Why the Economic Reconstruction and Recovery Plan is likely to fail
There is a high possibility that a large proportion of funding allocated for public infrastructure investment could be wasted.
The SA economy was sluggish even before the outbreak of the Covid-19 pandemic in 2020. Annual economic growth decreased from 1.41% in 2017 to 0.79% in 2018, for example, and in 2019 it dropped further to just 0.15%.
This decline in growth had an adverse effect on public finance, including increased public debt, and resulted in fiscal consolidation. The outbreak of the pandemic simply exacerbated SA’s public finance and economic growth challenges, resulting in a significant contraction of 6.96% in 2020.
In an effort to reverse the adverse economic growth trajectory, the government developed an Economic Reconstruction and Recovery Plan with several priority interventions, including aggressive infrastructure investment. Indeed, infrastructure investment (both public and private) is one of the key building blocks to reviving economic growth and employment creation.
Public-sector infrastructure investment, which broadly covers spending on new assets and replacing, maintaining, repairing, upgrading, renovating or refurbishment existing assets, not only contributes directly to improving access to basic services but is also an enabler for private sector investment and an attractor of foreign direct investment.
When government increases investment in infrastructure in sectors such as electricity, roads and water, it increases the chances of attracting domestic and foreign investment while improving socioeconomic conditions of households. So government is spot on to include infrastructure investment in the Economic Reconstruction & Recovery Plan. However, the big question is whether it is likely to achieve the anticipated growth using the infrastructure investment intervention.
According to data from the Treasury, public-sector infrastructure spending decreased 8.5% between 2017 and 2018 (from R236.2bn to R216.2bn) and dropped a further 13.3% between 2018 and 2019 (from R216.2bn to R187.4bn), and again the following year (to R183.4bn in 2020). It started picking up again in 2021, increasing 21% to R223.6bn, and is expected to rise a further 12% to about R250bn in 2022.
This is in line with the goals of the Economic Reconstruction and Recovery Plan, but it is important to strike a balance between the construction of new infrastructure and the maintenance and rehabilitation of existing infrastructure. In the past few years the SA economy failed to grow not only because of unavailable or inadequate infrastructure, but also because of poor maintenance and rehabilitation of existing infrastructure.
For example, according to the Council for Scientific and Industrial Research, in 2019 the SA economy lost between R59bn and R118bn due planned power cuts, not only because of inadequate electricity infrastructure but also due to poor maintenance and rehabilitation of existing infrastructure.
With respect to water, in 2019 it was estimated that almost 37% of water available to municipalities was lost to them, and that 25.4% of this “non-revenue water” was due to physical leakage caused by ageing water infrastructure and inadequate maintenance. It is clear that reducing expenditure on maintenance and rehabilitation has a significant effect on the lifespan of infrastructure and negatively affects performance.
Neglecting or delaying maintenance escalates future costs of infrastructure maintenance exponentially, yet government is not currently prioritising maintenance and rehabilitation — the percentage of expenditure allocated for rehabilitation has decreased from 6.6% in 2018/2019 to 0.9% in 2022/2023.
The effectiveness and success of the Economic Reconstruction and Recovery Plan with respect to the infrastructure investment intervention, entirely depends on the ability and capability of institutions and the sphere of government driving such investment. Public-sector infrastructure investment plans and projects are implemented across the three spheres of government (national, provincial and local) and through public-sector institutions.
One of the issues to note with respect to the implementation of infrastructure projects is a movement by the government to use state-owned companies and public entities as key delivery vehicles. In 2018, state-owned companies' share of total public-sector investment was 31.2%, which increased to more than 40% in 2021. However, it is a matter of record that key state-owned companies have failed to deliver on their mandates, reporting net losses and high levels of irregular, fruitless and wasteful expenditure. This poor performance signals a high possibility that a large proportion of funding allocated for public infrastructure investment could be wasted.
So, while government’s Economic Reconstruction and Recovery Plan correctly identified aggressive infrastructure investment as a key intervention, in the absence of comprehensive and credible turnaround strategies and governance improvements, this is unlikely to yield the hoped for results if the state-owned companies are the main delivery vehicles.