A poisoned infrastructure programme – or real policy reform?
DAILY FRIEND / 20 AUGUST 2020 - 11.22 / ANTHEA JEFFREY
Now that an estimated 3 million jobs have been lost and the crippled economy looks set to contract by some 7% in 2020, the government, the ANC, the SACP, Cosatu, and the Tripartite Alliance have all put forward plans for the country’s growth and recovery. Business For South Africa (B4SA) has also invested great effort in an alternative recovery plan.
What all these plans have in common is a strong emphasis on a massive infrastructure programme as the key to kick-starting growth. What all largely ignore is the vital need for policy changes to protect property rights, reform labour laws, and replace black economic empowerment (BEE) policies with a non-racial alternative that focuses on helping the poor, rather than a small elite.
Expanding and improving infrastructure is, of course, important. The binding constraint of limited, costly, and erratic electricity supply must be overcome. Sufficient water to meet future needs must be secured. Efficient and cost-effective rail, port, and road linkages are essential, as is the rapid roll-out of high-speed broadband. These needs must be met to provide a sound foundation for economic expansion.
But there are also major risks in the emphasis on infrastructure – and great dangers in overlooking the need for policy reform.
On the infrastructure front, the biggest risk lies in the ANC’s real reasons for wanting a host of billion-rand projects. In a nutshell, these projects are needed to oil the patronage machine that keeps its cadres loyal, mollifies its feuding factions, and helps maintain a façade of unity.
From the ANC’s perspective, a large and opaque infrastructure programme offers three key benefits. First, and most important, it provides a credible rationale for tapping into the country’s roughly R4-trillion pool of pension savings, both public and private.
Prime the patronage machine
Pension funds would be more difficult to access if the stated aim was to help pay public servant salaries (which cost 51c in every rand paid in tax) or to meet debt repayments (21c in every rand). Say, however, that the money is needed for essential infrastructure, and it becomes much easier to prime the patronage machine with the pension savings of ordinary South Africans.
The necessary soft-soaping of the public slipped earlier this week, however, when the Sunday Times reported that a revised ANC reconstruction plan, still to be officially released, seeks to amend Regulation 28 in worrying ways. (This regulation is issued under the Pension Funds Act and currently sets ceilings for equity and off-shore investments, among other things.)
According to the ANC’s new plan, Regulation 28 is to be changed to ‘facilitate direct access’ to pension savings by the state’s development finance institutions. This, it says, will help ‘unlock the funding of long-term infrastructure projects’.
Public concern soon mounted to the point where ANC economic policy chief Enoch Godongwana felt constrained to intervene. It was ‘mischievous’, he said the following day, to suggest that the ANC’s proposed ‘tweaking’ of Regulation 28 was intended to introduce ‘enforced prescription’ or to oblige pension funds to ‘bail out collapsing state-owned enterprises’.
All the ruling party wanted, he went on, was to ‘create an environment where trustees can invest in infrastructure projects as long as those projects are profitable’. But pension funds can already make investments of this kind without any regulatory change.
Unusual for the ANC
Mr Godongwana’s acknowledgement of the importance of profits is, however, unusual for the ANC – which generally regards a profit-making motive as illegitimate. Notable too is his assurance that the ANC has moved away from its national conference resolution in 2017 on the prescribed-asset issue. If this resolution can be jettisoned, why cannot others be abandoned too? And particularly the damaging expropriation-without-compensation (EWC) decision the ANC is still pursuing, despite the unprecedented economic crisis its lengthy lockdown has precipitated?
An infrastructure programme will also help the ANC by generating a host of additional state jobs and so expanding the patronage machine. Many more posts will be needed for project planning, authorisation, management, implementation, monitoring, and maintenance. And most will go to cadres appointed for their loyalty to the ANC rather than their competence.
The third advantage to the ANC lies in the public procurement sphere, where the state’s overall procurement budget stands at some R800bn a year. A big infrastructure programme will push up the procurement budget and make it easier to funnel monies to both cadres and the ANC.
