financial mail page 1 -15/06/18 03:10:03 pm · decision making, and the re-intro-duction of an...

Financial Mail -15/06/18 03:10:03 PM


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The DBSA is dedicated to improving the quality of life of people through infrastructure

development. That’s why we are proud to have played a key role in South Africa’s

ground breaking Renewable Energy Independent Power Producers Procurement

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that more households across the country have access to electricity.


Thursday June 21, 2018 3

OVERVIEW

S A’s infrastructure:

the highs and lowsThe country is faced with a mixed bag of challenges and opportunities

ý Every citizen has a direct inter-est in the condition of the country’sinfrastructure, from its roads,transport system, clinics, hospitals,schools, water, sanitation andwaste management, to its telecom-munications and energy require-ments. Without sufficient infras-tructure the ability of the economyto function is seriously jeopardised.

However, as an expensive asset,once developed it requires ongoinginvestment in maintenance toensure it is functional for as long asp o s s i ble .

Government is the single largestdeveloper of infrastructure projectsin SA, with the bulk of its invest-ment going to the transport andenergy sectors, though criticalwater shortages are making waterresource investments a priority inmany provinces. SA spends aboutR300bn annually on infrastructurewhich is planned, delivered andmanaged primarily by the state inthe form of state owned enterpris-es (SOEs), provincial or municipale nt it ie s .

By their very nature infrastruc-ture projects open themselves upto fraud and corruption, given thatthey involve enormous sums of

money and typically have long leadtimes. This propensity for corrup-tion is made worse because moststate-owned infrastructure deliv-ery organisations are poorlyequipped with the requisite engi-neering, technical and planningskills typically required to enablean efficient infrastructure project.

The World Economic Forumranks the quality of SA’s overall

infrastructure in 72nd position outof 137 countries — roughly in themiddle of their ranking. Saice (TheSA Institute of Civil Engineering) isless complimentary.

Its 2017 Infrastructure ReportCard for SA awarded the country’spublic infrastructure an overallgrade of D+. A “D” rating wouldindicate that overall, the country’sinfrastructure is at risk of failure, isnot coping with demand and ispoorly maintained. The report —while mindful of the efforts thathave been made in the past 20years to provide infrastructure tothe country’s poorest citizens —

focuses attention on insufficientengineering capacity within thepublic sector.

This was borne out by the latestconsolidated municipal audit,released last month, which report-ed that local government — w it honly a few exceptions — is over-spending and underperforming.The audit, according to auditor-general Kimi Makwetu, showed anoverall deterioration, with account-ability continuing to fall and gov-ernance a significant issue with bil-lions in irregular expenditurereported. A staggering one in threemunicipal councils are dysfunc-tional, meaning that they might notbe able to continue operating,while 11 are under administration.

The inability of local councils tomanage their finances has a rippleeffect on other utilities. Debt-riddenmunicipal councils are unable topay Eskom — Eskom is owed closeto R14bn — and water utilities, withthe result that the utilities them-selves fall deeper into debt.

The most significant backlogs ininfrastructure delivery are inwater, housing, transport and ener-gy. However, other sectors alsoface backlogs.

Little investment is being madein educational infrastructure as thedepartment of education focuses itsattention on ensuring improvedoutcomes. Many provinces, saysJonathan Cawood, capital projects& infrastructure leader for PwCAfrica, suffer not only from short-ages and lack of fitness for purposeof schools, but also challenginglocations in relation to demograph-ic and geographic shifts as peoplemigrate from rural and peri-urban

What it means:

For the country to meet its

economic growth targets and

provide basic services, SOEs

need a reviewed plan of action

infrastructurespecial report

Paul Semple: Infrastructure investment

needs to deliver an enabling environment

with proper skills and expertise

Jonathan Cawood: Geographic and

demographic shifts pose new challenges in

the sector

Johann Els: Infrastructure spend tied to

quality economic growth

Kwabena Malgas: More bankable

infrastructure projects needed for available

funding

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Thursday June 21, 20184

areas to cities and towns. “The r eare huge legacy challenges inaddressing these problems — a ndno quick and easy solutions,” hes ay s .

The country’s poor rate ofinfrastructure delivery is well doc-umented: projects frequently misstheir completion dates and runover budget. More than half of allprojects don’t have future mainte-nance plans after completion,which affects the assets’ life cycle.

Inadequate contract manage-ment at appointment stage, cou-pled with a burdensome regulatoryframework for the broader supplychain management process andproject overruns in the public sec-tor have resulted in a reduction ofavailable funding to maintain exist-ing infrastructure as well as devel-op new infrastructure.

This failure to maintain theco u nt r y ’s infrastructure assets,says Johann Els, head of economicresearch at Old Mutual InvestmentGroup, is costing the country byeroding the capital base. “SA willhave to start spending more oninfrastructure if we want to seehigher and better-quality economicg r o w t h ,” he says.

A large part of infrastructureinvestment in SA is done by SOEs.Despite the fact that the finances ofmost SOEs are in a precariousposition, Els believes foreigninvestors have sufficient faith inpublic enterprises minister PravinGordhan and his efforts at rootingout corruption and turning theseentities around to give them suf-ficient time to sort out their prob-le m s .

Poor technical & planning skills

There is a strong relationship overthe long term between infrastruc-ture spend and economic growth,says Cawood. “We estimate thatevery R1m spent on constructionactivity translates into an additionalR0.22m in GDP and the creation ofalmost three jobs.”

Spending on the right infra-structure requires effective plan-ning, co-ordination and foresight,he says. However, one of thebiggest reasons for the country’sinfrastructure backlog is the dearth

of technical skills at nearly all enti-ties responsible for infrastructuredelivery in SA, says industryorganisation, Consulting EngineersSA (Cesa) president Neresh Pather.Compounding this dearth of tech-nical skills is the lack of an infras-tructure directorate at nationaltreasury, with the result that thereis no one organisation takingresponsibility for implementingand monitoring compliance ofinfrastructure procurement.

Cesa says one of its key objec-tives for 2018 is to improve plan-ning in the public sector, ensureappropriate technical skills are inthe public sector for infrastructuredecision making, and the re-intro-duction of an infrastructure direc-torate. Cesa represents around 560member companies.

Critically, says Pather, publicsector procurement needs to beencouraged to move away from itscurrent focus on lowest cost to avalue-for-money proposition.

Major public sector projects

A constrained fiscus means it isunlikely government will be able toincrease its investment in infra-structure development in the shortterm. Its focus on social spending,debt-ridden SOEs and their ongo-ing loan requirements, the highcost of public sector salaries andweak revenue growth means gov-e r n me nt ’s infrastructure budget islimited and will continue to beco n s t r a i ne d .

Delivery of large, complex con-struction projects could also befurther challenged as a result of theunbundling of some of the largeconstruction firms, says Cawood.

Private sector investment

Private sector investors remainwary of investing in public infra-structure projects despite the res-ignation of former president JacobZuma and the appointment of theapparently more business-friendly,Cyril Ramaphosa. Left-leaningrhetoric around nationalisation andland expropriation without com-pensation has resulted in manypotential investors adopting a waitand see approach.

What the private sector

requires, says Cawood, is morecertainty around policy and regu-lation in key sectors, includingmining, energy and agriculture.“Private capital — including institu-tional investors and pension funds— looks for secure returns,” hesays. “They still perceive risk asso-ciated with political and policyuncertainty, unionised labourdemands, accountability, trans-parency and bureaucratic obsta-c le s .”

One notable exception is SA’sRenewable Energy IndependentPower Producer Procurement(REIPPP) programme, an initiativeto support the expansion of privateand institutional investment intothe renewable sector. Offering asignificantly reduced risk profileand stable returns, renewableenergy projects are proving to beattractive to both local and inter-national investors. In their favour isthe fact that a clear regulatoryframework is in place.

There is a global trend apparentin both mature and emerging mar-kets for the increased use of pub-lic-private partnerships (PPPs).However, while PPPs may be aviable alternative to state-onlyinvestment, they are not necessar-ily the answer for all infrastructuredevelopment and should not be asubstitute for public sector deliv-ery, says Cawood. “PPPs are bestapplied when an injection of pri-vate capital or scarce and spe-cialised skills are required; orwhen state capacity is limited,competition and efficiency arerequired; or if there is a clear com-mercial proposition which deliversvalue for money.”

Essentially, he says, there needsto be clarity on who will pay, thatit ’s affordable and that each partybears the risks they can best man-age or mitigate.

Commercial banks vary in theirrisk appetite for the financing ofinfrastructure investments.Kwabena Malgas, a transactor inthe infrastructure finance team atRand Merchant Bank, says thoughthere are funds available for thefinancing of infrastructure projects,there is a shortage of bankableprojects, particularly in the rest of

the continent. Bankable fundingprocurement structures that haveworked well are those employedin the PPP framework, where thereis strong government support andinvolvement with government andthe private sector working togetherto procure and meet public andsocial infrastructure needs.

From a project finance perspec-tive, he says, banks typically strug-gle to finance projects where thereis a lack of accountability and apredefined, clearly projected rev-enue line.

In the past few years, only ahandful of PPPs have reachedfinancial close. Futuregrowth AssetManagement portfolio managerPaul Semple believes one of thebiggest challenges facing newinfrastructure investment is thecorresponding need to deliver anenabling environment.

The exodus of skilled resourcesfrom national government leveldown to municipalities meansthere are less people available toassess, approve and facilitate newprojects. Investors also continue toface unnecessary bureaucratic reg-ulatory hurdles. “There is a needfor increased mentorship and skillstransfer in areas of governmentwhich deal directly with privatesector investors,” he says.

Funding gap creates

opportunities in Africa

There are significant opportunitiesfor PPPs to provide long-termfunding for African infrastructure,says Nazmeera Moola, co-head ofSA & Africa fixed income atInvestec Asset Management, giventhat Africa requires at leastUS$93bn in infrastructure invest-ment per annum, with an estimat-ed infrastructure funding gap of$31bn per annum.

However, these types of pro-jects need long-term investorswho can stay invested, typically for15 - 20 years. Despites the chal-lenges, Moola says viable, bankableinvestments in Africa are availablewhile the shortage of traditionalsources of funding is an opportu-nity for private sector funding to fillthe gap and to make good long-term returns. x

special report infrastructure

Financial Mail -7 -15/06/18 03:12:28 PM

Thursday June 21, 20186 Thursday June 21, 2018 7

ý The construction industry hasbeen having a tough time over thepast few years as the number ofprojects has fallen, leading to weakgrowth in activity, worsened bygo v e r n me nt ’s tendency to divideprojects into smaller parcels tosupport emerging SMMEs.

The majority of constructionprojects in Africa — between 57%and 90%, according to Deloitte’s2017 “Africa Construction Trends”(ACT) report — are owned by gov-ernments, indicating the impor-tance of their role in providing crit-ical infrastructure. SA is no excep-tion to this. However, the country’slack of economic growth hasresulted in a revenue shortfall,which means there are only lim-ited funds available for infrastruc-ture development. The result is thatmany proposed infrastructure pro-jects have been delayed.

These factors have all combinedto significantly slow down activityin the construction sector. Theconstruction sector experiencednegative growth in 2017 of -0.3%,according to GDP data released byStats SA, with confidence plum-meting to a 17-year low.

The reality is that there are justnot enough projects to go around.According to figures released bythe SA Reserve Bank, a total ofR297bn was spent on construction

infrastructure in 2017. This figureincludes investment in residentialand nonresidential buildings andconstruction works.

One of the few governmentsectors to be issuing contracts isSanral (SA National Roads Agency)though its proposed new tenderprocurement requirements —which demand 51% black owner-ship for prospective bidders — is ofconcern to listed companies aswell as international constructionfirms, many of whom battle tomeet this criterion.

The slowdown in the construc-tion sector has in part been blamedon government’s inability to plan,manage or execute infrastructureprojects correctly. Neresh Pather,president of Consulting EngineersSA (Cesa) says government’sinvestment in infrastructure is notbeing spent effectively, largely as aresult of poor planning and a pro-curement system which recog-nises only the lowest cost ratherthan overall value-add.

As government cuts back oninfrastructure spending, compe-tent, long-term planning is evenmore critical, he says.

Private sector investment inthe industrial and residential build-ing sector has been similarly lim-ited for the past few years, exertingfurther pressure on the construc-

tion sector, which has placed anumber of companies on a precar-ious financial footing.

As a result of the VoluntaryRebuilding Programme, which sev-en listed construction firms agreedto after an investigation into cartelconduct, a number of merger dealshave been proposed, which honourtheir agreement that 40% or moreof their construction businessesare sold to black construction

co mp a n ie s .To this end, Raubex formed an

alliance with Umso Constructionand Enza Construction; StefanuttiStocks, TN Molefe Constructionand Axsys Group merged; andWilson Bayley Holmes-Ovcon(WBHO) formed an alliance withEdwin Construction, Fikile Con-struction and Motheo Construction.

One of the better positionedconstruction firms is WBHO,which has adapted its businessmodel to operate sustainably inboth good and bad cycles and con-tinues to outperform the belea-guered local construction industry.

WBHO was one of the onlylarge construction firms to reportan operating profit last year. Itsgrowth, however, was the result ofbeing awarded a number of largeprojects in Australia and growthfrom the rest of Africa. Even thiscompany, however, is finding thegoing tough locally, as buildingrevenues contract and marginscome under pressure. Many of itscompetitors have fared less well.

Group Five reported an operat-ing loss of more than R700m forthe six months ended December2017, primarily as a result of itsloss-making construction division.In April this year the companyannounced that it had securedR650m bridging finance from aconsortium of funders and was inthe process of a drastic restructur-ing, which will result in it ultimate-ly selling the majority of its stake inits construction business.

In December 2017 Basil Read’sfortunes were not faring muchbetter, with its auditorsannouncing that they wereuncertain about its going con-cern status, considering thatits liabilities significantlyexceeded its assets and cash.Its biggest losses were occur-ring in its roads division, fol-lowed by construction losses.The company managed tosecure R150m in bridging

finance and an 18-month debtstandstill. It has since managed to

raise R300m capital, repaid its

debt finance and reduced its netdebt by around a third.

JSE-listed construction compa-ny Aveng reflected similar losses inDecember 2017 with gross debt ofmore than R3bn.

In April the companyannounced that it would be imple-menting a R1.8bn rights offer toraise the capital required to fundthe early redemption of a portionof its existing convertible bonds ofR 2bn.

During a review to identify corebusinesses and assets as well asidentify a sustainable future capitaland funding model, the companydecided to exit its manufacturingbusinesses as well as Aveng Tri-dent Steel and AvengGr i n a ke r -LTA .

Engineering company Murray &Roberts sold its local building andconstruction business in 2017.

The lack of construction activityis having a knock-on effect onsuppliers. Steel producer Arcelor-Mittal SA (Amsa) reports that localsteel sales have declined by 2%. Itexpects local sales to remain underpressure as a result of tough trad-ing conditions, though there couldbe an upswing from renewableenergy projects.

An absence of building stan-dards in the informal housing mar-ket, however, is encouraging the

import of cheap steel. Low-stan-dard thin-gauge steel is not man-ufactured in SA.

Cement sales declined by 4% in2017, with new entrants to themarket adding increased competi-tion. “Demand for cement is wellbelow our capacity,” says PPCCement SA key account managerRajesh Harripersadh.

Adding to the sector’s chal-lenges is increased debt, primarilyfrom customers who have out-standing payments from publicsector projects, he says, adding thatit is the private sector which iskeeping the cement sector afloat.

An alarming trend is theincrease in the number of “s it e -jacking ” incidents in the past fewyears.

Cesa CEO Chris Campbell saysa number of members havereported that projects frequentlyget halted as a result of communityunrest.

While it appears to be a partic-ularly gloomy picture for the localconstruction industry, Afrimat CEOAndries van Heerden says the sec-tor is not as badly off as it appears.Afrimat, a supplier of constructionmaterials, industrial minerals andcommodities, manages the Afrimatconstruction index, a compositeindex of the level of activity withinthe building and construction sec-

tors, compiled by economist RoelofBo t h a .

“Data revealed by the index forQ4 of 2017 indicates that the fig-ures are up compared with theprevious year. There is still work,though it’s more widely dispersedin smaller packages,” he says.

However, building plans passedand formal employment figures inthe construction sector are down,while monthly salaries are relative-ly constrained.

One of the reasons for theslowdown in the construction sec-tor, says Van Heerden, is workfrom Sanral stalled for a period.“Consulting engineers were quietfor nearly a year and though workis now picking up again, the con-struction industry will only expe-rience increased activity in about ayear’s time,” he says.

The construction industry tendsto lag the general economy byaround six months. Areas that areexpected to grow include theaffordable housing sector, renew-able energy projects and roadinfrastructure projects — t ho u g hthe rate at which these sectorsgrow is dependent largely on thepace of economic growth.

To be successful in the con-struction sector, says Van Heerden,requires intellectual capital.

“Typically, tenders are awarded

to the lowest bidder, which meansto be profitable, companies have tooperate smartly. The industry haslost many experienced people inthe past few years, to its detriment.Those companies that are doingwell have retained constructionexpertise and meet the basicrequirements of project manage-ment by delivering projects ontime, on budget and to specifica-t io n .”

Van Heerden says what theindustry requires is a compellingfuture vision which leverages boththe country’s natural and intellec-tual resources.

“Construction activity typicallyprecedes economic growth — a ndas a country we urgently need togrow our economy in order to cre-ate jobs. However, we need tothink very carefully about how weensure growth.” x

The country’s limited economic growth has affected its ability

to fund construction projects, resulting in slow growth

Andries van Heerden: Sector not doing

too badly, but could do better

Rajesh Harripersadh: Low demand for

cement adds to industry woes

CONSTRUCTION

Tough times for

the sector


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Financial Mail Page 8-9 -15/06/18 03:12:53 PM


ý Investment into Transnet’sfreight rail network as well asinvestment into maintaining andupgrading road infrastructure willbe the dominant focus of transportinfrastructure investment in theshort term.

A state-owned enterprise (SOE),Transnet has been plagued by alle-gations of corruption and statecapture after a number of highlyquestionable financial transactionscame to light. As part of his effortsto clean up corruption at SOEs,earlier this year President CyrilRamaphosa ordered the SpecialInvestigative Unit (SIU) to investi-gate allegations of maladministra-tion and irregular expenditure atTr a n s net .

The probe into Transnet focusesprimarily on the irregularitiesaround the awarding of a R54bncontract to acquire locomotives in2014. However, that is far from theonly suspicious contract whichTransnet has entered into. SA’s pri-ority crimes unit, the Hawks, toldparliament in January they wereinvestigating at least four potentialcriminal matters relating to cor-ruption at Transnet.

In April Transnet’s chief finan-cial officer Garry Pita resigned afterbeing implicated in a kickback

scandal. His resignation came as anumber of the parastatal’s previousboard members tendered their res-ignations, including the organisa-t io n ’s chair and a number ofnonexecutive directors.

Public enterprises ministerPravin Gordhan subsequentlyremoved those who had notresigned and appointed an interimboard at Transnet’s board. Thecompany has since announced thatit is reviewing and investigating allsuspicious contracts it has enteredinto, particularly those with links tothe Guptas, including Trillian andMcK i n s ey .

The health of Transnet, theco u nt r y ’s second-largest SOE, isimperative for SA’s eco-nomic turnaround. Key tobecoming more competi-tive globally is the abilityof commodities produc-ers such as mining com-panies to transportproducts efficiently andcost-effectively. AndTransnet, which con-trols the freight railsector through itsfreight rail and SA’sports, is key to this.

A revitalisation ofS A’s rail network has

been suggested as key to aturnaround in mining investment.At the Investing in Africa MiningIndaba earlier this year, AngloAmerican deputy chairman Nor-man Mbazima said cost-effectiveand efficient freight logistics areimperative for inland iron ore, coaland manganese miners to be com-petitive. He called for greater

investment in both rail and portinfrastructure.

In May, iron ore producer Kum-ba said it was unable to meet inter-national contractual supply agree-ments as a result of an unusuallyhigh number of derailments on therailway line that links its mines inthe Northern Cape with Saldanhaport.

“Transnet has a clear visionabout where it wants to go but haslost its way as a result of corrup-tion. It needs to clean up its pro-curement processes and spendmoney more wisely by investing inits freight rail infrastructure,” s ay sNeresh Pather, transportation headof the Africa business unit at MottMacDonald and president of Con-sulting Engineers SA (Cesa).

