national infrastructure expenditure estimates

National Infrastructure Expenditure Estimates

Implications for the construction industry2014/15 – 2016/17

Focus Forum 26 March 2014

Budget Review

Pravin Gordhan’s delivers his 5th Budget Speech

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

Transformation and Reprioritisation

Minister of Finance: Pravin Gordhan

• Maintaining current expenditure levels

• Maintaining current spending priorities

• Economic transformation through the NDP

• More effective spending• Reprioritisation rather

than new funds defines the MTEF

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

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

Allocations fall short of NDP targetIn order to achieve 10% target, need to double infrastructure allocations over the Medium Term

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/170.0%

% of GDP

Source: SARB Quarterly Bulletin, Budget Reviews

Gross Fixed capital formation Percentage of GDP

R200bn shortfall (2012, 2005 prices)

20.5% (2013Q2)Peak 21% (2009)

NDP 2030 Target

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

Some interesting considerations set out in the NDP

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)

NDP: Infrastructure Priorities

MONITORING

Investment in construction, Client TypeY-Y Percentage change, 2005 prices

Source: SARB Quarterly Bulletin

2007 2008 2009 2010 2011 2012 2013

-20.00%

-10.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Private Government Public Corporations

Impact of Government budget on GFCFGovernment (ex SOE, Private), Rm current prices

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160

100000

120000

140000

160000

Building Construction Works Infrastructure Budget

Source: SARB Quarterly Bulleting, Budget Reviews

• Challenge to compare calendar with financial year periods• Building industry less than 20% exposure (2012, 2013)• Civil industry app. 75% exposure (2012, 2013)

Impact of budget on GFCF: ResidentialGovernment (ex SOE, Private), Rm current prices

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160

Residential Human Settlement Budget % share

Source: SARB Quarterly Bulleting, Budget Reviews

• 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

Investment in construction: 2005 pricesRevised estimates

60 63 66 69 72 75 78 81 84 87 90 93 96 9920

100000

120000

140000

160000

180000

200000

Revised Equipment Official

Source: SARB Quarterly Bulletin, SAFEC, Industry Insight

Equipment and machinery supplied to large construction projects, ie coal-fired power stations

Government’s infrastructure programme cushion slowdown in construction sector

Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Jan-130

Lending rates Private Government Corp

Source: SARB Quarterly Bulletin

Private Government SOE’s

37% 30% 33%

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…”

“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

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.

MACRO ECONOMIC CONSIDERATION

Programme / Policy

Year Framework

RDP 1994 Social Development Policy

Housing, Electricity, Land Reform, Education, Health

GEAR 1996 Macro Economic Policy

Adopted by Dept of Finance – GDP growth of 6% by 2000, reduce budget deficit to 2% to 3% of GDP, increase savings..

ASGISA 2006 Prioritized spending

Responsibility of the Deputy President - Prioritized spending, strong focus on infrastructure investment. First mention of “National Infrastructure Programme”

NDP 2011 Transformation Dedicated Ministerial task team

Conflicted with job creation and growth targets

Infrastructure Development Bill

Shift in global growth expectations in favour of developed economies

2012 2013 2014 2015

World 3.20% 3.50% 4.10%

US 2.30% 2.00% 3.00%

Eurozone -0.40% -0.20% 1.00%

UK -0.20% 1.00% 1.90%

Sub-Saharan Africa 4.80% 5.80% 5.70%

Brazil 1.00% 3.50% 4.00%

Russia 3.60% 3.70% 3.80%

India 4.50% 5.90% 6.40%

China 7.80% 8.20% 8.50%

SA 2.50% 2.70% 3.50%

Source: Treasury

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.

