Posted by: michaeldavidpower | January 4, 2010

Another Business Day Op-Ed piece…

…this on the critical need for South Africa to develop its export-related infrastructural capacity.

Promoting a competitive currency is the single most important arrow the South African Government can fire from its quiver if it is to hit its targets of higher growth and greater employment. But it is not the only arrow, not by a long shot. Indeed if it were the only one, we would probably lose the war.

One, perhaps less obvious, arrow that will also need to be fired in the wake of any devaluation will be the vital need to build an infrastructure designed to support an export-led economy. As we enter 2010 – a year for which South Africa has undertaken the massive infrastructure spend required to host the World Cup – we need to remind ourselves that, once the vuvuzelas have fallen silent, a very different sort of infrastructure spend needs to be prioritized.

First let’s soften the coming hammer blow with the good news. One export-oriented sector a more competitive currency would naturally promote would be tourism. Conveniently the World Cup’s expenditure programme will leave us with a modern transport and accommodation network well able to handle many more tourists. This means, post 2010, investment in tourism infrastructure can take a breather; other sectors can and must be prioritized.

An export-oriented expenditure focus may not seem to develop what politicians crave: ‘delivery’. Not necessarily; President Zuma’s expanded rural road network would, if geared to the development of an export-oriented agricultural sector, serve a dual purpose: delivering transport connectivity to the rural poor plus promoting South African exports.

The funding demands that this new focus would place on the South African Treasury – and the balance sheets of our already overstretched parastatals – will be monumental.  Yet, if a more competitive Rand were to drive the healthy repositioning of the South African body economic, meeting these demands would still be of paramount importance. Of course, the public sector can and must carry its share of the burden and, in their efforts, they must pursue every funding avenue possible. Why not, for instance, as has been done in Kenya, issue very-popular-with-investors infrastructure bonds to help fund the state’s share?

But where Government cannot fund, say, another rail-link between a new coal project in Mpumalanga and Richard’s Bay, the private sector should be heavily encouraged to do so. A new rail link dedicated to facilitating coal exports would, by not diverting existing transport capacity, only complement the current network. And if new mines need water and electricity capacity, why not use tax incentives to help develop this capacity, so building new dams and solar power grids? By doing this as a country, we lose nothing and gain enormously: something of something is always more than 100% of nothing.

India – employing an economic model that is finding much favour in Pretoria – has encouraged its steel companies to develop their own integrated networks, from independent power and water supplies to dedicated rail and port capacities. Bottom line? These private sector networks supercharge India’s exports. But even in India, this open approach is not always enough; as Sunil Bharti Mittal, MD of Bharti Televentures, has noted: “Weak infrastructure is costing India about 3 or 4% of lost GDP growth a year”. Would it not be a disaster if, following a devaluation in South Africa, our inappropriate infrastructure prevented South Africa from growing 6% and more?

Letting the private sector build new infrastructural capacity in direct support of export growth is an absolute ‘no-brainer’ in today’s hypercompetitive world. All over Brazil it is happening – local heroes like iron ore mining Vale now own the Centro-Atlântica Railway and Vitória-Minas Rail and Praia Mole port facilities; foreign investors like the Noble Group have funded extensive grain and sugar export facilities in Santos. Indeed, the Chinese even allow foreigners to fund import-oriented infrastructure! Our own Kumba has financed the upgrading of its iron ore handling facility in the port of Qingdao.

Why burden the South African taxpayer with financing new infrastructure projects destined to sell product to foreigners? Let private capital do it instead; ultimately foreign consumers will pay for it. The South African Government should applaud loudly if someone else will bear such a burden. (Note too that funding expensive infrastructure projects can even work when the consumer is local – isn’t this how we built up our successful profit-earning, tax-paying, rural area-reaching mobile phone industry?)

Not all South Africa’s parastatal-driven infrastructure projects have underperformed. Thus far the Spoornet/Kumba Sishen-to-Saldanha-Bay rail-link has worked well. Iron ore export volumes have risen and capacity expansions continue. But it is becoming abundantly clear that if annual capacity is to jump from 60m to 90m tonnes (including ore from Assamang), the public sector cannot cover all the additional investment alone. So let the private sector fund it instead!  Kumba no doubt wants to run their own mine-to-port rail operations as do competitors BHP-Billiton, RTZ and Vale. Who knows? Kumba may even attract a Chinese co-investor for such a project. Where the private sector or a foreign investor is willing and able, generally speaking, the public sector should say “Be my guest”.

South African coal exports now face similar hurdles. Richard’s Bay Coal Terminal is a successful private sector infrastructure model deserving replication throughout the country. Yet coal shipments via RBCT have fallen 10% since 2006 even as the Terminal’s capacity has recently risen by over 30%. At fault is Spoornet, unable to provide the rail capacity to maintain tonnages. The execrable result is that South Africa’s coal industry – which has ample coal reserves – has only been allowed to play the price game in recent bonanza years, missing out on the volume game completely. A devaluation which only achieves higher revenues via the price effect would be missing the ultimate objective – to foster a supply side revolution that sees us producing more as a nation and, much more importantly, employing many more people to do so.

Other infrastructural requirements include (dare I say it?!) more electricity. We cannot grow an export-oriented industrial side without a reliable and increasing supply of electric power to those mines and factories that will need it: in particular, we cannot allow a repeat of power rationing to the gold and platinum sectors.  The woeful saga of aluminium smelting in South Africa – culminating in the cancellation by RTZ of the Coega Smelter – centres on the lack of availability of competitively priced electricity. So why not – and here is a radical thought – let private capital fund, say, 100% of the proposed Kusile Power Station?

Enough said; indulging in the national sport of kicking Eskom has crowded out much-needed comment on other areas where criticism is also due. For instance, Johannesburg cannot become the central aviation hub serving our tourism industry without an absolutely reliable supply of AVGAS – one reason, among many, why the construction of the Transnet Pipeline from Durban to Gauteng must proceed without further delay. And using massive tariff increases to fund heavy capital expenditure is a risky, inflationary and ultimately absurd way to proceed. Why not emulate Russia here? The pipeline network currently being built throughout Central Asia has high private sector involvement. Surely a Durban-to-Gauteng pipeline project can also be funded by private capital? And if this meant Transnet were not even to be a minority investor in the project, so be it: public interest can always be protected by the regulator, in this case NERSA.

If, via a competitive currency, South Africa were to develop an export-led growth strategy, government must rethink exactly what role they must play in reshaping the economy to get the most out of this new focus. Absolutely critical to this approach would be supporting the creation of a complementary infrastructure. And if our parastatals cannot fund all the new needs – as even now they cannot without forcing through huge increases in administered prices – they must be prepared to stand aside and let the private sector do it for them. After all, this approach is now very common in the BRICs – Brazil, Russia, India and China. So why not in South Africa as well?

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