By Tom Arnold
Like the rest of the world, South Africa has unveiled capital spending programmes to help fight the downturn.
From the UAE to the US, governments have unveiled capital spending programmes to help fight the downturn. South Africa’s infrastructure spending spree is bigger than most as it gears up to host the football World Cup in June 2010 — a preparation it hopes will stimulate its sagging economy.
South Africa and the gulf region have more than their diverse populations in common. As both seek a fast-track to recovery from the global recession stifling world economies, an escape route is emerging in the form of expanded infrastructure spending.
Integral to reviving the region’s flagging construction sector, creating jobs, easing the flow of credit and attracting investment, many economists consider stimulus packages targeted at civil infrastructure as a vital tonic to ailing economies.
GCC states haven’t waited to be told twice. Work will start next spring on the multibillion-dollar Qatar-Bahrain causeway, a 40km road and rail development planned to become the world’s longest fixed-link marine crossing, and predicted to provide a major economic boost to both states.
Half of the $2.7bn Abu Dhabi Municipality is set to spend on infrastructure this year will be on road projects, with neighbouring emirate Dubai setting aside $79m for three major road projects.
The 2009 budget for Saudi Arabia, the region’s biggest economy, includes $13bn billion for water, municipality, agriculture, industry and infrastructure, and $5bn for transport and communication.
And GCC states are not alone in deciding that expansionary capital budgets could revive limp economies. US president Barack Obama’s government is overseeing the delivery of the largest public works construction scheme since the inception of the country’s interstate highway system half a century ago.
In Europe, Germany’s coalition government has agreed a controversial economic stimulus package worth about $67bn, covering infrastructure investments in railways, roads and schools.
But nowhere is the theory of economic revival through capital spending being tested more stoutly than in South Africa.
The Rainbow Nation is in the midst of the third largest infrastructure programme in the world as it prepares to host the football World Cup in June 2010.
“The World Cup has been absolutely critical for South Africa,” acknowledges Leslie Maasdorp, international advisor at South African investment bank Absa Capital. “It [the tournament] has been key to boosting the construction sector, so has been a major positive factor.”Transport, power and communications are among the services the nation has been focusing on upgrading since it was chosen by football’s governing body FIFA to become the first African host of the competition five years ago.
The tournament has provided a catalyst for $96.5bn in infrastructure expenditure over the next three years.
With the country in its deepest recession in 17 years, the extra impetus provided by preparations for the football tournament will provide a spring-board to its early recovery, argue economists.
Improvements to roads and major airports along with the development of bus rapid transit systems in key cities have been combined with an expansion of power capacity and telecommunications network in the country.
This is on top of a $1.2bn outlay on five new stadiums and upgrading of a further five venues to stage the football matches.
“I would like to think that the World Cup will be something of a cyclical boost,” says Arthur Kamp, an economist at Sanlam Investment Management, one of South Africa’s largest financial services groups.
However, the government first of all has to ensure that it can resolve a strike by 70,000 construction workers threatening to derail the delivery of key projects for the international tournament.
Work ground to a halt on Wednesday, July 8 on all the stadiums and a high-speed rail link, with unions demanding a 13 percent increase in wages for workers.
World Cup organisers say they are confident the stadiums will still be ready in time unless the strike continues for months.
The month-long tournament, which is expected to attract around 550,000 international visitors, will boost the country’s GDP by between 0.3 and 0.5 per cent, according to Kamp.
He expects the economy to contract by minus two percent this year before climbing back to positive growth in 2010.“We have positive labour force growth, a young population and fairly low capital output ratio. Urbanisation and infrastructure themes are typical emerging market themes,” continues the economist.
“At this stage, we are doing a very typical emerging market thing, we don’t have enough savings of our own but we are investing, a lot of that is in infrastructure, which will lift the potential growth rate in future, along with the private sector too.”
An estimated 415,000 jobs have been created by preparations surrounding the tournament, vital for a country whose unemployment rate spiralled to 23.5 percent in the first quarter of 2009, the highest of 62 countries tracked by newswire Bloomberg.
Crucially, the capital programme is also rehabilitating a once creaking infrastructure network badly neglected since the mid 1990s after successive governments were forced to rein back spending to overcome a debt burden built up during the country’s Apartheid regime.
“Most emerging countries of our income would give their front teeth to have our infrastructure now,” says Nick Binedell, founding director and chair of strategic management of the Gordon Institute of Business Science in Johannesburg.
“We have an enormous infrastructure network, which is under pressure now, but nevertheless is an asset that is embedded in the South African economy.”
A chronic power shortage due to rising electricity demand from a growing population meant that, until last year, state-owned utility Eskom had to resort to load shedding, involving scheduled or emergency supply cuts, during times of peak demand.
In addition, up to 28 percent of households in South Africa still do have not electrical supply, according to government figures for 2008.
In an effort to extend capacity, Eskom is adding to its power supply an additional 3,720 megawatts, of which 80 percent is already in place.
To minimise the risk of supply cuts during next year’s tournament, the utility is targeting a power reserve margin of 15 percent. However, Johnny Dladla, head of Eskom’s 2010 task team admitted last month that reserve margins were currently “far below 10 percent.”
“The interventions we are engaged in, where we are energy saving, is helping to move us up the bar,” he says. “What we’ve said is if you had to save about five percent of electricity at least we would be sitting at about ten percent of our reserve margin to gives us some cushion, so we have power if there’s any glitch in the system.”
As part of a much-needed investment in public transport systems, bus rapid transit systems are being developed in Cape Town and Johannesburg to ease congestion and transport fans around host cities.In addition, the 80km long high-speed railway link, known as the Gautrain, is planned to link up Johannesburg, Pretoria and the OR Tambo International Airport.
Construction of the first line between the airport and Sandton in Johannesburg is expected to become operational two weeks before the tournament starts, with the rest of the network due for completion in 2011.
As many as 100,000 passengers per day will be carried between Johannesburg and Pretoria in each direction by the system.
The telecommunications sector, seen as a key indicator of a nation’s economic development, is also receiving a significant investment boost.
South Africa is updating its broadband infrastructure by laying fibre optic cables ahead of 2010, with 80 percent of the upgrade funded by the private sector.
Years of under investment in infrastructure mean internet penetration in South Africa in 2008 was only 10.6 percent, compared to internet penetration of 70.5 percent in the US.
On the other hand, the country is the fourth-fastest growing mobile communications market in the world, with 91.8 percent mobile phone penetration last year, better than the 71.8 percent mobile penetration in the US.
“Broadband infrastructure will improve by three to four times by 2010,” estimates Alan Knott-Craig, former managing director of South African telecommunications giant Vodacom.
“It’s only a matter of time before internet penetration equals mobile phone penetration in South Africa.”
Ultimately, South Africa hopes investment in its infrastructure will provide solid foundations to build a sound economic recovery from which to compete with other global emerging markets such as Brazil, India and China.
“The outlook at the moment is tough but although we are struggling a little we are not doing nearly as badly as most other emerging countries,” concludes Binedell.
“There’s an underlying strength and resilience to our economy.”