Domestic Economic outlook below 4%Treasury estimates

2010 2011 2012 2013 2014 2015 2016

GDP, Current prices 2674 2933 3139 3391 3706 4063 4456

Real growth 2.9% 3.1% 2.5% 1.80% 2.7% 3.2% 3.5%

Revenue 757.2 836.9 887.8 1010.5 1099.2 1201.3 1324.7

Expenditure 877.5 954.2 1055.9 1149.3 1252.3 1351.6 1451.6

Deficit -120.3 -117.3 -168.1 -138.8 -153.1 -150.3 -126.9

Deficit % of GDP -4.5% -4.0% -5.4% -4.1% -4.1% -3.6% -2.8%

GFCF Real % Change -2.1% 4.2% 4.4% 3.20% 4.2% 5.3% 6.0%

Revenue as % of GDP 28.3% 28.5% 28.3% 29.8% 29.7% 29.6% 29.7%

Expenditure % of GDP 32.8% 32.5% 33.6% 33.9% 33.8% 33.3% 32.6%

CPI Headline inflation 4.3% 5.0% 5.6% 5.70% 6.2% 5.9% 5.5%

Source: Treasury

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

Risk: Budget deficit

2007 2008 2009 2010 2011 2012 2013 2014 2015 20160

GDP Revenue 2013 Revenue 2014 Expenditure

Deficit

Source: Treasury

When spending exceeds income = budget deficit

R1.1 trillion

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

Threats to domestic economic outlook

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

Budget deficit to improve from -4% in 2013 to -2.8% in 2016

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-200.0

-150.0

-100.0

4.0%Rm % of GDP

Financed through bond marketsR215bn

2016/17: -2.8%

Source: Treasury

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

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.

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

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

Currency “adjustment”

Mar-13

Apr-13

May-13

l-13Ju

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Feb-14

Mar-14

Source: Global Insight

2012/13• Strike action• Sovereign debt rating• Current account deficit

US Federal easing of Bond purchasesEmerging market risks increase due to capital flows (May 2013 / January 2014)

• 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

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?

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

Saving / Debt dilemma

Mar-88 Mar-93 Mar-98 Mar-03 Mar-08 Mar-13

Saving to disposable income of households Household debt to disposable income

Source: Stats SA

Higher interest rates will impact on debt levels

Mar-88 Mar-93 Mar-98 Mar-03 Mar-08 Mar-130.00

Prime Lending rate Household debt to disposable income

Source: Treasury

Inflationary pressures surprised on the upside

Source: Treasury

Currency depreciation

Elections: Civil Tender index vs Elections1999=100 (MAT) (Source: Project Database)

Mar-99

Mar-00

Sep-00

Mar-01

Sep-01

Mar-02

Sep-02

Mar-03

Sep-03

Mar-04

Sep-04

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

Mar-12

Sep-12

Mar-13

Sep-13

2014 Election

1999 Election

2004Election

2009Election

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 confidenceRating agencies

?• 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

INFRASTRUCTURE ESTIMATES

2014/15 – 2016/17

Public Sector Infrastructure Estimates2011 vs 2014 (Rm, Current prices)

Source: Treasury

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/170

100000

150000

200000

250000

300000

350000

2011 2012 2013 2014

NDP and the Budget

NATIONAL DEVELOPMENT PLAN16 year plan

Budget 2014/15

Unpacking the R847bn

R847bn

GovernmentR363bn

43% (from 40%)

SOE’sR404bn

48% (from 51%)

PPPR9bn

1.2% (from 3%)

Extra-budgetary institutions

R70bn8% (no change)

Central: R45 bn (12%)

Provincial: R135 bn (37%)

Local: R184 bn (51%)