Tr a n s net ’s capital expenditureprogramme aims to also invest inother strategically important pro-jects such as increasing con-

tainer handling capacity at SAports. However, ambitiousplans to expand the Port ofDurban have been put onhold while an approved pro-ject to upgrade the railwaylink between the NorthernCape Province and the Portof Ngqura in the Eastern

Cape is yet to start.Slow economic growth and an

ongoing commodities slumpmeans that rail freight volumes arenot growing significantly, whichcould put a number of plannedprojects on hold. Last yearTransnet reduced its seven-yearcapital investment plan toR229.2bn (down by 17% fromR337bn) as a result of lower thananticipated freight demand. Itexpects to spend around R23.1bnon capital growth projects thisfinancial year.

“It ’s a classic chicken and eggs ce n a r io ,” says Hendrik Snyman,deal principal at Gaia Group. “Gov -ernment won’t invest further inTransnet freight rail becausedemand has weakened, anddemand remains weak becausethe infrastructure is dilapidated,affecting the level of service. SA’srailway network used to be asource of pride, but as a result ofmismanagement, customers don’thave confidence in Transnet’s abil-ity to deliver goods on time, withthe result that transportation isbeing done by road — with theexception of mining products —which have no alternative but touse freight rail.”

Faced with a subinvestmentgrade rating, Transnet no longerhas the ability to raise cheap cap-ital. And concerns around gover-nance have caused more than oneinvestor to suspend loans to theparastatal in the past few years.Transnet has announced a potentialprivatisation programme to attractinvestment. It’s also looking intoentering public-private partner-ships in order to develop its portprojects.

Prasa (the Passenger Rail Agen-cy of SA) has been similarly afflict-ed by allegations of mismanage-ment and corruption through itssubsidiary, Metrorail. The latter’sservices are characterised by con-stant delays and cancellations, withpassengers regularly fighting crim-inal elements on trains. As a resultMetrorail has suffered a decline inthe number of paid passengers.

An interim board was appointedto the beleaguered organisation inApril and tasked with cleaning up

corruption. At the same time trans-port minister Blade Nzimandeannounced that tackling the safetyand reliability of Metrorail, partic-ularly in the Western Cape, was apriority. Pather believes thereshould be debate around whetherPrasa should remain an SOE or bere-created in some way.

Proof of the success of properlyplanned public-private partner-ships is rapid transit railway sys-tem Gautrain, which was devel-oped via a public-private partner-ship. Construction, operations andmaintenance is the responsibility ofthe Bombela Concession Company,while management of the companyis handled by the Gautrain Man-agement Company, an agency ofthe Gauteng provincial govern-ment. Plans are in place for Gau-train to expand its network by anadditional 150 km over the next 20years to include routes throughRandburg, Fourways, Lanseria,Soweto, Boksburg and PretoriaEast. The Gautrain ManagementCompany has approached treasuryfor approval for the procurementof phase 1 of the expansion project.

Management of SA’s road net-work is the responsibility of Sanral(SA National Roads Agency), onbehalf of the department of trans-port, provincial departments andlocal municipal authorities. Nation-al roads, managed by Sanral, are byand large in good condition andproperly maintained, though thesame cannot be said of many of theroads out of large metros. Lack ofmanagement and inadequatemaintenance are the biggest issues,says Snyman.

“SA is not investing sufficientlyin its road infrastructure, primarilybecause of a funding shortfall andbecause municipalities are notapplying their funds correctly.Instead of doing maintenance,municipalities are doing repairs toroads, which is much more costly.”

Sanral, however, is one of thefew SOEs currently issuing ten-ders. One of the biggest road pro-jects announced this year is a R1bnmaintenance and upgrade invest-ment into the N1N4 by the Bakwe-na Platinum Corridor Concession-aire, which manages a 385 km

stretch as part of a 30-year con-cession contract with Sanral. Bak-wena is in year 18 of the 30-yearco nce s s io n .

The first phase of a plannednew highway for Gauteng, thePWV15, was announced earlier thisyear by Gauteng MEC for financeBarbara Creecy.

The east-west highway, whichis being designed to circumventGi l lo o ly ’s interchange congestion, isstill in the planning stages, and willcost the province around R250min the current financial year.

S A’s airport infrastructure,under the management of the Air-ports Company SA (Acsa), remainsin good condition, particularly theco u nt r y ’s major airport hubs, withmaintenance taking place on a reg-ular basis. In February Cape TownInternational Airport got the greenlight for a R3.8bn project to realignits primary runway and constructparallel and rapid exit taxiways.

The realigned runway will bebuilt to international specificationsand is expected to facilitateimproved air access into CapeTown and to allow for the growthof both passenger and cargo traffic.Construction of the runway isexpected to start in 2019.

One of the biggest issues withS A’s transport infrastructure is thatdifferent modes compete for users,with little attention given to theunintended consequences.

“On the one hand Sanral is try-ing to attract users to roadsbecause they make money themore road users there are,” s ay sPather. “However, the flip side isthat heavy use — particularly he av ytrucks — causes damage, thusrequiring more frequent mainte-n a nce .

Transnet wants more freight railbusiness, but as they’re not invest-ing sufficiently in infrastructure,customers are turning their backon rail in preference of road.”

He is equally critical of the BusRapid Transport (BRT) system, pri-marily because there was insuffi-cient technical review or planninggiven to the model. “While in somerespects the BRT made sense, ithas not addressed social imbalanceissues. There was insufficient con-sideration given to the fact that taxiowners were unlikely to voluntar-ily give up their routes and the sys-tem has not given enough consid-eration to commuters. A light railsystem would have better servedco m mu t e r s ,” says Pather.

His solution is a presidentialadvisory panel which considers allintended and unintended conse-quences and plans a way forwardfor the country’s transport infra-structure which takes all stake-holders into consideration.

If municipal transport authori-ties were properly capacitated, hesays, they would be in a position tolook at synchronising services,rather than the current situation“where different modes competeand the commuter is the one whogets the short end of the stick”.

Where the necessary infra-structure exists, service deliverycould be improved by providing aconcession to a private company,says Snyman. “The primary moti-vation for the privatisation of ser-vice delivery is alignment — go o dservice equals paying customersequals profits. That’s not the case,however, for SOEs and nationaladministrative companies, wherethere is no connection betweenperformance and reward.” x

[Transport

Still moving at

a slow pace

The country’s second-largest SOE has been plagued by

maladministration, almost grounding transportation networks

Neresh Pather: Transnet’s

procurement processes need to

be reviewed and revived in order

to restore its proper function


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OVERVIEW

Making a bigger

developmental impact

The bank is now no longer just giving loans, but gets actively

involved in supporting all projects that it funds

ý The Development Bank ofSouthern Africa (DBSA) has signif-icantly changed its focus andgrowth strategy in the past fiveyears in a bid to increase its devel-opmental impact. The bank wastraditionally renowned for theloans it provided to municipalitiesto enable large infrastructure pro-jects.

In the past five years it hasadded project preparation and pro-ject implementation support to itsservice offering, thus ensuring amore holistic end-to-end solutionand ultimately extending the bank’sinfrastructure value chain. Accord-ing to DBSA CEO Patrick Dlamini,the new growth strategy is inresponse to changing client needs,increased demands to grow itsdevelopmental impact and the per-

sistently challenging economicconditions. “The bank has adopteda new operating model incorporat-ing three front-line divisions: cov-erage, transacting and projectp r ep a r at io n ,” says Dlamini. All thenew front line divisions fall underthe investment portfolio headed bychief investment officer Paul Cur-r ie .

As a development finance insti-tution (DFI) the DBSA originates,prepares, leads and financesinfrastructure projects. “Our man-date is to promote economic andsocial development by mobilisingfinancial and other resources fromboth private and public investorsnationally and internationally toenable sustainable infrastructuredevelopment projects both in SAand on the African continent,” s ay s

Dlamini. Unlike a commercial bankwhich would focus on a commer-cial rate of return, the DBSA’s pri-ority is to generate a developmen-tal impact return. It thereforeworks on a cost-recovery modelwith the emphasis on sustainabilityand developmental impact.

As such, its mission is toadvance its infrastructure develop-mental impact both in SA and onthe rest of the continent — but par-ticularly in the SADC region — byexpanding access to developmentfinance while at the same timeintegrating and implementing sus-tainable infrastructure develop-me nt .

The DBSA’s revised strategy isin line with global trends, whichhave seen DFIs around the worldreviewing their purpose and mis-sion in an effort to increase theirdevelopmental impact.

A key part of this strategy is to

create opportunities for public-pri-vate partnerships and to leveragetheir own balance sheet by assum-ing institutional risk. “There is sig-nificant private capital in the devel-oped world looking to invest insustainable development projects,”says Dlamini. “Our goal is to lever-age this private capital using thebank’s balance sheet to get moreinfrastructure projects to bankabil-it y .”

Despite the fact that the DBSA’sbalance sheet is only R80bn, thebank has set itself a target ofcatalysing R100bn of infrastructureprojects a year by 2020.

According to Currie, the bankwill leverage its risk capital toattract private capital, in the pro-cess ensuring that both credit andoperational risks are distributedaccording to institutional appetite.

By offering end-to-end solu-tions across the infrastructuredelivery value chain, the DBSAplans, prepares, finances, buildsand, in some instances, even main-tains and improves existing infras-tructure. Its end-to-end valueproposition extends from prefeasi-bility through to finance and imple-me nt at io n .

“It ’s really through integratingour services across the value

Patrick Dlamini: New operating model set to

improve delivery

INVESTMENT

Focus on unlocking

value in each project

Leveraging balance sheet and expertise to aid development

chain, developing a greater level ofco-ordination and making moreeffective use of both our balancesheet and resources that the DBSAis able to expand its developmentimpact and drive infrastructuredelivery in an effective, efficientand timely manner,” says Currie.“Essentially, the internal realign-ment the bank went through in2017 aims to get the business awayfrom the previous silo-basedapproach which led to inefficien-c ie s .”

Municipalities and local govern-ment structures remain the bank’score business. These entities areresponsible for much of SA’sinfrastructure delivery and arebeing increasingly constrained dueto their dependence on grant fund-ing. Their challenges are worsenedby a lack of capacity and capability,and poor fiscal management.“We ’re cognisant of the fact thatcities have the potential to drivegrowth and create jobs,” says Cur-rie. “Our job is to support them, toplan, finance and roll out infra-structure to support that growth.”

