Road Needs in South Africa (and how to finance them)

1. Road Needs in South Africa(and how to finance them) Peter Copley PrEng Evaluation Specialist DBSA SARF/RPF Conference, Fernhill Hotel PMB/Msunduze, KZN 8th May 2012

2. What is sustainability?

3. SARF_RPF Conference, Fernhill: PMB/Msunduze Real Gross Fixed Capital Formation by General Government and Public Corporations on Economic and Social Infrastructure, 1946 -2007 (Rm)

4. Strategic road network of South Africa (SANRAL: 2005)

5. Condition of Roads Serving an Economic & Social purpose (generally provincial)

6. Annual Provincial Road Expenditure 1800.0 1600.0 1400.0 1200.0 2001 1000.0 2002 R millions 2003 2004 800.0 2005 600.0 400.0 200.0 0.0 Limpopo KZN Mpumalanga Free State Western Cape Eastern Cape North West Northern Gauteng Cape Province A provincial response (PIG)

7. The Municipal Infrastructure Grant (MIG) for Social Infrastructure in general (competing alternatives)

8. SARF_RPF Conference, Fernhill: PMB/Msunduze Chasing Moving Targets

9. Capital revenue source by municipal category (for South Africa)

10. Budgeted vs. Modelled roads operating expenditure by municipal category (for South Africa)

11. SARF_RPF Conference, Fernhill: PMB/Msunduze PPP Funding Options practiced in SADC

12. World Oil Production Forecast Source: Energy Watch Group (2007)

13. SARF_RPF Conference, Fernhill: PMB/Msunduze Transport Energy Efficiency Source: http://openlearn.open.ac.uk/file.php/1697/t206b1c01f49.jpg

14. Output 3: Ensure maintenance and strategic expansion of road and rail network, operational efficiency, capacity and competitiveness of sea ports • Key sector Challenges (problem statement): • Inefficient operations • Underinvestment in infrastructure and operations • Inappropriate policy and regulatory frameworks • What have we not done right? • Failure to make timely decisions regarding critical transport infrastructure investments • Inappropriate regulatory frameworks • Lack of transparency on cross subsidisation • No involvement of private sector in infrastructure provision and operations • What are we going to do differently? • Develop and provide policy clarity to facilitate timeous decision-making • Develop a framework for economic regulation and competition • Introduce and enhance private sector involvement in infrastructure investment and operations • Secure adequate funding for infrastructure investment

15. Sub-outputs and activities for transport

16. Sub-outputs and activities for transport

17. Indicators, baseline, targets, resources and funding

18. Indicators, baseline, targets, resources and funding

19. Operational efficiency indicators for transport

20. SARF_RPF Conference, Fernhill: PMB/Msunduze • ‘Infrastructure to 2030’: (ISBN 978-92-64-02398-7 OECD Publishing, May 2006) • ‘The African Infrastructure Country Diagnostic (Study)’:"Africa‘s Infrastructure: A Time for Transformation”: The World Bank, released end 2009 http://www.infrastructureafrica.org/aicd • IRF International Road and CODATU public transport statistics, published annually, together with gTKP/SUTP (German), ITDP (New York), ITSSA and ‘The New Mobility/Economy’ Cape Town • ‘Heads in the Sand’: Martin Creamer Publications: A Report by Global Witness: October 2009 Current Seminal Documents for Africa

21. SARF_RPF Conference, Fernhill: PMB/Msunduze • Fifteen policy recommendations, three of which are listed here. • Infrastructure is long term in nature and its provision is necessary irrespective of changing political persuasions • Asset management is of equal importance to new investment • The governments of the World can no longer afford to provide the necessary infrastructure unaided. There have to be PPPs. Fundamental Findings: OECD

23. Except for Road Safety data, South Africa’s comes from 2000 and remains largely incomplete (Thanks to SABITA and SANRAL for what there is) • Competitors’ (ie BRICs) data is complete and current viz 2005 (now 2009) • Current IRF statistics are dated 2011, data up to 2009, available from SARF Head Office in Braamfontein at no cost if you are a paid up member of SARF Where does South Africa stand…..

24. While the title of the IRF publication says ‘International World Roads Statistics’ they extend very comprehensively into rail and liquid energy, also accommodating economic indicators and environmental considerations (eg fuel consumption and carbon emissions), although not yet logistics or public transport data • RPF requested to consider how to bring South Africa back on board in providing timeous, comprehensive internationally comparative quality data within the international data set already described by and existent with the IRF(with extension into public transport, logistics and other related energy data eg electricity for both rail traction and electricity/gas for road based vehicles) Generic observations

25. Economic roads should be funded as directly as possible. This means direct user charging, using loan funding if necessary. • Roads with a mixed economic and social function should be funded from an indirect tax. This means a levy on fuel, with decisions being taken as close to the ground as possible. Do NOT loan fund. • Roads with a purely social function should be funded from the general tax bases, using loan funding if essential. Fundamental Closing Thoughts