Public sector infrastructure estimates

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17MTEF Total

National Departments 7200 6600 9600 11400 14100 14300 16700 45100

Provincial Departments 39100 43400 36400 41800 42600 45500 46600 134700

Local Government 30900 33200 41700 55200 58300 61800 63500 183600

Public Entities 9400 15400 14100 16400 21500 23700 24400 69600

PPP's 7300 10700 2600 3000 3100 3300 3500 9900

Public Enterprises 86000 98900 113400 124800 133400 139100 132000 404500

Total 179900 208200 217800 252600 273000 287700 286700 847400

2011/12 2012/13 2013/14 2014/15 2015/16 2016/17MTEF Total

National Departments -8.3% 45.5% 18.8% 23.7% 1.4% 16.8% 14.0%

Provincial Departments 11.0% -16.1% 14.8% 1.9% 6.8% 2.4% 3.7%

Local Government 7.4% 25.6% 32.4% 5.6% 6.0% 2.8% 4.8%

Public Entities 63.8% -8.4% 16.3% 31.1% 10.2% 3.0% 14.8%

PPP's 46.6% -75.7% 15.4% 3.3% 6.5% 6.1% 5.3%

Public Enterprises 15.0% 14.7% 10.1% 6.9% 4.3% -5.1% 2.0%

Total 15.7% 4.6% 16.0% 8.1% 5.4% -0.3% 4.4%

Stronger growth over MTEF from government

Investment by government will surpass SOE’s by 2016/17

Infrastructure breakdown

Economic Transport Water Energy

Social Education Health Other

Justice and Protection services

R223 bn

Eco n o mi c

So c i a l

Ju s t i c a n d p ro te c t i o n

Nominal change2014/15

Infrastructure does not equal construction

Construction Exposure

R534bn

Source: Industry Insight

Govt budgets increasing at faster rate compared to SOE’s

Bulk of infrastructure via Local government

Transnet Eskom Central Energy Fund

SANRAL TCTA National Dep

Provincial Local Govt

480014100

2014/15

R273bn 2014/15

Public Enterprises

SANRAL TCTA0

2014/15

Account for 95% (R381bn)

R126bn 2014/15 (R404bn MTEF)

Public Enterprises

SANRAL TCTA-10000

3600 31002014/15 Change

Account for 95% (R381bn)

-61.7%

-43.4% 182.4%

R126bn 2014/15 (R404bn MTEF)

31.6 -10.0 -28.2 27.9 45.3Avg Change MTEF (nominal)

Nominal growth slows over the medium term

2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 MTEF Total

Economic services 13.9% 4.9% 16.2% 9.3% 5.8% -3.0% 4.0%

Energy 28.5% 11.9% 7.3% -10.3% -9.4% -22.7% -14.2%

Water and Sanitation 31.5% 17.7% 43.4% 12.7% 1.1% 4.3% 6.0%

Transport and logistics 2.2% -0.9% 13.1% 26.7% 20.5% 6.3% 17.8%

Other economic services -4.2% -22.6% 46.1% 16.9% -6.6% -9.9% 0.2%

Social services 21.4% -3.2% 18.2% 2.2% 3.8% 9.5% 5.2%

Health 14.9% 26.0% 1.0% 7.1% 7.6% 2.7% 5.8%

Education 25.8% 25.6% 23.5% 11.6% 0.7% 2.9% 5.1%

Other social services 22.7% -31.8% 29.0% -9.4% 4.0% 22.3% 5.6%

Justice and protection services -26.3% 57.1% 11.4% 0.0% 2.0% 30.0% 10.7%

Central government, administrative and financial services 116.7% 6.2% 5.8% 8.2% 6.3% 10.7% 8.4%

Total 15.8% 4.4% 16.0% 8.1% 5.5% -0.4% 4.4%

Government Infrastructure Estimates: R386bn

2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2014 MTEF

Total Public Sector 208171 217800 252600 273000 287700 286700 R847 4700

Govt Contribution % 40.0% 40.3% 42.9% 42.1% 42.3% 44.2%

Infrastructure expenditureCurrent prices, Rm

89,806,100 93,281,570 102,222,800 116,748,000 130,847,100 138,922,000 386,517,100

Infrastructure expenditureConstant 2005 prices, Rm

53,708,909 53,130,884 54,927,914 58,085,940 60,278,428 59,257,741 177,622,109

Infrastructure expenditureReal Annual Change

17.9% -1.1% 3.4% 5.7% 3.8% -1.7% 2.6%

Building cost index: 2005 = 100 167.2 175.6 186.1 201.0 217.1 234.4 167.2

Building cost index: 2005 = 100: Annual Change

6.50% 5.00% 6.00% 8.00% 8.00% 8.00%

Source: Treasury

Construction cost inflation erodes budgets

99/000

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

10.00%

12.00%

14.00%

16.00%

18.00%

Source: Industry Insight, Statistics SA

2008/09: Infrastructure expenditure fell by 3%, vs 14% increase in allocations

Fuel and plant drive construction costs

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

Composite Material (Civil) Fuel Plant Labour (CPI)

Government Infrastructure expenditure(excl state-owned enterprises) Real change (%)

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17-10.0%

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

Source: Treasury

Infrastructure priorities stabilise in the medium termRemain below 20% of total national expenditure

Source: Treasury

Important highlights

Gordhan’s approach not as comprehensive as Manual - Less detail (PPP’s, CIP’s…)

Moving horizons – in many cases to 2016/17 Stricter criteria to release conditional grants Taking no-nonsense approach to under spending Increased allocations transferred to “Indirect grants” Centralised procurement Spatial framework (NDP)