The bank offers planning exper-tise to undercapacitated andunderresourced municipalities andalso plays an advisory role ininfrastructure planning. Its projectpreparation division phase pre-pares projects for bankability,while its transacting division offersa variety of financing appetites. TheDBSA is also responsible for

implementing or building actualinfrastructure through its infras-tructure delivery division (IDD).

Maintenance and improvementis a key element of infrastructuredelivery and here too the DBSAplays a part by supporting themaintenance or improvement ofkey infrastructure projects onbehalf of both national and provin-cial government departments aswell as municipalities.

According to Currie, 70% oftransactions outside SA involvedother financial institutions. Howev-er, the bank never really max-

imised the potential of formalisingthe management of these relation-ships. The new operating modelhas addressed this. “We see theDB SA’s role as complementary toboth government and the privatesector, addressing the trust deficitbetween the public and privatesector, catalysing any investmentand ensuring that projects get val-ue for money.”

The DBSA has made an effort tomove responsibly up the riskcurve and provide higher levels ofgearing. “It ’s about filling the gapbetween where private sector

financial services can operate andwhat is required to get a specificprogramme or project over thel i ne ,” says Currie.

The DBSA is in the process ofsetting up a climate finance facilitytogether with local and internation-al partners, to provide the privatesector with first-loss capital tocover innovation risk in climateenhancing investments aligned tothe UN Sustainable DevelopmentGoals. The facility is broadly mod-elled on a US-based Green Bank,typically a state-sponsored, spe-cialised financial entity whichworks with the private sector toincrease investments in cleanenergy markets. “Our climatefinance facility has the potential tobe a significant shifter and weexpect significant uptake of it onceit ’s in place in the third quarter of2 0 1 8 ,” says Currie.

“Though its focus will start offlargely in SA, we won’t be restrict-ed to SA.”

The climate finance facility ispart of a broader push by the bankto create platforms which allowthe private sector to invest ininfrastructure projects with agreater degree of comfort. Anotherfocus is supporting the provision of300,000 student beds over thenext 10 years in an effort tocounter the country’s studentaccommodation shortfall, as wellas opportunities in the non-urbanbroadband space. x

ý The Development Bank ofSouthern Africa (DBSA) willachieve its goals by playing what itcalls a “c at a ly t ic ” r o le . The bank’sstrategy of unlocking andcatalysing infrastructure invest-ment is based on a concept papertitled “From Billions to Trillions:Transforming Development

Fi n a nce”, which was authored in2015 by a number of prominentdevelopment banks. The paperpoints out that in order to meetglobal sustainable developmentgoals (SDG), a paradigm shift isrequired in terms of how develop-ment finance is used to unlock theresources needed to achieve the

S D Gs .For the DBSA, this translates to

leveraging both its balance sheetand its expertise to stimulateinfrastructure development, giventhat the country’s infrastructuralneeds significantly outweigh thebank’s lending capacity.

“Everything we do at the DBSAis part of our strategy to unlockthis R100bn worth of investment ininfrastructure, primarily in SA butalso on the African continent,” s ay sMohan Vivekanandan, group exec-utive for the client coverage divi-s io n .

“We are very cognisant of the

fact that, at best, we can onlyunlock around R20bn-R25bnbased on our balance sheet —which means the balance needs tobe achieved through crowding-inprivate and development financei nv e s t o r s .

The client coverage division isresponsible for the bank’s dealorigination efforts, bringing togeth-er the DBSA’s full suite of infras-tructure planning, project prepara-tion, financing and implementa-tion/maintenance services to pri-vate investors, state-owned entitiesand African sovereigns.

The division provides the bank

special report dbsa

Paul Currie: An all-inclusive support

sys te m

123RF/Wang Song



with a link to international capitaland concessionary finance, whilelocally it is responsible for provid-ing access to transactional oppor-tunities and enhancing opportuni-ties — all efforts to grow the size ofthe pie.

Client coverage — essentially adivision focused on new businessdevelopment — is a newly createddivision within the bank that actsas a bridge between the DBSA’sthree product divisions and clientsand investment partners. “Ou rstrategy at the DBSA is to bringinfrastructure solutions to our coreclient segments and not just be ale nde r .”

The division services a numberof client sectors within SA and thebroader continent, including largerand smaller municipalities andpublic and private sector clients inthe energy, transport and logistics,water and sanitation, informationand communication technology,

health and education sectors.The DBSA’s mandate has

recently been expanded outside theSADC region, and so projects havebeen initiated in a number of coun-tries in East and West Africa.

“Essentially, our expertise atdeal origination and client coveragelies in relationship building as wellas a thorough knowledge of theneeds of our clients, along with thecapabilities of the DBSA. Our job isto have an intimate understandingof the issues and to offer solutionsthrough the DBSA’s product suiteas well as external expertise fromstrategic partners, such as interna-tional development finance institu-t io n s ,” says Vivekanandan.

One of the DBSA’s strengths isits strategic partnerships withdevelopment finance institutionsaround the world, including theWorld Bank Group, the AfricanDevelopment Bank, the Frenchdevelopment agency, the German

development bank), the JapaneseInternational Co-operation Agencyand various US development agen-cies (such as USAID, USTDA andPower Africa).

“Relationships at the SADC levelare also crucial if we are to providethe right infrastructure to enableeconomic growth,” s ay sVivekananadan. “For example,w e’re involved in a number oftransboundary projects on theAfrican continent, including theNorth-South Corridor, the South-ern Africa Power Pool and theLapsset corridor in Kenya.”

He is particularly proud of theDB SA’s catalytic role in supportingS A’s renewable energy pro-gramme, including the funding ofR80m which has unlocked overR200bn of investment and nearly6,000 MW of renewable energy,80% of which was from the privatesector including around R50bn inforeign direct investment. x

ý The Development Bank ofSouthern Africa’s (DBSA) corporatestrategy is anchored on its abilityto provide integrated infrastructuredevelopment solutions to itsclients. One of the bank’s compet-itive advantage is its ability to takeearly-stage risk through providingproject preparation funding andex p e r t i s e .

A key lever for developingbankable projects with the abilityto attract long-term capital is thebank’s project preparation division.

The role of the division is to de-risk projects so they are able toattract long-term capital or fiscalallocation in the case of projectsundertaken by underresourcedmu n ic ip a l it ie s .

Though both SA and the rest ofthe continent have a huge need forinfrastructure development, t he r eis on average an 8-9 year gapbetween project identification andimplementation. The “Infrastruc -ture Financing Trends in Africa”report produced by the Infrastruc-ture Consortium for Africa in 2016identified about US$228bn worthof infrastructure investment oppor-tunities across the continent. How-ever, one of the biggest challengesin unlocking these opportunities issourcing early-stage risk capitaland the requisite skills to developand prepare the projects until theyreach financial close.

According to the report, Africaneeds $11.4bn for project prepara-

tion, but as of December 2016, theavailable resources (uncommittedcapital) for de-risking projectswere only about $800m. As a con-sequence, says Mohale Rakgate,DB SA’s group executive of the pro-ject preparation division, the num-ber of infrastructure projects thatare successfully implementedremains low. The DBSA’s projectpreparation division aims to bridgethis gap by offering both capitaland expertise across the infras-tructure value chain to its clients.

Previously a unit within financ-ing operations, project preparationis now a division in its own rightunder the DBSA’s new organisa-tional structure and is made up offour units: infrastructure planning;project preparation; programmedevelopment; and climate financ-ing. The primary role of the divi-sion is to provide financial, strate-

gic and technical support to ensureprojects and programmes can befinanced and implemented.

“Project preparation ensuresthat a proposed project is feasible,appropriate and ready for imple-me nt at io n ,” says Rakgate. “Ou rmandate includes conductingscoping of projects at conceptualstage; undertaking prefeasibilityand bankable feasibility studies,which include technical; economic;financial; institutional; legal andregulatory assessments as well associal and environmental impactassessment and assist with projectfinancial structuring.”

To qualify for funding, projectare required to fit into the DBSA’smandate of supporting infrastruc-ture development to alleviatepoverty, drive economic growthand promote regional integration.

“It can take several years ofproject preparation before a typicalinfrastructure project is ready fori mp le me nt at io n ,” says Rakgate.“Our role is to work with the spon-sors to identify all the key risksearly on and develop suitable risk-mitigating mechanisms.”

Mohale Rakgate: Early-stage risk leveraging is essential for a project’s long-term survival

PROJECT PREPARATION

Early-stage funding

unlocks opportunities

Key driver to transition projects from inception to

implementation

Mohan Vivekanandan: Healthy investor

relations help grow project investment

Through the division, the DBSAalso offers clients access to a num-ber of third party concessionalfunds that it either manages or towhich it is accredited. Theseinclude the Infrastructure Invest-ment Programme for SA (IIPSA),SADC Project Preparation Devel-opment Facility (PPDF), Green Cli-mate Fund, the Green Fund and theGlobal Environment Facility. Suchsources of concessional funds arecritical for catalysing infrastructuredevelopment in SA and the rest ofAfrica, says Rakgate.

The project preparation divisionhas a strong pipeline of infrastruc-ture projects in different sectorsacross different geographies. Thispipeline is always informed by theDB SA’s strategic imperatives.

Through the infrastructure plan-ning unit, the DBSA provides pre-financing support and services tounderresourced municipalitiesaround the country such as assist-ing them to develop comprehen-sive infrastructure plans, infra-structure investment plans andinfrastructure sector plans.

Most infrastructure projects faceincreasingly complex planning

processes, yet many project spon-sors do not have the resources orexpertise to deal with these com-plexities. As a result, along withpreparing individual projects, pro-ject preparation also activelydevelops programmatic approach-es to addressing infrastructurechallenges and backlogs in keysectors such as student accommo-dation, small independent powerproducers and long-term financialplans for municipalities.

As the accredited institution forthe Global Climate Fund and theGlobal Environment Facility, theDBSA — through project prepara-tion — is able to mobilise conces-sional capital to drive investmentsin climate friendly projects in sup-port of SA’s commitment to theParis Climate Accord and the UNSustainable Development Goals.