26. The mix of these options remains a political choice. • Tolls; fuel levy; EPWP/Jobs Fund • Transport operational subsidies …..sustainability? • Recognising the political nature of road and transport investment decisions, is it not time to resuscitate the National Transport Commission, representative of government, stakeholders, users, business and civil society? Takeaway

27. Peter Copley Pr Eng: Evaluation Specialist DBSA: peterc@dbsa.org Thank you

28. Contact Details SARF_RPF Conference, Fernhill: PMB/Msunduze

29. Drivers of Road Provision Miriam Chikwanda/Peter Copley Advisory Unit DBSA

30. Road tolling in the South African model can start at between 4 000 and 4 500 vpd AADT, with approximately 17% heavy vehicles Rail requires 1 m tonnes per annum (South African Freight Rail) cf 300 000 tonnes per annum for the BBR and other rail concessionnaires..but fixed investment needs are substantial Ports appear to require 3 million tonnes per annum Airports are difficult but appear to need in excess of 500 000 persons per annum Below these thresholds does not imply PPP’s can’t be developed but other measures of support need to be considered (eg shadow tolls; market guarantees; increasing the revenue base; capital from government, operations from private sector) In general, speaking of debt equity ratios of approx 17:83 and DSCR of between 1,0 and 1,5 in year 5 to 8 SARF_RPF Conference, Fernhill: PMB/Msunduze An indication of viability for self sustaining projects

31. SARF_RPF Conference, Fernhill: PMB/Msunduze • Looking into sources of funding and their pros and cons • What is a reasonable investment rate? Risk/Return expectations • Equity investors five years at between 17% and 50% per annum (Libor and Jibar rates) • Commercial banks eight years at prevailing interest rates • Merchant Banks twelve years at medium term interest rates • Pension funds fifteen years at long term interest rates • DFI’s 20 year horizons ideally judged on economic as opposed to financial merit Finding ways for sustainable funding

32. Low volume usage Fundamental to use ICT effectively to collect revenues Fundamental to have understandable, common legal frameworks and agreements Transparency and consistency imperative User acceptance and willingness to embrace (e.g. charging per tonne km and electronic through ticketing) Capacity to administer the financial systems Societal acceptance of the fact that infrastructure is long term in nature and needs to be taxed Exchangeable instruments and markets to exchange these....within the regions SARF_RPF Conference, Fernhill: PMB/Msunduze Which instrument for which aspect?

33. SARF_RPF Conference, Fernhill: PMB/Msunduze • A steady state? Entropy, as of steam engines and the Universe? • Environmental sustainability • Economic sustainability • Technical sustainability • Financial sustainability • Institutionally sustainable • Socially sustainable • Compounding ‘growth’ appears to inevitably lead to collapse and renewal What is sustainable? What is ‘sustainable’?

34. SARF_RPF Conference, Fernhill: PMB/Msunduze • Centrally planned economies collapsed in the 1990’s, after a life of about 80 years • Market driven economies collapsed ten years later, in accordance with the long wave model of Kondratieff, also of about 80 years • ‘Sustainability’ appears to lie in societies’ abilities to develop systems which can in some way try to ensure equitableness, fairness, reduced Gini coefficients and closer rankings of measures of entropy, aiming towards unity…and a common ‘unity’ • Environmental (biophysical) sustainability is indisputably the highest priority at this time Some personal views

35. SARF_RPF Conference, Fernhill: PMB/Msunduze • Fundamental that freight (truck and rail) growth will grow at the same rate as GDP growth, with personal movement (cars and public transport) growing at 1,5 times that: Gauteng traffic currently growing at 7% per annum • The measure of success is GDP growth, euphemistically and idealistically expressed as per capita GDP growth • With roads, priorities are determined using the Highway Design and Maintenance Model (HDM) which prioritises according to producer surplus, • with the Rural Economic Development (RED) Model (Consumer Surplus) coming in as an after thought • It is possible that ongoing ‘sustainability’ is an unachievable utopia Structural weaknesses/flaws

36. SARF_RPF Conference, Fernhill: PMB/Msunduze • In general people urbanise, with an idealised notion of creating sufficient personal resources to out migrate to more salubrious climes at a point in the future • Need to consider central places theories (Christaller and Loesch) as existing before the 1913 Land Act for a real sense of fair and sustainable spatial distribution of our South(ern) African universe • Ultimate sustainability lies in harmonizing with natural forces rather than endeavoring to ‘harness the forces of nature for the benefit of humankind’ (a definition of civil engineering) • Triple bottom line accountability….and we have a long way to go in this regard Fundamental

37. SARF_RPF Conference, Fernhill: PMB/Msunduze • European banks led the ‘Scramble for Africa’ in the 19th century, for leveraged growth of their home based equity • The BASIC countries are now doing the same, for the same reasons • Nothing sinister in this. Just normal human behaviour but it does color all transport investment decisions in whether we are looking at local, provincial, national, regional or sub-continental canvases against which we are thinking ‘sustainably’ • An investment in one will have an effect, frequently unforeseen, on the others…and that can be scary unless our societal systems can effectively check and balance The Global Village

