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Capital projects down in 2019 as economy battles

BUSINESS LIVE / 12 FEBRUARY 2020 - 12:43 / LYNLEY DONNELLY

The value of capital expenditure projects declined by R5bn in 2019, as the economy faced difficult conditions that included extensive power cuts

Capital expenditure projects, an important ingredient for growth and job creation in the economy, declined in 2019 as SA faced difficult conditions that included power cuts, depressed local and global demand, and a poor policy environment.

“The combination of these factors kept business confidence at record lows and investors wary of committing to large expansion plans,” Nedbank said in its latest capital expenditure project listing report released on Wednesday.

According to the report, the value of projects in 2019 was R123bn, down from R128bn in 2018, while the number of projects announced was 58, down from the previous 59 — the lowest level since 2017.

As unemployment remains stuck at record levels of 29.1%, President Cyril Ramaphosa has made attracting fixed investment to the value of R1.2-trillion by 2023 a goal of his administration. Investment in the economy is an important enabler of job creation.

However, load-shedding by cash-strapped power utility Eskom has weighed on economic activity, and uncertainty over policies, such as the mining charter and land expropriation without compensation, have left investors leery.

At last year’s second SA Investment Conference, Ramaphosa announced that about R363bn in investment pledges had been secured from local and international investors.

According to Nedbank economist Johannes Khosa, Nedbank’s report only captures projects that are going ahead or have begun, not projects that are promised and still awaiting approval. The report also does not capture projects valued at less than R20m, and only records projects of an expansionary nature, as opposed to those that are maintenance or pure replacement investments needed to replace worn out capital goods.

Private sector investment

The private sector accounted for most of the investment that took place in 2019 at 63% of the total projects, while the public sector accounted for 29%.

Electricity supply has to improve if fixed investment is going to pick up, said Khosa. “If we see a reduction in load-shedding we are likely to see a pick up in confidence.” Similarly, if the global economy improves and local demand grows, “chances are that companies will commit to expanding capacity”, he said, adding, “but overall, the general picture is very weak.”

Nedbank forecasts fixed investment to only grow by 0.9% in 2020.

“There are still significant concerns about the unresolved policy issues such as on land expropriation without compensation and the unfavourable policy framework for mining,” the report said. “Investors are likely to remain cautious of committing to large capital spending in the short term.”

During 2019, the manufacturing sector saw the largest declines in terms of investments — given subdued demand and domestic operating challenges — with projects valued at R14bn, down from R49bn in 2018.

The value for projects in the sector for 2018 was, however, likely boosted by the first investment conference and the projects announced there and which started to come on stream, Nedbank said. These included the Mercedes-Benz SA plan to spend R10bn expanding its East London plant and paper giant Sappi’s R5bn spend on various plant improvements.

The transport, storage and communications sector saw the largest projects, valued at R44.5bn in 2019, its highest level of investment since 2012.

The value was pushed up by the second phase of the Dube Tradeport special economic zone (SEZ), and the expansion of the Cape Town International Airport and OR Tambo International Airports by Airports Company SA.

donnellyl@businesslive.co.za

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LINK : https://www.businesslive.co.za/bd/economy/2020-02-12-capital-projects-down-in-2019-as-economy-battles/

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