South Africa: How infrastructure spend will drive growth - Malusi Gigaba

15 February 2012 | February 14, 2012

Prepared speech by Malusi Gigaba MP, Minister of Public Enterprises, on the occasion of the State of the Nation Debate in the National Assembly, February 14 2012.

Excerpts on infrastructure:

...The vision advanced by the President beckons us to pursue a growth-enhancing economic response path that places at the core infrastructure development and directly deals with structurally-entrenched industrial weaknesses - amongst those is investment in social and economic infrastructure.

...The State of the Nation Address (SONA) is predicated on the government's willingness to correct capital market failures through infrastructure investments as a mechanism to facilitate economic transactions.

As outlined by the President, the State-Owned Companies are but one of the vehicles for the achievement of the national objectives.

This programme outlined in the SONA could potentially position South Africa as manufacturer of capital and intermediate goods through investment localization programme.

The programme seeks to meet a global demand for our natural resources, exploit economic opportunities in various routes and present a new opportunity for in particular the manufacturing industry to create downstream linkages while the electrification programme is responding to our growing economy and ensure the security of supply, with a long-term of objective of reducing carbon foot print by 2030 and building technical expertise that could be converted into a national assert for global south electrification programme.

Already through the construction of Kusile and Medupi power stations, the socio-economic impact of Eskom in these communities is massive.

The next step is to encourage provincial and local governments to use the technical capacity created by this investment to stimulate local economic development.

By its nature, the developmental state is the manager of strategic sectors of the economy and re-allocation resources to productive sectors.

Infrastructure is critical for South Africa to break free from the minerals complex economy and diversify - build a dynamic economy.

We believe that through the public infrastructure programme, we are not only testing our ability to facilitate cross pollination between public and private sector, but will be writing a growth story that is unique to the South African context.

In that regard, Government is determined that it should provide the leadership requisite for infrastructure roll-out to take place, including through resolving all bureaucratic impediments to the speedy and successful implementation of projects.

For example, we have acted swiftly to eradicate the obstacles that might impede the implementation of the coal corridor expansion from Waterberg, by engaging our Swazi colleagues at Ministerial Ministers in the Cabinet understand it that the successful implementation of these projects is not merely the responsibility of the relevant SOCs, but they are taking the lead.

Furthermore, we understand that the Department of Public Enterprises must intensify its focus on its three functions as the shareholder, stakeholder and change manager.

The issue of organisational capacity requires that we continue to pay attention to the strength of our SOCs, their internal leadership capabilities as well as financial viability.

With regard to Transnet, the Company has a solid leadership and has been enjoying positive results recently, which have strengthened its balance sheet and enabled it, as the President announced it, to review its capital expenditure from R110 billion in 5 years to R300 billion in 7 years.

This emboldened capital expenditure is intended to satisfy validated demand and more importantly to shift the Transnet capex spend away from focusing on investment backlog, as is currently the case, towards expanding capacity to meet market demand by enabling volume growth, capturing operational efficiencies, expanding funding sources and expanding South Africa's economic transformation by supporting the New Growth Path.

The focus on this Market Demand Strategy is on GROWTH, in order to reposition South Africa as a key global coal iron and manganese supplier, as well as the leading logistics hub for Sub-Saharan Africa and global reference for container and heavy haul operations.

This will make Transnet one of the largest employers in South Africa, one of the top 5 global freight railways and one of the top 5 South African companies in terms of revenue.

Its overall headcount will grow by 25% by 2019 from 59,192 currently to 73,962, whilst indirect jobs are estimated to increase to 194,383.

R7.7 billion will be spent on training over the next 7 years to up-skill workforce and the intake of apprentices will increase from 500 per annum to 886 per annum by 2019.

The purpose of this MDS is to reduce the cost of doing business and facilitate job creation, localisation and regional integration. R31 billion will be spent on local suppliers for locomotive spend over 7 years.

The investment for the revitalisation of the rolling stock fleet is R125 billion over 7 years.

Of course, this strategy is financially sound and most of the growth will be internally funded, off Transnet's strong balance sheet and only a third of this will require external funding.

In implementing this strategy, opportunities for Private Sector Participation amounting to about R5 billion in various segments such as containers, dry bulk, break bulk, liquid bulk and automotive will be pursued.

Further private sector participation will also be pursued towards the construction of the dig-out port at the old Durban International Airport.

