By Bongani Mankewu
THE MEDIAN-Term Budget Policy Statement 2021 appreciates building a prosperous society requires much higher levels of economic growth, supported by structural reforms, improved state capacity, and sustainable public finances. The aim of structural reforms is to boost an economy’s competitiveness, growth potential and ability to adjust.
This is consistent with President Cyril Ramaphosa’s emphasis “We are determined not merely to return our economy to where it was before the coronavirus, but to forge a new economy in a new global reality.”
Accordingly, the Economic Reconstruction and Recovery Plan identified eight key areas of priority including infrastructure roll-out and localisation through industrialisation.
Additionally, directing pension funds through Development Finance Institutions (DFIs), for preparing projects for bankability and unlocking funding for high-impact capital projects and long-term infrastructure projects. Phase two of the recovery plan calls for the state-owned enterprises (SOEs) to boost industrialisation and trade competitiveness. With private sector investment to be bolstered by appropriately structured public-private partnerships.
On the contrary, the fiscal framework offers no support to SOEs over the medium term, as they remain a large contingent liability risk. In addition, the government will not commit to new spending despite temporary revenue windfalls.
In addition to other instruments, SOEs and the state-owned development bank, the Industrial Development Corporation (IDC), played a critical role in post-WWII industrialisation. The apartheid state introduced various industries, including electricity, rail, ports, telecommunications, steel, petrochemicals and aluminium, primarily through the introduction of SOEs.
In spite of the debilitated state of SOES, constraining them without offering alternative instruments runs contrary to the Recovery Plan, which seeks to stimulate industrialisation and trade competitiveness. This, therefore, raises concerns about the certainty of these strategic assets whether they should be controlled by the public or private sector.
However, the Recovery Plan calls for a review of PPP regulations that can foster innovation in infrastructure delivery, thus stimulating industrialisation and trade competitiveness. The preparation of bankable projects requires an impeccable level of independence and robustness and indisputable, universities dovetailing with industry bodies are a better place for the task.
By establishing a sector-focused PPP regulatory framework, it will be possible to structure Special Purpose Vehicles (SPVs), Gautrain-like, that effectively eliminate political interference, and agency problems when executing these bankable projects. However, short-term liquidity threatens private investors because of the high leverage of these SPVs, with a debt-to-equity ratio of about 80:20 to be sustained by ex-ante cash flows. According to the Recovery Plan, pension funds through DFIs must guarantee liquidity with a thorough risk allocation.
As a result of these SPVs, the industrialisation and trade competitiveness objectives of the Recovery Plan can be achieved through the creation of value chains that enhance localisation.
Therefore, this might be cutting the Gordian Knot (third way) for the benefit of the noble objectives of the Recovery Plan –stimulating industrialisation and trade competitiveness.
Bongani Mankewu is an associate of the Infrastructure Development & Engagement Unit at Nelson Mandela University.
*The views expressed here are not necessarily those of IOL or of title sites.
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