Housing budget (Central and provincial departments takes less responsibility)

SIP and SEZ’s (long term implication) Policy development

Conditional and Indirect grants

The contribution of indirect grants to total conditional grants transferred to provinces increase from 3,4% in 2013/14 to 6,2% (R5.4bn)

The contribution of indirect grants transferred to municipalities increase from 14,3% in 2013/14 to 17,6% (R7.7bn

National electrification programme shifted to Eskom: R460m Municipal Water infrastructure shifted to DWAF: R3.3bn Rural household infrastructure grant: R132.8m

Review of effectiveness of existing infrastructure grants Over reliance by municipalities on grant funding Changes to conditional grants may be introduced in 2015/16

DEPARTMENTSInfrastructure review 2013/14 – 2015/16

• 6 Departments are responsible for 95% of total government infrastructure expenditure

Source: Treasury

2014 MTEFR’000 current prices Per. Share

Transport 111,567,300 28.9%Human Settlements 90,428,500 23.4%

Cooperative Governance and Traditional Affairs (MIG) 45,548,700 11.8%

Education (Basic Education + Higher Education) 44,538,200 11.5%

Water Affairs 27,678,100 7.2%Health 19,117,000 4.9%Energy 16,133,100 4.2%Safety (Police, Correctional Service, Defense, Justice and Constitutional Dev)

12,899,800 3.3%

Trade and Industry (SEZ’a IDZ”s) 4,154,500 1.1%

Science and Technology 3,110,700 0.8%

National Treasury 2,562,700 0.7%Public Works 2,239,600 0.6%

Agriculture, Forestry and Fisheries 1,832,200 0.5%

Arts and Culture 1,699,900 0.4%

Environmental affairs 1,694,800 0.4%

International Relations and Cooperation 673,500 0.2%

Home Affairs 373,500 0.1%Communications 265,000 0.1%

386,517,100 100.0%

Transport (largest allocation)R111,6bn (current prices)

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

-100.0%

-50.0%

100.0%

150.0%

200.0%

250.0%

300.0%

% Change Current 2012 Budget

Department / VoteReal Percentage change

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2013 MTEF

Transport 6.1 41.1 -15.2 0.7 16.9 4.3 -2.8 6.1

Source: Treasury

Bigger portion of Transport prioritized towards Rail infrastructure

Source: Treasury

SANRALTransfers from Fiscus increase by 16% in 2014/15

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/170

2013 2014

• In 2011 the Dept. provided an

additional R5,8bn to SANRAL

due to delays in implementation

of e-tolling on Gauteng Freeways

• Infrastructure financed by

SANRAL’s own revenue is

projected to increase by R2,4bn

to R3,7bn in 2014/15

• Operating tolls takes less than

20% of revenue collected

SANRAL

Need R250m – R300m / month to repay debt (R3,6bn / year)

In first three months collected R250m Need to restore investor confidence to

buy SANRAL bonds Will this be enough for rating agencies

review SANRAL’s recent downgrade? Debt R40bn (from R6bn in 2007) No provision for bad debt made Legal fees cost taxpayer R6m Expanding Road network puts pressure

on financial obligations Non-toll road network increased by 27%, but

budget increased by only 9% Limpopo’s 1628km incorporated into SANRAL’s

network in 2014 Eastern Cape (2113km) and North West

(1142km) = total of 3500km incorporated in 2012

• SANRAL appointed as Coordinator for SIP4 projects which covers the North West Province

• Western Cape toll – SANRAL priority• R10bn needed to upgrade the Huguenot Tunnel

Future road constructionE-toll, financing debt and maintenance

2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2014 MTEF % of TotalSANRAL Road projects 11,477,300 6,602,600 7,043,500 8,180,800 8,545,700 8,998,600 25,725,100 23.1%SA Rail 6,134,800 6,701,100 7,481,100 10,711,000 9,681,500 10,194,700 30,587,200 27.4%Public Transport Infrastructure and systems grant

4,611,600 4,884,400 4,668,700 5,126,000 5,278,900 5,558,700 15,963,600 14.3%

Provincial Road maintenance grant 5,872,400 6,828,500 7,519,500 9,361,500 9,952,300 10,291,900 29,605,700 26.5%

