National Infrastructure Expenditure Estimates

1. National Infrastructure Expenditure Estimates Implications for the construction industry 2014/15 – 2016/17 Focus Forum 26 March 2014

2. Budget Review

3. Pravin Gordhan’s delivers his 5th Budget Speech

4. Investor’s budget • Capping expenditure • Maintaining focus on infrastructure expenditure • No idle targets or promises in terms of delivery • Strong focus on what has been achieved over the last twenty years • Focused on improving deficits to restore (or at least maintain current) sovereign debt ratings

5. Transformation and Reprioritisation • Maintaining current expenditure levels • Maintaining current spending priorities • Economic transformation through the NDP • More effective spending • Reprioritisation rather than new funds defines the MTEF Minister of Finance: Pravin Gordhan

6. Outline • Review of budgeted allocations over the next three years 2014/15 – 2016/17 • Not a review of policies or whether or not they are effective • Not a critic of whether or not the budget is sufficient to deal with backlogs • Unpacking the numbers, focussing on budgets rather than “plans” or programmes • Not project specific – list of infrastructure per vote • May be more questions than answers – new events develop on a daily basis

7. National Development Plan“Plan not a budget” • Golden thread for planning and setting short to medium term priorities to achieve long term objectives • Need the buy in from all government departments as well as the private sector

8. Allocations fall short of NDP targetIn order to achieve 10% target, need to double infrastructure allocations over the Medium Term Source: SARB Quarterly Bulletin, Budget Reviews

9. Gross Fixed capital formation Percentage of GDP NDP 2030 Target

10. Some interesting considerations set out in the NDP • Who pays for economic infrastructure? • “…users must pay the bulk of costs for economic infrastructure” • Role of fiscus to provide requisite guarantees • Human Settlements • Coordinated at local (municipal level) • (planning, implementation, services) • Local government challenges • Poor capacity, weak administrative systems, undue political interference in decision making, uneven fiscal capacity • Spatial transformation • SIP, Economic Zones

11. NDP: Infrastructure Priorities • Upgrading informal settlements • Public transport infrastructure and systems • Developing Durban-Gauteng freight corridor • New coal line to unlock coal deposits in the Waterberg • Develop new water schemes to supply urban and industrial centres • New irrigation systems in the Umzimbuvu river basin and Makathini Flats • National water conservation programme • Construction of infrastructure to import liquefied natural gas and increasing exploration to find domestic gas feedstock • Producing at least 20 000 MW of renewable electricity by 2030 • Currently 64 projects with collective capacity of 3933 MW, further announcement for additional projects expected 31 December. Thus far received a total of 93 bids (6032MW). • Decommission 11 000 MW ageing coal-fired power stations • Establishing national, regional and municipal fibre-optic networks to provide the backbone for broad band access (led by private sector)

12. Monitoring

13. Investment in construction, Client TypeY-Y Percentage change, 2005 prices Source: SARB Quarterly Bulletin

14. Impact of Government budget on GFCFGovernment (ex SOE, Private), Rm current prices • Challenge to compare calendar with financial year periods • Building industry less than 20% exposure (2012, 2013) • Civil industry app. 75% exposure (2012, 2013) Source: SARB Quarterly Bulleting, Budget Reviews

15. Impact of budget on GFCF: ResidentialGovernment (ex SOE, Private), Rm current prices • Challenge to compare calendar with financial year periods • Definition of capital asset based on ownership, not originator of finance 2004/05: Breaking new ground Housing policy Source: SARB Quarterly Bulleting, Budget Reviews

16. Investment in construction: 2005 pricesRevised estimates Equipment and machinery supplied to large construction projects, ie coal-fired power stations Source: SARB Quarterly Bulletin, SAFEC, Industry Insight

17. Government’s infrastructure programme cushion slowdown in construction sector Source: SARB Quarterly Bulletin

18. Mr L Ramatlakane (Cope) to ask the Minister in the Presidency ‘What progress has been made with regard to the delivery of the R860bn infrastructure programme…”

19. “Excellent progress is being made on the delivery of the R827bn MTEF” Minister in Presidency • Presidential Infrastructure Coordinating Commission (PICC) had presented 5 quarterly reports to cabinets showing progress on 150 project clusters in construction across the 18 Strategic Integrated Projects (SIP) • Must be seen in context in relation to the 20 year NDP • Current value of the National Infrastructure Plan is R4,3bn? • PICC tracks 50% of the all public sector infrastructure spend across the state and in SOE’s • State spending should increase to R300bn (from R200bn) per annum to reduce backlogs

20. PPS Survey Professional Provident Society (PPS) Only 42% of engineers felt that government was effectively delivering on its promised infrastructure spend, a recent Professional Provident Society (PPS) survey of 400 South African engineers revealed. Only 18% of engineers surveyed believed that enough was being done to attract new engineers to the profession. Still falling short of target of 10 093, with 8424 engineers registered in 2009 and 9387 in 2011. “Currently the roll-out of projects is hardly making a dent in the earmarked spend of more than R870-billion. The lack of adequate roll-out has seen companies releasing civil engineering professionals and some engineers have also chosen to leave the country for employment elsewhere,” SAICE, CEO Manglin Pillay said, adding that this was something South Africa could not afford should the big infrastructure roll-out happen.