Eskom’s Medupi and Kusile build contracts provide some insight into the potential gains. The ruling party benefited significantly through the participation of its Chancellor House funding vehicle in the R40bn boiler contracts won by Hitachi Power Africa. In addition, the Special Investigating Unit (SIU) is investigating tainted construction contracts (for both these power stations and the Ingula power plant) valued at some R139bn.
A draft Public Procurement Bill released in February 2020 (the Bill) is supposed to put a stop to tender fraud via stricter safeguards, a more centralised approach, and the creation of a new Procurement Regulator (which will also provide more jobs for cadres, of course).
Laws have been poorly enforced
But South Africa already has comprehensive rules against corruption, including the Public Finance Management Act and the Prevention and Combating of Corrupt Activities Act. These existing laws have been poorly enforced, making it doubtful whether the Bill will make much difference. What the Bill will achieve, however, is a great expansion in the preferential BEE procurement that provides the primary vehicle for corruption in state tenders.
The Bill will repeal the Preferential Procurement Policy Framework Act of 2000, which BEE tenderpreneurs have long criticised as too restrictive. Under this Act, public tenders valued at more than R50m are subject to a 90/10 preference points system, under which 90 points are awarded for price and 10 points for preferences based on the bidder’s BEE score.
The Bill, by contrast, empowers the finance minister to determine a new preference points system while providing no guidance at all as to how this should be structured. The minister could thus gazette regulations providing for a preference points system in which 50 points are awarded to price and 50 to BEE preferences. Or in which the points system is even further skewed in favour of BEE.
The Bill will greatly increase the scope for infrastructure contracts to be funnelled, via suitable BEE intermediaries, to ANC leaders – not one of whom, according to ANC secretary general Ace Magashule, ‘has not done business with the state’.
The Bill will also break new ground in allowing various state contracts to be set aside exclusively for women, the youth, and the disabled. This will extend the patronage machine far wider. It will also provide a means of fulfilling President Cyril Ramaphosa’s 9th August (Women’s Day) pledge that 40% of all state tenders will in future go to women.
Far from kick-starting growth, the proposed infrastructure programme is sure to prove a poisoned chalice unless the ruling party is willing to abandon prescribed assets, cadre deployment, and preferential public procurement.
Without these key reforms, infrastructure projects will inevitably be characterised by massive (but largely hidden) corruption, along with major cost overruns, defective performance, and lengthy delays.
Policy reforms more pressing than infrastructure backlogs
At the same time, there are important limits to what even the best-run infrastructure programme can achieve. Programmes of this kind cannot address the policy reforms that – in South Africa, especially – are even more pressing than infrastructure backlogs.
The country cannot attract the direct investment vital to expansion and employment without safeguarding property rights. This in turn requires the scrapping of EWC, prescribed assets, and the National Health Insurance (NHI) proposal, with its plans for nationalising private healthcare.
South Africa also cannot generate a million net new jobs each year without reforming the labour laws that price the unskilled and inexperienced out of work – and have already pushed the youth unemployment rate up to a staggering 70% (on the expanded definition that includes those discouraged from seeking work).
In addition, the country cannot help the truly disadvantaged get ahead unless it jettisons the BEE rules that help only a skilled and often politically connected black elite – and finds effective and race-neutral ways to empower the many millions who remain marginalised and destitute.
The SACP/ANC alliance is assuming that South Africa can spend its way out of this economic crisis. Organised business seems willing to agree. But the financial burden of the infrastructure programme will be heavy. Inevitably, that burden will fall on already stressed South Africans in the form of higher taxes, higher debt, higher inflation, or outright dispossession.
Yet the real need is for pragmatic policy reforms that require no additional spending, do not impose the costs of economic recovery on ordinary people – and can easily and swiftly be implemented with nothing more than the necessary political will.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER