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JIMMY MOYAHA: As David Shapiro highlighted, Investec has released its Fixed Investment Outlook report. This document underscores the essential focus on infrastructure needed for South Africa’s growth, particularly as we look toward 2025 and beyond.
I’m pleased to welcome Investec’s chief economist, Annabel Bishop, to discuss this topic and its implications. Good evening, Annabel. It’s great to have you with us. Wishing you all the best for the year ahead.
The year has started strong regarding research and insight. While these conversations have been frequent, the emphasis on fixed investment is now stronger than ever. Why is that the focus for this year?
ANNABEL BISHOP: Hi, and Happy New Year! At this crucial moment for South Africa, it’s vital that we stop allowing our economy to lag. Such stagnation impacts employment directly, particularly in relation to fixed investment.
The challenges are well-documented. Various diagnostics have pinpointed the obstacles we face surrounding fixed investment, including infrastructure deficits, economic stagnation, and unemployment issues.
While it has taken time, we must now initiate efforts to repair, maintain, and importantly, improve our infrastructure delivery in South Africa.
JIMMY MOYAHA: When we discuss infrastructure, we need to consider both capital and social aspects. For instance, the water scarcity crisis in South Africa demands urgent action as part of necessary social spending. While these issues are critical, how can we strike a balance with the need for capital infrastructure to drive growth?
ANNABEL BISHOP: That’s a key point. All types of infrastructure are important.
As you mentioned, South Africa faces water scarcity, with rainfall at just half the global average. Coupled with high evaporation and limited potential for additional water resource development, managing our water delivery infrastructure is crucial. Currently, three-quarters of our exploitable surface water resources are already in use.
In addition to water supply, we need to focus on delivery systems like pipelines and overall infrastructure. Unfortunately, our national bulk infrastructure has deteriorated.
Read: Johannesburg needs R221bn for infrastructure repairs
Furthermore, Transnet is experiencing significant delays at ports, which is concerning, particularly as we observe a consistent decline in freight levels. The railways had a brief moment of positivity last year, yet since 2022, we’ve seen a troubling downward trajectory in freight transport.
Listen/read: Transnet costs the SA economy R1bn daily
Efficient freight transport is crucial for South Africa, making rail the more affordable option, particularly when considering road and highway maintenance costs.
To boost productivity and achieve a GDP growth rate exceeding 5%, which would improve employment and reduce unemployment, we must enhance our infrastructure.
Our current infrastructure simply cannot accommodate the existing level of activity.
JIMMY MOYAHA: Concerning that ambitious 5% growth target, achieving it seems possible if we can align our strategies properly.
In line with the discussed infrastructure initiatives, various government entities have indicated that new projects are on the horizon. How do we ensure that we maintain current infrastructure to meet existing demand while simultaneously investing in new projects to foster growth?
ANNABEL BISHOP: That’s indeed a critical concern. We have to maintain and enhance the capacity of our existing infrastructure while also investing in new projects to spur rapid economic growth.
According to the presidency, if Transnet had been fully functional, South Africa could have seen a 4% economic growth last year and in 2023, rather than nearly 1% growth.
For example, consider a mining company that produces minerals and metals. If they cannot export their products efficiently, production will need to be scaled back, leading to potential workforce reductions due to stockpiling issues.
We have seen recent setbacks with companies like ArcelorMittal.
Read: ArcelorMittal SA sees a 27% drop following plant closures
While it’s promising to see signs of improvement in the electricity crisis, as noted by the presidency, we must remain cautious about potential load-shedding episodes.
The challenges faced by Transnet are complex and not as straightforward to address as those encountered by Eskom.
Eskom has been able to leverage the expertise of original equipment manufacturers to restore power stations to their full capacity. However, Transnet confronts a wide-ranging railway network plagued by issues such as infrastructure vandalism and theft.
One possible resolution is to ban scrap metal exports to deter criminals from dismantling and selling critical infrastructure components.
Read:
Navigating a long-distance freight train ‘blind’
It could take R80bn and a decade to repair Transnet’s core rail network
It’s vital that South Africa’s infrastructure strategy emphasizes segmenting Transnet’s operations into specialized units and improving regulatory clarity to assure private-sector investors about their returns and associated costs.
However, it is also essential to evaluate the current rail infrastructure’s capabilities to accommodate new operators and services.
In conclusion, we must take action against crimes that dismantle crucial infrastructure, establish regulatory certainty, and encourage private sector investment.
JIMMY MOYAHA: From a private sector perspective, what approaches can we adopt to attract investment?
For a long time, South Africa has been promoted as a prime destination for foreign investment, particularly stressing the necessity for capital to fund infrastructure projects.
How can we improve our appeal to capital markets for these initiatives, especially in light of the associated costs?
ANNABEL BISHOP: Ultimately, the key factors to consider are risk and return.
What risks do these investments carry, and what returns can investors expect? Greater certainty around these matters will lead to increased investments from both foreign and domestic sources in South Africa’s infrastructure.
Regulatory clarity is essential.
Private investors need a clear understanding of the landscape and how they can operate profitably.
For instance, uncertainties surrounding the railway system can complicate operations. If there is a considerable increase in rolling stock and transport activities, operators require guarantees regarding rail capacity and avoidance of delays at ports, which currently significantly affects profitability.
Thus, resolving port-related issues is critical to reduce congestion and promote smoother operations, potentially requiring additional infrastructure development.
This situation encompasses numerous interconnected factors. It is quite complex, and one should anticipate that challenges relating to Transnet may persist longer than expected.
On a positive note, we do anticipate economic growth for this year.
While there is no cause for despair, we project a GDP growth of 1.8%, compared to last year’s 0.8%.
This improvement will arise from enhancements to South Africa’s infrastructure, including advancements in water systems to capital investments in rail and ports.
It’s also crucial to not overlook ongoing developments in electricity generation and distribution, especially the expansion of transmission networks across South Africa.
JIMMY MOYAHA: While the outlook is not entirely dismal, it’s uplifting to hear the positive expectations for the year ahead. The projected growth of 1.8% is still below our potential, but it is attainable if we unite our efforts to drive progress.
Thank you, Annabel, for your valuable insights. That was Annabel Bishop, chief economist at Investec, sharing her thoughts on the infrastructure and fixed investment outlook, which could catalyze sustainable economic growth in South Africa.
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