Total 28,096,100 25,016,600 26,712,700 33,727,300 37,980,400 39,859,600 111,567,300 100.0%

Annual ChangeCurrent prices 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17

2014MTEF Avg

SANRAL Road projects 182.3% -42.5% 6.7% 16.1% 4.5% 5.3% 8.6%SA Rail 20.0% 9.2% 11.6% 43.2% -9.6% 5.3% 13.0%Public Transport Infrastructure and systems grant 24.7% 5.9% -4.4% 9.8% 3.0% 5.3% 6.0%

Provincial Road maintenance grant 43.9% 16.3% 10.1% 24.5% 6.3% 3.4% 11.4%

Total 61.5% -11.0% 6.8% 26.3% 12.6% 4.9% 14.6%

Source: Treasury

Human Settlements: R90bnDelivery of housing transformed, negative growth over MTEF

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

Department / Vote

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2014 MTEF

Human Settlement 14.3 11.9 1.5 7.8 0.0 -1.2 -2.9 -1.3

Source: Treasury

Fewer units targeted over MTEFFocus on rental housing

2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2014 MTEF

Housing delivery targets 120610 115079 70362 66655 72,533 76433

215 000(653 000

2013 budget)

Units completed 58587 45698 21424 75275 81,912 68318225 505

Source: Treasury

2013 MTEF 2014 MTEF0

100000

200000

300000

400000

500000

600000

700000

• Moving away from typical RDP housing developments

• Deliver 215 621 units over the next three years (vs 653 000 in 2013 Budget)

• Upgrade 92 000 serviced sites• Acquire 7197 hectares of land• 17977 rental units• Bucket eradication programme R1,9bn over

the next two years• Mining townships

Less than 5% of national expenditure dedicated to housingGrowth predicted to decline over the MTEF

50,000

100,000

150,000

200,000

250,000

300,000

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

Units completed Sites servicedRm, constant prices

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

Top structures Serviced sites

Source: Treasury

Under delivery will lead to reprioritization of allocations

Urban settlement development grant Reduced by R130m Underspending by Manguang and Buffalo City

Accountability Shifted from provinces to metropolitan municipalities to improve

alignment in the planning and implementation of residential infrastructure and housing projects

Subject to accreditation R300m/year to assist with transition In line with NDP targets 70% of housing backlog is in urban areas

Rental Housing

• Social Housing Regulatory Authority• Capital Restructuring Grant (transferred to SHRA)

• Increase by 12,5% over the MTEF

• Deliver 17 977 medium density rental housing units (households earning

between R1500 and R7500/month)

• Can SHRA deliver on rental housing?

• Due diligence report conducted in Dec-13 found that R336m provided to

Woodglaze trading linked to Jay Singh, in the centre of the Tongaat Mall

collapse, towards the Moko rental housing project in Durban

• Many of the houses built suffered from structural defects

• Rental housing Amendment bill tabled by Connie September (Minister of

Human Settlements) in February 2014

• Green paper for Human Settlement to support the NDP’s vision

Municipal Infrastructure Grant: R44bnProvides basic services to poor households, allocations decrease over MTEF

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

-20.0%

100.0%

Department / VoteReal percentage change

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2014 MTEF

MIG 6.9 10.7 15.5 -2.4 -5.3 -4.8 -3.3 -4.5

Source: Treasury

Basic services include water, sanitation, lighting and roads

Education Infrastructure Expenditure: R44,5bnBasic Education / Higher education

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

Basic Education Higher Education

Basic Educa-tion79%

Higher Ed-ucation

and Train-ing21%

Basic EducationR35bn

School infrastructure backlog indirect grant

Education infrastructure grant

Technical secondary school

recapitalisation grant (2%)

Allocations to school building programme reduced, but still increasing over the medium (R35bn MTEF)

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/170

2000000

4000000

6000000

8000000

10000000

12000000

14000000

-30.0%

-20.0%

-10.0%

Department / Vote

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2014 MTEF

Basic Education -20.1 62.9 16.7 21.4 5.6 11.4 -1.6 5.1

Source: Treasury

Education key focus

School infrastructure backlogs grant Replace infrastructure at 510 schools Provide water to 1120 schools Sanitation to 741 schools Electricity to 916 schools In the next two years 143 inappropriate schools will be

completely replaced with new schools Spending project to peak in 2014/15

Education infrastructure conditional grant Primary objective to build new schools and supportive

services (libraries) and basic service (water and sanitation)

