation could also encourage new industries and services, such as improved recycling of plastic, electrical and textile waste.
Many South African companies are already moving ahead with privatization efforts.
For example, a major mining operator is developing and commercializing a hydrogen truck, the world’s largest prototype hydrogen-powered mine transport truck, an important step toward long-term carbon emissions reductions. The mining sector is lobbying for greater participation in the operation of key logistics corridors. Each major insurance company pays to direct traffic at broken traffic lights and repair potholes.
There are some complications.
With increasing involvement in the private sector, especially the commercial sector with greater solvency, revenues will continue to decline, so there is limited incentive for governments and local governments to change. However, this can be mitigated by concessions, “royalties” or license payments.
Cartel collusion and ownership of large-scale infrastructure services, such as the construction industry, are also headwinds, as is individual resistance through backhanding and general corruption.
Therefore, making it successful will require community involvement and self-management, which will lead to reduced crime and improved public safety. Success is based on keeping projects local so that private companies can monitor the systems and processes being implemented and make changes when and where needed.
It is also important to implement strong accountability so that informed decisions are made quickly. In particular, it is also important to understand at what point a project becomes unsustainable so that good money is not thrown after bad.
How will the private sector respond to financing needs?
According to an EY survey of South African CEOs, 66% of respondents said they are considering joint ventures and strategic partnerships with government as the best way to finance infrastructure spending. This is expected to be a combination of existing government funding and additional government funding pledged through international commitments, such as the $8.5 billion COP26 commitment. Philanthropy through organizations such as IDH, the Sustainable Trade Initiative and Afreximbank (African Export-Import Bank) will also play a major role.
The survey also revealed that 50% of CEOs say investing in early-stage businesses is their preferred funding model to strengthen their existing portfolio, access new talent and build new business platforms.
Looking at ways to leverage green assets, such as carbon credits for agricultural land or trading renewable energy production on carbon markets, is also seen as a good model for financing green investments.
Creating innovative insurance and benefits products is also key for CEOs. For example; road aid (in addition to medical aid), which allows people of means to pay at the corporate or individual level to maintain roads and traffic lights within a square mile, could be a powerful model.
Interestingly, half of SA CEO survey respondents believe that fiscal policy supports infrastructure spending. The other half don’t. However, despite the uncertainties and headwinds, most CEOs remain optimistic about South Africa.