38. The problem Studies of European transport policy highlight the difficulty of mobilising capital investment as a key problem in financing transport infrastructure projects. Research is needed to identify the optimum charging and investment policies to attract the necessary funding. One promising avenue is the creation of a European transport infrastructure fund, financed by mark-ups on transport activities. Another option is to exploit mark-ups of user costs charged by the suppliers who make the initial investment. Scientific modelling and analysis is needed to find the best option or mixture of options. The Problem, internationally

39. SARF_RPF Conference, Fernhill: PMB/Msunduze Project deliverables Report on the economics of European infrastructure funds – June 2006 Scenarios for a European infrastructure fund and the use of mark-ups – June 2006 Results of testing the impacts of alternative scenarios for a European infrastructure fund – April 2007 Five case studies on the effects of infrastructure fund scenarios on existing Trans-European Transport Network projects – June 2007 Conclusions, recommendations and final report – December 2007 The European Deliverables

40. SARF_RPF Conference, Fernhill: PMB/Msunduze • Africa’s Infrastructure need is accelerating due both to economic growth and to historic and current underinvestment • Current need is US$93 bn per annum, twice that determined only nine years ago • Energy the dominant issue (50%), with Transport second (25%), followed by water and sanitation and ICT Fundamental Findings: World Bank

41. SARF_RPF Conference, Fernhill: PMB/Msunduze • Fifteen policy recommendations • Infrastructure is long term in nature and its provision is necessary irrespective of changing political persuasions • Asset management is of equal importance to new investment • The governments of the World can no longer afford to provide the necessary infrastructure unaided Fundamental Findings: OECD

42. SARF_RPF Conference, Fernhill: PMB/Msunduze • In the transport sector the different modes are finding their market niches based on economic forces, without need for regulation • In particular rail is finding its role in longer distances for containers, low value high volume freight and fast people movement (BRT for Africa) • This has great (massive) implications for the possible future of rail in Africa if there is a change in rail gauge Fundamental Findings: OECD

43. SARF_RPF Conference, Fernhill: PMB/Msunduze • How can investment in transport programmes and projects be justified? • Sober economic analysis (CBA, IRR, NPV) versus wider economic and social assessment of costs and benefits • Competition with other public services • Remove emotion Dilemma - Justifying investments

44. SARF_RPF Conference, Fernhill: PMB/Msunduze SADC Intra Regional Traffic movement

45. The problem Common experiences in African transport policy and implementation highlight the difficulty of mobilising capital investment as a key problem in financing transport infrastructure projects. Research is needed to identify the optimum charging and investment policies to attract the necessary funding. One promising avenue is the creation of various African regional transport infrastructure funds, financed by different financial sources but without mark-ups on transport activities. It is imperative that appropriate levels of mark-up of user costs charged by the suppliers (ideally PPP’s) who make the initial investment. Scientific modelling and analysis is needed to find the best option or mixture of options in an environment of low levels of usage. The Problem, for Africa

46. SARF_RPF Conference, Fernhill: PMB/Msunduze Project deliverables Report on the economics of African sourced and located infrastructure funds – June ???? Scenarios for co-ordinated Regional infrastructure funds and the use of mark-ups – June ???? Results of testing the impacts of alternative scenarios for Regional infrastructure funds– April????+1 Five case studies on the effects of infrastructure fund scenarios on existing Trans-Regional Transport Network projects – June ????+1 Conclusions, recommendations and final report – December 2011 The African Deliverables

47. I’m personally satisfied that we have a strong case to continue to develop PPP’s to provide necessary infrastructure Do we start small (e.g. municipal services) and work upwards? Or do we start big (e.g. toll roads) and work downwards? Fundamentally need long term committed champions from both the public and the private sector sides…together with easily understandable , robust user charging systems within legal frameworks that are trusted…by everyone SARF_RPF Conference, Fernhill: PMB/Msunduze Thank you for your attention….

48. The State of South Africa’s Transport Networks A comparative review of the IRF’s 2007 International Road Statistics: (2005 data)

49. Transportation & Logistics: PricewaterhouseCoopers EBS Business School Supply Chain Management Institute: For more information on the T&L 2030 series or a download of our three T&L 2030 publications, please visit www.tl2030.com. Volume 3: Emerging Markets –New hubs, new spokes, new industry leaders?

50. China Logistics Performance Index 3.49 (#27) • South Africa Logistics Performance Index 3.46 (#28) • Turkey Logistics Performance Index 3.22 (#39) • Brazil Logistics Performance Index 3.20 (#41) • India Logistics Performance Index 3.12 (#47) • Mexico Logistics Performance Index 3.05 (#50) • Russia Logistics Performance Index 2.61 (#94) • South Africa’s World Competitiveness Ranking (#54) South Africa’s logistic competitors