Lastly, the division is alsoactively involved in projects thatsupport the regional integration of

the SADC region. Through partner-ships with facilities such as theSADC PPDF and IIPSA, projectpreparation has secured f u nd i ngfor various cross-border projectsin the energy and transport sec-tors. Some of the key initiativesinclude the North-South Corridorrail rehabilitation and upgradingproject, the Mozambique-Zimbab-we-SA transmission line and theAngola-Namibia interconnectorproject, among others. x

special report dbsa

Zodwa Mbele: Projects with catalytic impact

are scrutinised and prioritised

ý Infrastructure project financinghas come under increased focus inrecent years as developmentfinance institutions (DFIs) try toleverage their balance sheets andin-crowd private sector invest-me nt s .

At the Development Bank ofSouthern Africa (DBSA), the trans-action division is responsible forconverting bankable projects intoi nv e s t me nt s .

This is achieved through duediligence performed on each pro-posed project to ensure it meetsthe bank’s developmental impact

c r it e r i a .“Due diligence is an art rather

than a science,” says Zodwa Mbele,group executive for transacting.

Deals, however, must be viableand creditworthy.

The bank provides both vanillaand sophisticated financial instru-ments ranging from debt, mezza-nine finance and limited nonre-course to municipalities in SA, aswell as private sector, state-ownedenterprises (SOEs), sovereigns andPPPs in SA and the rest of the con-t i ne nt .

Municipalities and SOEs form

the bulk of the DBSA’s loan book,yet some of them are often per-ceived to have poor governance.

While good governance preoc -cupies the bank, Mbele says whenlending to an institution perceivedto have poor governance, part ofthe due diligence is to establish thesource of the adverse audit find-ings, and remedial action thereofbecomes the condition of the loan.

For instance, an adverse auditfinding may be resulting fromirregular expenditure.

An expenditure may not havebeen incurred in vain. It may meanthat transparent procurement pro-cesses were not followed for var-ious reasons,” she says.

It is pleasing that more munic-ipalities have achieved a healthyfinancial state and are able to bor-row.

This is due to the various gov-ernment-supported reforms,including funding the initiatives forcapacity building by the DBSA.

Consequently, more players cannow fund the municipal niche thatwas not always possible.

“Given the huge backlog ininfrastructure development andlimited government resources forinfrastructure funding, there ishuge scope for the DBSA to fill theg a p ,” she says. x

TRANSACTIONS

Based on principles of

due diligence

Stringent measures are taken to ensure projects are bankable



Davin Chown: Policy, consistency and price

will drive renewable energy growth

Brenda Martin: Climate change projects has

been affected by past reluctance

ý SA finally signed its long-delayed renewable energy con-tracts with independent powerproducers in April 2018. The sign-ing had been held up for more thantwo years under former presidentJacob Zuma, who favoured anuclear deal over promotingrenewable energy. It was then fur-ther delayed by a last minute legalchallenge from labour union Num-sa and pro-Zuma lobby group,Transform RSA.

The latter argued that Eskomd id n ’t have the liquidity or cashflow to support the agreementswhile the former feared job lossesin the coal sector. SA has tradition-ally been reliant on fossil fuels, coalin particular, for its energy.

According to the agreements,Eskom will purchase power fromindependent wind and solar ener-gy producers. However, merelysigning the 27 power purchaseagreements does not necessarilyput the renewable energy sectorback on track. “Getting back ontrack requires a number of regu-latory hurdles to be removed,” s ay sDavin Chown, Genesis Eco Energy

MD and chair of Sapvia (SA Pho-tovoltaic Industry Association).“While the policy is in place, theprogrammes don’t always followpolicy. We need line of sight to along-term order book, which willdetermine at what scale the indus-try will grow.”

The industry expects thefinalised Integrated Resource Planand Integrated Energy Plans to be

released in August 2018. BrendaMartin, CEO of Sawea (SA WindEnergy Association) says it’sessential that these finalised plansare based on choices that put SAon track with the global energytransition. “The clear technologyinvestment roadmap it provides isessential to investor certainty overa multidecade time horizon, and isparticularly important for growingjob-creating prospects in SA’srenewable energy manufacturings e c t o r ,” she says.

SA has significant untappedcapacity to drive renewable energyprojects. The World Wide Fund forNat u r e’s (WWF) “Renewable Ener-gy: Facts and Figures 2017” r ep o r tclaims that the country’s windenergy potential is 6,700 G W,should wind farms be more widelyinstalled across the country, whileabundant sunshine throughout thecountry could be better utilised.

Many of the world’s largesteconomies including China, the USand even countries in Europe withfar less solar irradiation, success-fully use solar power.

Renewable energy’s businessand value proposition for SA isclear, says Chown, and the localmarket is adopting the technologyin leaps and bounds. Investor inter-est is strong, with both private andinstitutional capital attracted to thesector.

Hendrik Snyman, the deal prin-cipal at Gaia Infrastructure Part-ners, an infrastructure-focusedinvestment asset manager, whichhas to date completed 11 renewableenergy transactions valued atR3bn, says despite policy uncer-tainty he is “cautiously optimistic”about the current state of therenewable energy sector. Howev-er, he says he is not convinced thatthe Renewable Energy Indepen-dent Power Producer ProcurementProgramme (REIPPPP) — a com-petitive tender process that waslaunched to facilitate private sectorinvestment into grid-connectedrenewable energy generation —will continue in its current state.

Of further concern is the factthat it appears that Eskom nowwants to build its own renewableenergy projects, “despite the factthat it has a history of budget over-runs and an inability to meet pro-ject deadlines”.

Cost is the key issue and is like-ly to be what ultimately drivesinvestment into renewable energy.Renewables have already beenconfirmed as being cheaper thannew thermal generation technolo-gies, with the department of energyconfirming that the November 2015Expedited Round bids for wind andsolar power were 65c/kWh com-pared with coal IPPs at around

RENEWABLE ENERGY

Projects finally taking

off after many delays

The move signals an end to political reluctance and ushers in a

new era for SA’s power supply systems


IDD

Key support system to

accelerate delivery

This division is made up of

specialists in different

disciplines to achieve the

success of each project

ý Implementation challenges ininfrastructure delivery often relateto the capacity and expertiserequired to see projects through tocompletion. One of the waysthrough which the DevelopmentBank of Southern Africa (DBSA)contributes to addressing thesechallenges is by offering pro-gramme/project implementationcapabilities through its infrastruc-ture delivery division (IDD).

IDD is the infrastructure deliv-ery arm of the DBSA and has beentasked with accelerating plannedinfrastructure development, sup-porting job creation, advancing thegreen economy and ensuring thedelivery of value-for-moneyinfrastructure. It works with stake-holders to improve both the speedand quality of infrastructure deliv-ery. Close to R12bn was spent onprojects implemented by the divi-sion over the past five yeas

“We complement the bank’soverall offering by assisting allthree spheres of government withprocurement, construction andmaintenance of infrastructure,”says Mohammed Bhabha, actinggroup executive of the IDD.

The division’s primary clientsare municipalities, provincial gov-ernment departments and nationalgovernment departments. “Essen -tially we help these entities spendtheir budgets in a more efficientw ay ,” says Bhabha. “When it comesto construction, for instance, pro-curement is a specialised and evenrisky business requiring specialistskills. We offer that expertise.” Inkeeping with the DBSA’s mandate,IDD offers its services in deliveringinfrastructure mainly in the health,

education, housing, water, sanita-tion and roads sectors.

Employing a multidisciplinaryteam which includes procurementspecialists, engineers, project man-agers, quantity surveyors, planners,legal and contract managers, occu-

pational health and safety officers,development facilitators andaccountants, the division providesa rapid procurement process toallow for projects to be initiatedand executed quickly and efficient-ly .

The team deals with a variety ofinfrastructure projects includingthe construction and refurbishmentof clinics, hospitals and schools aswell as emergency repairs at thesefacilities. It is also involved in themaintenance and rehabilitation ofroads, municipal infrastructure andrefurbishing industrial parks.

One of the flagship programmessupported by the IDD is thedepartment of basic education’sASIDI programme, in which atleast 117 schools have been con-structed since 2012, benefiting over48,000 learners. During the2017/2018 financial year, the divi-sion supported the KwaZulu-Nataldepartment of education and theLimpopo department of educationwith refurbishing at least 101storm-damaged schools. Over afive-year period (2013 to 2018),IDD refurbished and did emergen-cy repairs to 349 clinics, hospitals

and doctors’ consulting rooms onbehalf of the national departmentof health and the Limpopo depart-ment of health (41 facilities).

The majority of the division’shuman settlement projects tookplace in the Eastern Cape, where arural housing programme for theEastern Cape department ofhuman settlements was underway, with IDD completing 3,400units, while a similar project in theCity of Ekurhuleni has delivered112 social housing units.

Working with the department oftrade & industry together with theIndustrial Parks Management, theIDD refurbished commercialindustrial parks to improve secu-rity and the state of the parks toattract tenants and make themmore commercially viable.

In support of regional integra-tion, the division supports theSADC Water & Sanitation Fundimplementing a German Develop-ment Bank KFW-funded project,the Kazungula Water Supply Pro-ject, in Zambia and the Loma-hasha/Namaacha Cross-BorderWater Supply Project in Mozam-bique and Swaziland.

Unlike a commercial bank, theI DD ’s client footprint is where thedevelopmental index is the lowestand its aversion to risk is far lessp r o no u nce d .

Alongside the delivery of infra-structure, the division supportsgo v e r n me nt ’s empowerment ini-tiatives. The division maintains alist of accredited suppliers, whichare prevetted with their capabilitiesbalanced with their black econom-ic empowerment credentials. Dur-ing the 2017/2018 financial year,projects implemented by the divi-sion created 8,492 employmentopportunities with 717 SMMEs andsubcontractors benefiting.

In contributing to sustainabilityof service delivery, the division hasin the past year changed its focusfrom new builds to prioritise refur-bishment and maintenance ofexisting infrastructure. At present,more than half its projects arefocused on maintenance and refur-bishment. x

special report dbsa

Mohammed Bhabha: Helping to keep a

healthy balance sheet in each project

12

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Declining GDPIn an environment where, relative to our emerging market peers and the rest of the global economy, we are faced with a declining GDP trend, investor appetite to deliver against both our local currency and foreign currency requirements to boost GDP has very strong competing alternatives. These can only be delivered on in a business “unusual” environment, where both the private and public sector actively collaborate. A reverse in the declining trend of private investment (which contributes 60% of total investment of circa ZAR 616bn) will need to emerge, if the plan to boost the economy and increase the ratio of investment to GDP from the current 19.5%, to the 2030 National Development Plan target of 30% is to materialise.