In addition to this, Transnet has been in extensive discussions with the Regulator on the issue of port tariffs to effect, as the President indicated, a R1 billion rebate for exporters of manufactured goods for the 2012/13 financial year mindful of its mandate to assist in lowering the cost of doing business in South Africa, enabling economic growth and ensuring security of supply through providing appropriate port, rail and pipeline infrastructure in a cost effective and efficient manner, within acceptable benchmarks.

Accordingly, we expect that the Ports Regulator will issue the Record of Decision/tariff decision, which will be effective from 1 April 2012.

The automotive sector is one of the key customer segments that will benefit from the 'rebate'.

In this regard, Transnet signed an agreement with Toyota on the 14th December 2011 to rail all its cars from the Durban Harbour to Gauteng, and from their Prospecton manufacturing plant to the Durban Harbour for exports and to do other value-added services inland and in Durban.

Further to this, Transnet will create additional container handling capacity, pmeet the demand. R12bn will be invested to expand the Richards Bay Terminal and a coal terminal will be constructed in the East London Harbour to support coal mining in the Eastern Cape.

In addition, Ngqura will finally be officially opened by the President on 16 March 2012, to be positioned as a trans-shipment hub.

It is important to continue operating the container terminals as a complementary system in order to optimise the volumes that can be handled through the SA port system.

At the same time, after engaging NERSA, Eskom should be able to report to the President, Government and the public within four weeks about the electricity pricing path favourable to economic growth and job creation.

 Notwithstanding the fact that we still have a tight system for the next year or two and are taking steps to create space to catch up on maintenance and reduce security of supply risks, Eskom is robust enough financially and operationally look at some flexibility in how it funds and spends it capital and to introduce internal efficiency measures not previously possible.

Because of this, the company has refined its capital expenditure numbers, re-evaluated its debt funding approach and performed a detailed interrogation of the future energy demand forecast to enhance its accuracy.

For this to happen,

We must manage the electricity demand and all South Africans must work together to reduce their electricity consumption by 10% through more efficient usage, in which regard we will need a pact, especially with big business in this regard to use electricity more efficiently to reduce consumption, but hopefully to maintain current production levels;

We will also need to gain more certainty around Eskom's input costs, especially coal price increases over the next 5 years and a pact will be needed with its suppliers of coal to limit price increases to the absolute minimum preferably in the single digit percentages year-on-year; and  Eskom will also need to engage with ratings agencies to ensure that its investment outlook remains stable. In this light and to provide more certainty to the investor community, Eskom might have to revise its price path going forward without jeopardising its commitments.

The Medium Term Risk Mitigation Plan shows that the electricity supply/demand balance will remain tight until both the Medupi and Kusile power plants begin operating.

In the interim, efforts are needed from all sectors of society to ensure that the balance is maintained and load shedding does not happen. We are determined that load shedding can be prevented if businesses, households and government work together to implement supply and demand measures, creating a safety net that can see the country and the economy through this period.

The existing generation maintenance plan and system outlook underline the constraints on the system, with growing risks for plant performance and safety.

In addition, high temperatures are affecting the operation of dry-cooled power stations (up to 1 000 MW), while imports from Mozambique's Cahora Bassa facility have faltered as a result of the delay in investment in the converter station at Songo.

Deferring maintenance is no longer an option to manage supply and demand. The maintenance programme will be implemented, which requires other supply and demand levers.

Additional capacity of 3 000 MW is needed to ensure a comfortable reserve margin so that there is no load shedding, that the generation fleet is adequately maintained (to meet statutory and safety standards) and to secure sustainable long-term performance.

Preparation for a mandatory Energy Conservation Scheme needs to begin immediately and the needs to be maintained until December 2013, with a savings target of 10 percent.  South Africa aims to "keep the lights on" and prevent rotational load shedding. These goals are non-negotiable.

The current instability in operating the power system is not acceptable. We need to move from crielectricity, with scheduled windows for maintenance.

This moment calls for responsible citizenship on the part of individual and corporate citizens in South Africa.

Towards this effect, we are implementing the 49M Campaign aimed at mobilising individual South Africans to save electricity in their households.

Eskom cannot do this alone!

To achieve these objectives an emergency plan has been developed between the Department of Public Enterprises and Eskom for consideration and approval of Government. We are cooperating with the Department of Energy and other stakeholders on these plans.

Read the complete speech...

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