Largest sub-programme (75%) R26bn transferred to provinces over the medium term Nominal growth projected for 2014/15 but stronger

increase in allocations projected for 2015/16 Technical secondary schools recapitalization

grant To build 31 new workshops.. Fall in real terms in 2014/15 but show some

improvement in 2015/16

Tertiary institutions infrastructure R9.6 bn allocated over MTEF R2,6 bn allocated for construction of

two new universities Mpumalanga and the Northern Cape

Improve accessibility for disabled persons

Most of allocations are earmarked for universities in historical disadvantaged areas.

Water Infrastructure allocations reduced by still showing positive growth over the medium term: R27bn (MTEF)

99/000

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

-100.0%

-50.0%

100.0%

150.0%

Department / Vote

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2014 MTEF

Water Infrastructure 20.0 35.9 32.1 5.0 28.4 18.1 -2.1 14.7

Source: Treasury

Sharp increase in water projects at design and feasibility stage, but fewer projects at tender stage

• Total of R124bn projects included in various implementation stages, compared to

R72bn in 2013 Budget

• Decline in the value of projects at tender stage, but strong increase in the value

of projects at feasibility and design stages

Source: Treasury

TCTA:• Expenditure projected to

increase by 10% in real terms in 2014/15 to R4.3bn compared to an increase of R24% in 2013/14

• Contraction of 20% projected for 2015/16, and only inflationary increase projected for 2016/17.

• Budget Review includes details of expenditure by TCTA over the medium term

R1bn allocated for acid mine drainage in 2014/15

2011/12 2012/13 2013/14 2014/15 2015/16 2016/170

Acid Mine Drainage (TCTA)

• Spending on Lesotho Highlands berg water projected to increase by 36% in 2014/15 to R4,4bn

• Spending on Olifants river water resource development projected to increase by 50% to R1,9bn

Health Infrastructure: R19bnAllocations reduced over the MTEF

2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/170

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

-20.0%

-10.0%

% Change 2014 Budget Current 2013 Budget

Department / Vote

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2014 MTEF

Health 22.3 25.4 -7.4 -6.6 3.2 -4.0 -2.0 -0.9

Source: Treasury

Health Infrastructure grants revised in 2013Value of projects at design and feasibility decrease

Hospital revitalisation grant

Health infrastructure grant

Nursing colleges

Health facilities revitalisation grant

Source: Treasury

ProvinciallyDelivered

Nationally Delivered

Summary of key departments Y-Y Change (Real)

Department / Vote

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2014 MTEF

Transport 6.1% 41.1% -15.2% 0.7% 16.9% 4.3% -2.8% 6.1%

Human Settlements (including grants to provinces)

14.3% 11.9% 1.5% 7.8% 0.0% -1.2% -2.9% -1.3%

Cooperative Governance and Traditional Affairs

6.9% 10.7% 15.5% -2.4% -5.3% -4.8% -3.3% -4.5%

Basic Education 62.9% 16.7% 21.4% 5.6% 11.4% -1.6% 5.1% 62.9%

Water Affairs 20.0% 35.9% 32.1% 5.0% 28.4% 18.1% -2.1% 14.8%

Health 22.3% 25.4% -7.4% -6.6% 3.2% -4.0% -2.0% -0.9%

Source: Treasury

EnergyEskom, CEF, Dept of Energy

Eskom: R152bn Reducing spending over MTEF

due to financial constraints Central energy Fund:

R13.5bn Solar water heating units Ikwezi R11,2bn) first gas in

June 2014 Sabre Oil and gas in the

Jubilee production field (R4bn) Irene and other downstream

acquisitions (R14bn) – closure in 2014/15

Project Mthombo (Petro Sa initiative) refinery in the COEGA IDZ (by end of March 2015)

Dept of Energy: National Electrification programme: R16.1bn

Indirect conditional grant R3.3bn transferred to Eskom

Source: Treasury

2012/13 2013/14 2014/15 2015/16 2016/170

Electrification programme

SA 12th most attractive investment destination for renewable energy

Integrated resource plan (Dept of Energy) Involves the planning of infrastructure including power stations and

transmission lines by Eskom and IPP’s Focus given to projects that make use of renewable energy

technologies (wind, solar, photovolataic, biomass and hydro), through bidding rounds.