Relief will be required by the public sector to facilitate this through more programmes and policy certainty, which bodes well for PPPs and private sector participation in infrastructure projects.

�� Ä�� factors are dealt with through a conducive regulatory and �� from both end user and investor perspectives is often the key decision factor in considering participation. It also impacts the risk appetite of the private sector to invest in a project over a set investment horizon or lifecycle of �� perspective, to the extent that the key enabler of a project ��

The infrastructure sector is broad and has varying degrees of complexity due to the scale and cost of projects. It furthermore requires multiple parties to deliver a single project, often governed within a highly regulated environment in which these projects are to be developed and operated in. This requires a detailed analysis of the �� Ä�� another, or even one investment asset class over another. �� Ä�� well planned and sustainable infrastructure investment programmes, adequate liquidity can be raised to invest in projects, as was seen with circa 75% of the investment in REIPPPP having been sourced domestically.

If anything, this proves that the country’s demand for sustainable renewable energy can be met through private sector partnerships with government, with room for expansion into other infrastructure sectors.

Mphokolo Makara is a Transactor in the Infrastructure Finance division of Rand Merchant Bank.

The Renewable Energy Independent Power Producer Programme (REIPPP) (currently in its fourth round) has been heralded as a mechanism to involve the private sector in collaborating with government to deliver against the country’s infrastructure requirements.

Without taking away from other proven regulatory mechanisms such as Public Private Partnerships (PPPs), which have facilitated infrastructure development across all three spheres of government, the systematic approach that the REIPPP followed, provides medium to long-term clarity on government policy and its requirements to attract skills and capital from the private sector to develop the power sector in South Africa.

�� Å�� !!!�� !�� Management Act was enacted in 1999 as a percentage of public sector infrastructure spending, relative to the ZAR201-bn invested by the private sector for government to procure just over 6GW of energy through REIPPP to date, since 2011.

SNAPSHOT OF PPPS VS REIPPPP INVESTMENTS IN SOUTH AFRICA TO DATE

Total number of projects

Total investment value (ZAR-bn)

Projected % of public sector spending over the current MTEF

PPP Projects 33 90 2.22%

REIPPPP Projects

112 201.8 21%(estimate based on total energy spend

allocated to Eskom, being the signatory

of REIPPP PPAs)

*Source – National Treasury 2018 Budget

"�� #�� Ä�� maintenance and development perspective, include health care, housing, water and sanitation and transport.

The challenges faced in attracting capital into these sectors, which often service a social need, span the country’s socioeconomic conditions (the basis of an infrastructure development plan); ��$��#�� %��&��'��between the immediate needs of the country and how these feed into productivity and job creation over the long term), to contribute towards a positive and inclusive Gross Domestic Product (GDP) trajectory.

()!�� Ä�� #�� *+,-� &��Å�� #��'��'�quarter decline since 2009 of 2.2%) further drive the point home that our manufacturing and industry sectors continue to face pressure, heightened by their reliance on physical infrastructure.

��Ä�� Å��Ä��$�� macro-economic statistics drive investment appetite, this brings to light the challenges we face in delivering against: 1) Government’s long standing annual average of circa ZAR300-bn spent on public sector infrastructure, and 2) the President’s recent announcement to raise US$100-bn over ��.��Ä ��

Infrastructure development within the South African landscape

Financial Mail Infrastructure Report Guest Column

By Mphokolo Makara

R 1/kWh.According to Meridian Eco-

nomics, in SA renewables arecheaper even than existing thermalplant technologies. The companysays electricity consumers wouldbe better off if between three andfive of Eskom’s oldest coal stationswere shut down in 2018, ratherthan at their scheduled end-of-life,and that instead, SA’s energy needsshould be met by new renewablepower producers.

“Worldwide, competitive auc-tions — the model applied to SAsince 2012 — result in more sig-nificant tariff declines than feed-int a r i f f s ,” says Martin, adding thatlocal governments are increasinglyseeing the value of having theoption of municipal auctions thatcan result in more direct consumerb e ne f it s .

“Given SA’s significant inheritedsocioeconomic and environmentalchallenges, the electricity invest-ment plan should be based on acost-optimal build and technologymix in support of achieving socio-economic development and envi-ronmental sustainability,” she says.

The delays in signing therenewable energy contracts haveput the country behind in terms ofachieving its climate change com-mitments. According to the ParisClimate Agreement, which SAsigned in 2016, the country needsto reduce its carbon emissions bynearly half by 2030.

In addition, the delay createdsignificant capacity challenges, par-ticularly for local content, manu-facturing and construction, saysMa r t i n .

However, now that the powerpurchase agreements have beensigned, the industry expects thatthe 2,206 MW of power procured

in rounds 3.5 and 4 by the end of2015 will soon achieve financialclosure, with construction due tostart by the end of the year or early2 0 1 9.

Criticism of REIPPPP

There have been criticisms ofREIPPPP, most noticeably fromorganised labour, who perceive itto be a way of privatising the ener-gy sector. What this view doesn’ttake into account, says Martin, isthat Eskom currently is a verticallyintegrated monopoly, which meansit ’s not legal for any private powerproducer to sell power to any otherutility. “Renewables currently con-tribute less than 3% to SA’s totalpower. The 27 projects signed willtake this up to 5%. There is cer-tainly no risk of the private sectortaking over SA’s power supply anytime soon. However, the industryis keen to find solutions that resultin improved socioeconomic bene-f it .”

Ideally, what is required is amodel that encourages broaderparticipation in the energy market.According to Chown, this shouldinclude a move towards decen-tralised “citizen utilities” that areable to adopt information technol-ogy and cryptocurrencies as partof their delivery mechanism. “Weneed a more inclusive energy sys-tem, and to achieve that we needlabour’s participation in a markettransition that will lead to greaternumbers of cleaner, more secure,less risky jobs in a different kind ofeconomy. SA must take centrestage in this global energy transi-t io n ,” he says.

The benefits of growing therenewable energy sector are clear:REIPPPP has already attractedmore than R200bn in investment:

75% from local finance institutionsin the form of equity and debt, withthe balance originating from directforeign investment.

Job creation

According to the department ofenergy, more than 26,000 jobs hadbeen created by the renewableenergy sector by the end of 2017.The preferred bidders in round 4have committed to the creation of afurther 15,000 jobs.

It ’s not just direct jobs that willbe positively affected. Once the 27projects have achieved financialclose, ancillary sectors such asconstruction and equipment supplycompanies will benefit. The pro-jects themselves will require addi-tional resources including legalskills, technical advisers, electricaland mechanical engineers, artisansto install plants and environmentalconsultants to conduct environ-mental impact assessments. Martinexpects the first orders could beplaced as early as the end of June.

Much of the future of the sector,says Chown, will be in the handsof government and its long-termvision. “Any industry that operates

in a developmental economy envi-ronment needs policy consistencyand a progressive rollout plan if thebenefits of the industry are to ber e a p e d ,” he says. “Renewable ener-gy is no different. It requires policyconsistency; a strong, credible pro-curement regime; a credible,working, patient finance sector;and a skilled, technically compe-tent workforce. These elements areall there in part — but they need tobe scaled up.”

Wh at ’s now required, he says, isa meeting of the minds on SA’senergy future, what it looks like,and how the country will get therein a manner that is inclusive andbuilds sustainable livelihoods.

There is little doubt that renew-able energy makes sense for SA,given its plentiful wind and solarpower resources, along with clearevidence that costs are competi-t iv e .

“Price will ultimately make thechoice of consumers — and in fact,entire economies — lean muchmore strongly towards the uptakeof cheaper, cleaner, more decen-tralised, smarter energy and tech-nology choices,” says Chown. x


SOLAR UPTAKERenewable energy projects

Of the eight largest wind energy projects in SA, four are in the

Eastern Cape, three are in the Northern Cape, and one is in the

Western Cape. Combined they have the capacity to produce

more than 1,068 M W.

T h e re’s been significant interest in solar energy from local

malls, including the Mall of Africa and Clearwater Mall in

Johannesburg, as well as businesses such as Vodacom in Cape

Town. In addition, there’s been significant uptake of solar power

among wine farms in the Western Cape. Kimberley, Upington

and De Aar in the Northern Cape, Vryburg in the North West and

Lephalale in Limpopo are home to a number of large-scale

photovoltaic projects. Investment for these projects, says

Genesis Eco Energy CEO Davin Chown, has come from a mix of

both local and international investors. x



ý SA is currently facing a watercrisis caused primarily by mis-management, poor planning and aloss of institutional competence inthe public sector. The crisis isworsened by a number of factors,including unnecessary delays inrolling out water infrastructure,budgetary constraints, drought andexcessive wastage.

Population growth, particularlyin urban areas, has placedincreased pressure on the coun-try’s water resources, aggravatedby the fact that the country has alow average rainfall with anuneven distribution. Droughts inthe Western and Eastern Cape,coupled with critical water short-ages, have highlighted the need forbetter management of the coun-try’s water resources as well as amore conservative approach towater consumption.

Responsibility for the country’sbulk water resource infrastructurerests with the department of water& sanitation (DWS). Water supplyand sanitation services are theresponsibility of municipalities thatare designated as water serviceau t ho r it ie s .

The Saice 2017 InfrastructureReport Card for SA gives the coun-try a D- grading for its bulk waterresources (implying it’s at risk of

failure) due to insufficient mainte-nance. Sanitation, including wastewater, receives a C- (satisfactoryfor now) in major urban areas butan alarming E (unfit for purpose) inall other areas.

The report highlights the factthat current water usage alreadyexceeds the reliable yield of exist-ing water infrastructure, and themarginal cost of future expansionsis rising rapidly. “As a conse-quence, though SA uses less than40% of the country’s total renew-able water resource, much of thisis not available at the requiredassurance level, and thus economicand physical water scarcity is ar e a l it y .”

As a water-scarce country, thereality is that unless waterresources are properly managedwith sufficient long-term planningstrategies in place, shortages willbecome increasingly common-place. A number of municipalitieswhich have failed to implementproper long-term planning havefound — to their cost — that alter-natives in the form of desalination,aquifer exploration and groundwa-ter pose their own challenges, pro-hibitive costs being the primaryissue, particularly in relation to thefirst two.