21. Macro economic consideration

22. Conflicted with job creation and growth targets Infrastructure Development Bill

25. Shift in global growth expectations in favour of developed economies • Lower than expected exports due to weaker than expected demand from trading partners (Europe, US and Japan). This in turn affected the manufacturing sector. Africa has subsequently become a more important export destination. • Higher levels of exchange rate volatility, because of higher levels of global liquidity and fluctuating risk appetite due to US easing bond purchases in May 2013 and again in January 2014. • South Africa relies on foreign inflows to sustain current investment levels and fund the current account and budget deficits. Inflows fell to R24bn in 2013 vs R88bn in 2012. Source: Treasury

26. Domestic Economic outlook below 4%Treasury estimates Source: Treasury

27. Growth outlook for 2014/15 hinges on the following: • Improved export growth • Lower import growth • Stronger private sector investment as a result of improved infrastructure alleviating bottlenecks • Stronger growth in job creation stimulating household expenditure

28. Risk: Budget deficit When spending exceeds income = budget deficit Deficit R1.1 trillion Source: Treasury

29. Threats to domestic economic outlook • Budget deficit • Current account deficit • Weaker export demand, could lower GDP growth outlook • Credit ratings and the World Government bond index • Volatile capital flows • Exposure to foreign portfolio investments • Emerging market risks • Currency depreciation • Oil price volatility (supply constraints) • Inflationary pressure surprise on the upside • Monetary policy – balance lower growth amidst higher price pressures • Savings / Debt Dilemma • 2014 Elections

30. When spending exceeds income = deficit • How is this financed? • Through borrowing in the domestic and international markets mainly through bonds • Adds to government’s debt level that needs to be serviced through interest payments • The higher the debt level the more money is required to from the fiscus to finance it • Borrowing requirement is projected to increase to R180bn by 2016/17. • 3% of GDP goes towards servicing debt

31. Budget deficitto improve from -4% in 2013 to -2.8% in 2016 Source: Treasury

32. Debt is financed through bond markets: R215bn • Ownership of government bond has increased from 18% in 2009 to 36% in 2013’ • Increased vulnerability • Critical to maintain (or improve) credit ratings

33. Tighter control on expenditure • Because expenditure will be capped over the MTEF, more effective spending will be critical • How does government propose to achieve this? • Several spending reviews are under way by National Treasury and Dept of Performance Monitoring and Evaluation to provide greater understanding of performance and value for money • These include feedback by SOE’s on capital spending (Quarterly) Initial findings will be released in 2014/15 • Similar reviews are currently being conducted in provincial governments • Office of the Accountant-General is also strengthening the control environment ito government’s financial systems • Combat waste – cost containment instructions in January 2014 include budgets for consultants, travel, accommodation, and venue hire • Contingency Reserve was lowered to R3bn in 2014/15. This means government wont be table to accommodate unforeseeable and unavoidable expenditure.

34. Reprioritisation NOT new funds • Reprioritisation that effect construction announced in 2014/15: R5.5bn • Rail network • Municipal Human settlement capacity grant • Regional bulk infrastructure • Repairs to damaged infrastructure caused by natural disasters • By comparison R21.9bn was added to the public sector salary and wage bill

35. Impact of higher inflation on public sector wage agreements • Wage agreements are inflation +1 • Reviewed for 2015 • Capping expenditure means higher wage bill will be financed through reprioritization • Brings us back to the issue of more effective spending or the construction sector will bear the brunt

36. Currency “adjustment” US Federal easing of Bond purchases Emerging market risks increase due to capital flows (May 2013 / January 2014) • 2012/13 • Strike action • Sovereign debt rating • Current account deficit • The rand experienced the largest depreciation among emerging markets, falling by 17% • Risk to inflation • But is hoped to boost manufacturing, exports and job creation Source: Global Insight

37. Interest rates, inflation targeting and the currency • Repo rate was increased to 6% as a result of currency depreciation. • Prior 2008 this was a more effective instrument to control money supply • Low growth economy, money supply is already under pressure • Is inflation targeting still a credible instrument post 2008/09? • How much tightening of monetary policy would be needed to improve the currency? • FNB 11% by end 2015?

38. Exports should be driven by more than a weaker currency • Manufacturing sector steady, albeit slow recovery up to 2012, but stagnated in 2013 • The currency has been deprecating for the past two years (more aggressively over the last six months), with no real improvement seen in 2013 • What do we have to export vs what we need to import

39. Saving / Debt dilemma Source: Stats SA

40. Higher interest rates will impact on debt levels Source: Treasury

41. Inflationary pressures surprised on the upside • Currency depreciation Source: Treasury

42. Elections: Civil Tender index vs Elections1999=100 (MAT) (Source: Project Database) 2009 Election 2004 Election 1999 Election

43. Economic environment • Stable, low global growth outlook • Increased emerging market risks • Capital flows and currency volatilities • China • Russia • Weak domestic growth • Poor business confidence • Savings and debt ratio unsatisfactory • Limited opportunities for employment growth • Below inflationary wage increases • Deficit risks • Current account deficit • Budget Deficit • Trade deficit • Tighter fiscal control • Inflationary pressures • Inflation targeting being criticized • Election Investor confidence Rating agencies

44. ? • If we do not achieve 2.7% growth • Will not have R1.1 trillion to spend • Will not be able to finance current or new borrowing requirements • BUT will still have to finance a growing public sector wage bill because of higher inflation • Reprioritisation NOT new funds • Result in further cuts in infrastructure

45. 2014/15 – 2016/17 Infrastructure estimates

46. Public Sector Infrastructure Estimates2011 vs 2014 (Rm, Current prices) Source: Treasury

47. NDP and the Budget Budget 2014/15 NATIONAL DEVELOPMENT PLAN 16 year plan Employment Urbanisation Education / Training Diversified Economy Links with emerging economies Low-carbon future Equality

48. Unpacking the R847bn Central: R45 bn (12%) Provincial: R135 bn (37%) Local: R184 bn (51%)

49. Public sector infrastructure estimates

50. Stronger growth over MTEF from government