September 2013 – three bidding rounds complete to contact 3900 Mw (R120bn of direct investment in green economy) = less than 20% of 2030 target

By 2030 target of 20 000 MW of additional 29 000 MW should be met by renewable resources

IPP’s will also be introduced to the baseload programme Financial institutions are on board to finance long term projects

60% funded by SA banks Foreign portion of the third window estimated at R15.6bn

Safety Infrastructure Expenditure: R12.9bnDefense, Police, Correctional Services, Justice and Constitutional Development

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/170

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

Correctional Services Justice and Constitutional DevDefense Police2013 Budget

Correc-tional

Services19%

Justice and Con-stitutional

Dev21%

Defense33%

Police27%

• Allocations reduced in:• Correctional Services• Defense• Police

• Increased allocations• Justice and Constitutional

Development

Safety related infrastructure

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2014 MTEFCorrectional Services 950,900 592,400 744,500 803,100 813,000 819,900 863,400 2,496,300Justice and Constitutional Development 542,500 683,600 621,200 784,600 844,500 784,100 1,046,900 2,675,500Defense 699,900 530,700 1,381,700 1,207,700 1,043,300 1,041,300 2,183,500 4,268,100Police 1,118,200 671,100 691,600 1,036,900 1,099,900 1,149,500 1,210,500 3,459,900Total 3,311,500 2,477,800 3,439,000 3,832,300 3,800,700 3,794,800 5,304,300 12,899,800

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2014 MTEFCorrectional Services 9.7% -41.5% 19.7% 1.8% -6.7% 4.9% 0.0% 9.7%Justice and Constitutional Development -11.6% 18.3% -13.5% 19.2% 8.0% 4.6% 10.6% -11.6%Defense -21.9% -28.8% 148.0% -17.5% 33.9% 54.8% 23.7% -21.9%Police 0.5% -43.6% -1.9% 41.4% -1.4% 12.7% 17.6% 0.5%Total -5.1% -29.7% 32.2% 5.1% -8.2% -7.6% 29.4% -5.1%

Current prices

Real Percentage Change

Special Economic Zone and SIP

Geographically designated areas of a country (or province) set aside for

specifically targeted economic activities, which are then supported

through special arrangements (which may include laws) and support systems that are often

different from those apply in the rest of the country. It is an economic

development tool to promote rapid economic growth by using incentive

packages to attract targeted investments and technology. The

zone act as a magnet for investment by offering quality infrastructure complemented by an attractive incentives package, business

support services, cluster development and minimal red tape.

There are 7 types of SEZ’s:

• A free port, an area adjacent to a port of

• Free trade zones

• Industrial parks

• Science and technology parks

• Sector development zones

• Spatial development corridors

• Industrial Development zones

Source: Treasury

Economic Zones and Industrial Dev Zones

Source: Treasury

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2014 MTEFCOEGA 714000 383700 417900 308,200 0 0 0 0East London 198000 171300 150000 100000 0 0 0 0Richards Bay 20000 60700 182000 30000 0 0 0 0CIP 80600 118500 131600 190000 190000 190000 190000 570,000

SEZ's Investment incentives 0 0 5000 500000 450000 1130000 1684500 3,264,500IDZ'S Other 0 0 0 0 200000 70000 50000 320,000

Centurion Aerospace Village 37500 10000 15000 15800 0 0 0 0

SABSA building 174200 93200 48000 0 0 0 0 0Total 1,224,300 837,400 949,500 1,144,000 840,000 1,390,000 1,924,500 4,154,500

Several grants focused on rural development avg R6bn/annum

Municipal Infrastructure grant Integrated national electrification grant Rural households infrastructure grant Rural roads asset management systems grant

Department of Public Works

Public Works: R2.2bn MTEF

Less spending on border management, more spending on management of dolomite risk areas CIDB: Amendments to the Built Environment Professional Bill Policy

Agrement South Africa Bill Expropriation Bill (Expropriation of property for public purposes with compensation) Green building Policy – to promote the green economy through policy framework, creating jobs – minimum of three public sector

green demonstration projects by mid 2014

Source: Treasury

200000

400000

600000

800000

1000000

1200000

1400000

-40.0%

-30.0%

-20.0%

-10.0%

% Change Current #REF!