In the early 1980s SA was laud-

ed for having a world-class waterplanning system in place but theprevious minister of water & san-itation, Nomvula Mokonyone,began to undo this system, leavingher department with insufficientexpertise to implement the neces-sary planning, says Mike Muller,adjunct professor at Wits Univer-s it y ’s School of Governance. “Ha dboth Cape Town and Port Elizabethpaid attention to the planning sys-tems and what the systemrequired them to do to safeguardwater supply they would not be in

the situation they are now in,” s ay sMu l le r .

Water reuse and desalination,he adds, are emerging as importantoptions that will become increas-ingly cost-effective as surfacewater opportunities are exhaustedor become more expensive. “Fo rcoastal cities there is no doubt thatdesalination can be a useful sourceof water — but it’s expensive.Reusing waste water is much morecost-effective than desalination.Certainly, for Cape Town, ground-water is the most cost-effectiveoption, followed by reusing wastewater, with desalination a lastr e s o r t ,” says Muller.

To restore its water stability, SAneeds to ensure that it reducesconsumption, treats more of itswaste-water and starts once moreto invest in planned water infras-tructure projects. The longer it putsthe latter off, the more expensivethese projects will be.

S A’s waste-water is also in adire state. The DWS’s own ratingsystem for waste-water systemsfound that 30% of waste-watertreatment works are in a criticalstate, with 66% of all wastewatertreatment works requiring somekind of intervention.

Earlier this year a parliamentaryinquiry was ordered into thedep a r t me nt ’s finances after itadmitted it had overspent its bud-get by R2bn and requested aR2.9bn overdraft from the ReserveBank. Auditor-general Kimi Mak-

wetu told parliament that thedepartment was suffering a skillsand leadership crisis coupled withdeviations over the years includingduplicate payments, paying exces-sive project management and pro-fessional fees, expenditure on pro-jects that had not been budgetedfor, deviating from tender proce-dures and incurring billions inirregular expenditure.

The department has blamed itsfinancial problems on budgetarycuts coupled with the failure ofmunicipalities and water boards topay their bills. Towards the end of2017 at least 30 municipalitieswere warned about water cutsunless they paid any outstandinginvoices to provincial water boardsand the department’s Water Trad-ing Entity. The Standing Committeeon Public Accounts (Scopa) hascalled for criminal charges to beopened against the ministry underMokonyane, arguing that it suffereda complete collapse under herle a de r s h ip .

“There is little doubt that afteryears of mismanagement, the DWSis in a shambles and has lost mostof its expertise, with the result thatthere is little forward planning takep l a ce ,” says Andrew Johnstone, MDof independent water and environ-mental consultancy, GCS. “The fail-ure of many water infrastructureprojects is due largely to incompe-tence, which is unfortunatebecause the country used to berenowned for its huge infrastruc-ture schemes such as the LesothoHighlands Water Project.”

As a country, says Johnstone,SA needs to realise that demand israpidly outstripping supply. “2025is when demand and supply get toequilibrium — before demandexceeds supply we need a reval-uation of water and its supply,” hesays, adding that the situation willbe made worse by climate changeand variable rainfall.

An expert in groundwaterresources, Johnstone says ground-water is one alternative option, butit needs to be properly managed.“Unfortunately, management andinfrastructure fail before the waterresource fails,” he says. “The sectorneeds more skills in the public

arena and, as a society, we need toaccept that we’re going to have topay more for an increasinglyscarce resource, bearing in mindhow critical water security is to afunctioning economy. Withoutwater we jeopardise the agricul-tural sector, food security, sanita-tion, health, industry and manufac-turing. Without water our economygrinds to a halt.”

Droughts in numerous regionsleading to severe water shortageshave been the driving force behinda number of water projects indevelopment. The bulk water andsanitation infrastructure budgetwas given a boost in 2016 whenR15bn was allocated over a three-year period through the RegionalBulk Infrastructure Grant pro-g r a m me .

One of the cities most criticallyaffected by drought and watershortages has been Cape Town.The city has set itself ambitioustargets of producing additionalwater through a combination ofdesalination plants, groundwaterextraction and water reuse. Threedesalination plants are to be built inStrandfontein, Monwabisi and theV&A Waterfront.

Another significant project inthe pipeline is the WesternAquaduct in KwaZulu-Natal, a bulkwater pipeline delivering waterfrom the Midmar and Springrovedams to eThekwini; and the con-struction of two reservoirs. Com-missioned at the end of 2012, thesecond phase is due for completionthis year.

While the Lesotho HighlandsWater Project was supposed to beproviding Gauteng with water from2019, the project has sufferedexcessive delays with estimationsthat it won’t be supplying waterbefore 2025 at the very earliest.

The Organisation Undoing TaxAbuse (Outa) accused the DWS ofserious maladministration of phasetwo of the Lesotho HighlandsWater Project, alleging thatMokonyane tried to ensure herpreferred service providersreceived a cut of the R25bn project.

However, now that a change ofleadership has taken place, the go-ahead has finally been given for the

design of the dam and connectingtunnels, says Muller. “However, itwill be several years before theybegin actual construction. On theplus side, there is a reputable teamin place managing the project.”

The fact that the project is run-ning six to eight years late, he says,is of grave concern. “If Gauteng hasa drought any time before 2026,the province could be looking at asimilar situation to Cape Town,despite the fact that it now hasadequate reserves.”

Water infrastructure financing

Large water resource infrastruc-ture projects are difficult to financeon a stand-alone basis in the short-term despite their long-term eco-nomic benefits because demandvaries with the weather, saysMuller. The domestic and agricul-tural sectors also have limited abil-ity to pay for the full costs of theirsupply, for instance. This makes itchallenging for private financiers toget involved, with the result thatthe burden of providing — and pay-ing — for most water infrastructureprojects typically tends to fall to thepublic sector.

SA has had some success withthe Trans-Caledon Tunnel Author-ity (TCTA), an organisation estab-lished in 1986 to implement the SAarm of the Lesotho HighlandsWater Project. In 2000 the TCTAwas transformed into a genericpublic project implementing agen-cy and has, according to Muller,funded and implemented the time-ly and economical delivery of anumber of large water projects.“The TCTA’s methodologies haveavoided many of the risks typicallyassociated with large-scale waterresource projects, due largely tothe disciplines imposed by thefinancing model,” says Muller.“However, as a state-ownedorganisation it is subject to politicaluncertainties, which means its pro-ject pipeline is dependent onunpredictable mandates.”

According to Muller, TCTA’sexperiences prove that it is possi-ble to structure water infrastruc-ture projects in a way that allowslimited recourse funding to beraised from the private sector, thus

alleviating some pressure on publicfinances as long as financiallycapable water users are preparedto enter into long-term water sup-ply agreements. “The secret to thesuccess of this kind of financingmodel is to structure it so that itmanages the risks,” he says.

A number of the bigger waterinfrastructure schemes are stillworking well, says Muller, but asyou get to smaller water boardsand municipalities, there is a lackof maintenance and proper man-a ge me nt .

Despite intermittent headlinesclaiming that acid mine drainage,particularly in Gauteng, is a hugeproblem, Muller says the threatacid mine drainage poses to watersecurity in the province is exagger -ated by those wishing to capitaliseon it. “It constitutes just 15% of thepollution in the Vaal,” he says.“Statements about the urgency ofbuilding a desalination plant totreat acid mine drainage are greatlyexaggerated and will significantlyraise water prices while doing littleto solve long-term water supplyp r o ble m s .”

SA needs to adopt a much morescientific and intellectual approachto water, says Johnstone. “Current -ly, human need and politics seemto override all else, even ecologicalreserves. It’s a classic case of sci-ence versus politics versus theeconomy — an eternal struggle andone which politics is winning, tothe detriment of both the economyand science.” x

WATER RESOURCES

S A’s deepening crisisPoor management, climate dynamics as well as political

interference are threatening the country’s water capacity

Andrew Johnstone: Ground water is a viable

alternative, but needs management

Mike Muller: Incompetence is affecting SA’s

water supply


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ý S A’s telecommunications andICT sectors are regarded as amongthe most advanced in Africa. Inrecent years the country has shift-ed its focus from fixed-line net-works to mobile networks. Mobilepenetration is high at over 155%,though expectations are that thisgrowth will slow down significant-ly as the mobile market reachess at u r at io n .

Internet penetration sits ataround 37%. Fixed-line penetration,however, lags at 5.2% and this fig-ure looks set to dip even further.Telkom, a state-owned companyand the country’s largest providerof fixed phone lines, has had amajor decline in its traditionalvoice services. In the past year itsfixed lines declined from 2.9 mfixed lines to 2.7m lines. In a bid tobolster its revenue streams, the

company has started to push moreaggressively into the mobile andfibre broadband space.

Government owns 40.5% ofTelkom. After announcing in 2017that it was considering selling aportion of its share in Telkom, thatproposal appeared to be off thetable by mid-2018.

The country’s connectivityinfrastructure has grown signifi-cantly over the past decade, withone of the most significant driversbeing the influx of undersea cablesthat connect SA with the rest of theworld. In the past few years anumber of high-speed underseacables have been developed, push-ing both SA and the African con-tinent into greater — and more effi-cient — co n ne c t iv it y .

There has been a similar pushto roll-out a fibre network, partic-

in SA. The four largest mobile net-work operators, Vodacom, MTN,Cell C and Telkom, collectivelyinvested more than R30bn ininfrastructure in the 2016/2017financial year. And about 29mSouth Africans own smartphones— though many can’t afford toaccess the Internet, despite havinga mechanism to do so.

This is because mobile data inSA is among the most expensive inAfrica, and the most expensiveamong the continent’s six leadingeconomies. Research consultancyBDRC Continental ranks SA in 97thposition out of 197 countries interms of competitive pricing inrelation to mobile data costs.Among the Brics countries (Brazil,Russia, India, China and SA), SAhas the third-most expensive data.Stakeholders have called for moreinvestment in data infrastructure toimprove accessibility as well asbetter regulations to bring downdata costs.

Though there is strong demandfor 4G mobile services, networkoperators are battling to deliver 4Gas a result of congested data net-works. However, until the neces-sary spectrum is allocated, this sit-uation won’t be resolved.

Earlier this year governmentannounced that bringing dataprices down would be a priorityfor 2018. President CyrilRamaphosa has also revealed thatincreased competition and lowermobile communication prices arehigh on his agenda. He also saidgovernment would ensure that theallocation of spectrum wouldreduce barriers to entry.

However, as Govan-Vassenpoints out, while governmentunderstands and often highlightsthe importance of a digital society,very little has been done to bridgethe digital gap in SA.

The creation of a wireless openaccess network (OAN), a managedconsortium of public-private sectorstakeholders, was a key element ofthe 2016 National Integrated ICTPolicy. The thinking behind thispolicy is that a wireless OAN couldbe a solution to expanding connec-tivity to reach the 20m people inrural, less populated areas. How-

ever, says Govan-Vassen, it’s a rad-ical measure and a costly exercisethat will create a monopoly at thetop level.

“Rather than implementing awireless OAN,” says Govan-Vassen,“government needs to implement aflexible strategy that takes intoaccount the needs of each geo-graphical region. It should be look-ing at existing infrastructure acrossall technology types and map thisout per region, identify the gapsand develop a strategy to bridgethe infrastructure gaps.”

She says all network operatorsshould be given financial incentivesto provide competitive and inde-pendent open access services forless developed areas.

“Government should be takingthe lead to drive connectivityreach, and its role should focuspredominantly on launching policyand regulations that enable fasterdeployment of ICT plans whileensuring collaboration across alls t a ke ho lde r s ,” Govan-Vassen says.

Mobile operators blame lack ofspectrum for the high cost of data,arguing that in a spectrum-con-strained environment, they’re arehaving to make significant invest-

ment into densifying existing net-works to meet the growingdemand for data. A lack of spec-trum is limiting the ability ofmobile data providers to build highcapacity networks.

Lack of spectrum is also hin-dering the efforts of mobile net-work operators to offer 5G con-nectivity. However, this problem isexpected to be resolved in theshort term, says LehlohonoloMokenela, ICT senior industry ana-lyst at Frost & Sullivan.

Earlier this year Icasa (Indepen-dent Communications Authority ofSA) announced that its end-userand subscriber service charter reg-ulations were the start of a three-pronged process to address theprice of data services. These willprimarily be consumer protectionregulations aimed at promotingtransparency and prohibiting unfairbusiness rules.

Icasa has said it first needs toidentify priority markets that areprone to uncompetitive behaviour,and only then will it undertake amarket review of these prioritymarkets. The “Discussion Docu-ment on Priority Markets” wasreleased in February this year.After consumer groups complainedabout expiring data and costly out-of-bundle charges, Icasa in Aprilprohibited mobile operators fromcharging higher out-of-bundle datarates without the consent of cus-tomers. The new regulations cameinto force in June.

SA Connect

Go v e r n me nt ’s investment into ICTinfrastructure has focused on aselect few projects. In 2013 it gavethe green light to SA Connect, abroadband plan which aims todeliver 100% broadband connectiv-ity to government facilities by2020, as well as broadband accessto 90% of SA’s population by 2020.Phase one of the project involvedconnecting all schools, health facil-ities, government offices, ThusongCentres and post offices in eightrural district municipalities tobroadband services.

The project, however, has suf-fered endless delays with littlemovement made since it was

announced in 2013, primarily as aresult of a lack of project manage-me nt .

By early 2018, only two govern-ment institutions out of a targeted2,700 had been connected. Thebudget allocated to SA Connectwas reduced to R1.7bn in the 2018national budget, down from R1.9bnin 2017.

Due to a lack of funding, gov-ernment is working on leveragingprivate sector funding and theestablishment of public-privatepartnerships in order to fund phasetwo of the SA Connect project, for -mer telecommunications & postalservices minister Siyabonga Cweleannounced earlier this year.

Cwele also expressed the needto scale up public WiFi pro-grammes in the country. On lyTshwane, Johannesburg and CapeTown offer free WiFi in publicspaces. Tshwane takes the leadwith more than 1,000 free Internetzones. These free WiFi offeringsare funded by the city.

The first private entity to offerfree WiFi is Nashua Mpumalanga,which rolled out a free public Wi-Fi project in Mpumalanga’s Nkan-gala District Municipality in Maythis year, allowing all residents tosign up for 250 MB of free data, perdevice, each month.

Digital migration

The International Telecommunica-tions Union, an agency of the UN,has called on countries around theglobe to switch from an analogueto a digital broadcasting signal inan effort to free up radio frequencyspectrum in order to make way formobile broadband services.

SA failed to meet the July 2015deadline for the migration fromanalogue to digital. In late 2017government directed that SAswitch from analogue to digital ter-restrial television by June 2019.

S A’s digital migration project,however, has been fraught withproblems including legal battles,allegations of bribery and corrup-tion regarding the procurementprocess of digital TV decoders, aswell as party politics in connectionwith the ANC’s broadcasting digitalmigration policy. x

ICT

Combating SA’s

ICT challenges

SA needs to do more to bridge the huge digital gap and lower

the country’s data costs, which are among the highest in Africa

Naila Govan-Vassen: More commitment and

action from government needed

Lehlohonolo Mokenela: Access to 5G

connectivity on the horizon

ularly in urban areas. SA now hasan estimated 228,000 km of fibreinstalled, with 75% forming part ofthe backbone network, says NailaGovan-Vassen, ICT senior industryanalyst at Frost & Sullivan.

The gap in high-capacity infra-structure is greater in rural areasand former homelands than in thecities, though there are some urbanareas with high population densi-ties that remain underserved.

“However, the most significantgap in the national broadbandinfrastructure is in the access net-work, the so-called last-milei n f r a s t r u c t u r e ,” she says.

Despite this, there are opportu-nities for investment in ICT infra-structure, given that many of theco u nt r y ’s rural areas still lack suf-ficient connectivity, and as demandfor technologies such as fibre andlower data costs grows.

The high cost of data remains asignificant stumbling block.According to the “Internet Accessin SA 2017” research report, pro-duced by World Wide Worx andDark Fibre Africa, price, ratherthan a lack of infrastructure, is thebiggest obstacle to Internet growth

123RF/Jordi Clave Garsot

Financial Mail Page 22 -15/06/18 03:14:44 PM

Thursday June 21, 201822

ý Engineering skills and capacityhave a significant impact on infra-structure delivery: ensuring water,transport and health infrastructureare in place for starters.

There is little doubt that there isa clear link between well-function-ing infrastructure and a country’seconomy. According to the recentIMD World Competitiveness Rank-ing, SA remains in the bottom 10 ofa total of 63 countries assessed fortheir competitiveness. Those in thetop 10 tend to have well main-tained public infrastructure. Assuch, the infrastructure of a coun-try should be regarded as a publica s s et .

According to the 2017 SA Insti-tute of Civil Engineering’s (Saice)Infrastructure Report Card, whichmeasures the state of the country’sinfrastructure, one of the majorthemes emanating from all infra-structure sectors in the mostrecent report was the shortage ofskilled personnel involved in thedevelopment of infrastructure anda lack of maintenance taking place.

As the Saice report points out,efficient maintenance of infrastruc-ture is critical because, if infras-tructure is not correctly main-tained, its lifespan is shortened.Infrastructure, once created, is ademanding mistress. Miss out oncrucial maintenance steps andcosts will escalate.

While the engineering profes-sion has long lamented the criticalshortage of available engineeringskills, industry association, Con-sulting Engineers SA (Cesa) saysthere just aren’t sufficient engi-neering jobs to go around. Most ofCe s a’s member companies are inthe process of cutting back on staffcounts, says Cesa CEO ChrisCa mp b e l l . “The irony is that asmuch as SA has a huge backlog interms of infrastructure delivery,with the slowdown in governmentinvestment in infrastructure, therejust aren’t sufficient projects to goround and not enough positions forconsulting engineers,” he says.

“The result is that the gap, orwhat we call the ‘missing middle’,is getting wider as existing engi-neers get older and leave theindustry, yet recently graduatedengineers cannot find work.” Hesays this is despite the fact that thepublic sector has a huge shortageof experienced engineering skills,particularly at local governmentlev e l .

One of the biggest chal-lenges affecting the engineeringsector is that the public sector— typically a large employer ofengineering professionals — isprocuring engineering skills on

the basis of lowest possible costrather than on appropriate and rel-evant experience, expertise andc a p a c it y .

“An average consulting engi-neering service costs about 2 % -3 %of the total cost of the asset over its20-year life cycle,” says Campbell.“However, if the consulting engi-neer has the appropriate experi-ence, they should be able to addconsiderable value in terms of pro-ject life cycle value, mitigating risk

measures, long-term maintenancemeasures and overall specifica-t io n s .”

Government procurement,instead of focusing on properlyplanned projects, tries to squeezeengineering consulting fees — ev e nthough that portion of the projectaccounts for only 2%-3% of theoverall project life cycle cost —rather than focusing on ensuringvalue for money in the remaining97% of the project life cycle cost.

Procurement within the publicsector is a tick box exercise only,says Campbell, with those respon-sible for this critical area more fix-ated on compliance rather thanensuring they get value for money.

Infrastructure procurementshould be a very different gamefrom procuring stationery. Withoutthe appropriate expertise projectsend up being compromised, withthe result that infrastructure deliv-ery is once again jeopardised.

“Procurement officials need tobe re-educated in terms of how toprocure for infrastructure projects,and only competent serviceproviders with the requisite skillsand expertise should be allowed totender for these kinds of projects,as opposed to the current system,which is purely cost-based,” hesays. “This results in work going tocompanies without even a sem-blance of the most basic skillsr e q u i r e d ,” says Campbell.

Though public sector employ-ment figures have risen dramati-cally in the past few years, this hasnot been accompanied by anincrease in engineering capacity.

Even when engineering skillsare employed in the public sec-tor they’re often not retained forlong as a result of a lack ofclear and flexible career paths.

“The ideal scenario wouldbe a well capacitated publicsector that understands its rolein terms of infrastructure pro-

curement and delivery as well asits assets,” says Campbell.

ENGINEERING

Skills capacity issues

affecting infrastructure

More needs to be done to recruit and retain skilled engineers

for the entire life cycle of projects

Chris Campbell: Good-quality

engineering skills missing


Corporate report compiledby Lynette Dicey

Cover Picture: 123RFAdvertising executive:

Nigel Twidale

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