Procurement, Regulations and Pricing

Centralised procurement via central tender board Not distinctly South African Root out corruption Main function to check on pricing and adherence to procedures / fairness Chief procurement officer appointed : Kenneth Brown

Pricing guide Maintenance National Treasury or Stats SA CPAP

Adjudicating on performance and quality rather than pricing?

“While our ablest civil servants have had great difficulty in optimising procurement, it has yielded rich pickings for those who seek to exploit it.”

Pravin Gordhan, Feb 2013

Improvement in Q3 after slow start to 2013/14Government expenditure:2013/14 Q3 (source National Treasury)

Capital Spending Summary % of budget

Spent(2012/13)

% of budget Spent

(2013/14)

Y-Y per change

Spent Dec

2013Rbn

Provincial

Education64.7 69.3 21.5 6.6 Free State (-44%),

KZN (-7%)Health

62.8 58.0 -15.1 5.26 provinces negative growth,

except NWP (115%), EC (6,4%) Gau (7.8%)

Public works, roads and transport 68.0 68.5 13.6 7.5 Unknown

Limpopo under administration

Human settlement Development Grant

65.5 61.2 -0.4 10.5Limpopo (-44%), Gau (-10%), Mpu

(-11%)EC (24%), KZN (10%), NW (31%),

NC (14%)

Provinces spent R21 bn (or 64.9 percent) of their R32 bn capital budgets, representing an increase of 7,1 percent compared to the previous financial year.

FORECAST

Private sector investment constrained by low confidence

Mar-81 Sep-83 Mar-86 Sep-88 Mar-91 Sep-93 Mar-96 Sep-98 Mar-01 Sep-03 Mar-06 Sep-08 Mar-11 Sep-130

-30.0%

-20.0%

-10.0%

Confidence Private sector investment

Forecasts: Base Case scenario2014Q1

2010 2011 2012 2013 2014f 2015f 2016f

Total construction, Rm 2005 prices (excl equipment) 82,584 83,849 85,911 83,012 86,483 88,029 87,998

% change -20.94% 1.53% 2.46% -3.37% 4.2% 1.8% -0.1%

Building 59500 59432 60193 59866 62296 63599 64326

% change -11.8% -0.1% 1.3% -0.5% 4.1% 2.1% 1.1%

Residential 23956 22902 23344 22547 23,111 23,631 23,158

% change -20.2% -4.4% 1.9% -3.4% 2.5% 2.3% -2.0%

Non-residential 35544 36530 36849 37319 39,185 39,969 41,168

% change -5.1% 2.8% 0.9% 1.3% 5.0% 2.0% 3.0%

Civil Turnover (based on Safcec turnover) 23,084 24,417 25,718 23,146 24,188 24,430 23,672

% change -37.6% 5.8% 5.3% -10.0% 4.5% 1% -3.1%

Source: Industry Insight

Forecast considerations

Building investment remain sensitive to private sector participation Slower growth in public sector infrastructure expenditure over the MTEF, possibly

negative growth Building industry experience lower growth in social infrastructure (housing, health,

education and safety) Lower turning point reached, but recovery slow

Value of building contracts awarded fell by 9,5% y/y in 2013 vs 3,5% increase in the value of civil projects awarded

Improvement in sqm approved (up 9,5% y/y in 2013, compared to 1% in 2012) Residential increase by 5% y/y in 2013 (or 460l sqm est value R3,2bn) compared to -1% in 2012 Non-residential buildings increased by 19% y/y in 2013 (or 854k sqm est value R6bn) compared to 2,8%

increase in 2012 Higher construction cost inflation in 2014

Civil industry benefit from increased expenditure in economic infrastructure in 2014/15, but not sustained over the medium term

Strategic Investment incentives (SIP and SEZ) long lead time Low growth (single digit) scenario for near term

Investment in construction stabilize in low growth environment

2007 2008 2009 2010 2011 2012 2013

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

20,000

40,000

60,000

80,000

100,000

120,000

Source: SARB Quarterly Bulletin. SAFCEC, Industry Insight

Thank You

Copies of budget www.treasury.gov.za

Elsie Snymanelsie@industryinsight.co.za

www.industryinsight.co.zaT: 27 21 554 0886 (CT)

national infrastructure expenditure estimates

infrastructure allocations

budget review pravin

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