Fitch Solutions operational risk analyst Keaton Fitzpatrick says practical security challenges “cast a shadow” on updated infrastructure investment policy.
“These practical challenges undermine the regulatory changes seeking to boost investment,” Fitzpatrick said. “Key risk areas for firms operating in SA’s construction and infrastructure sector are intimidation and project disruption by active criminal groups, also locally known as the ‘construction mafia’ or ‘local business forums’.
“These groups mainly operate in the KwaZulu-Natal (KZN) province, where they first emerged in late 2015, though the practice has spread to other parts of the country including Gauteng and the Western Cape,” Fitzpatrick said.
For SA, achieving GDP growth of above 4.0% y/y will not be possible without substantial foreign direct investment, and while international investors are aware of the security challenges in SA, this emphasis by Fitch Solutions further highlights the deterring effect on investment and reduces economic growth and job creation.
Fitch’s scathing outlook comes the same week S&P Ratings agency downgraded SA’s credit outlook over infrastructure and power issues. S&P on Thursday said SA’s downgrade is a result of the country’s slow pace to reforms in terms of improving the much needed governance at state-owned entities (SOEs), as well as its failure to address the worsening infrastructure constraints.
Fitch said according to a release from the SA Forum of Civil Engineering Contractors (Safec) in April 2019, at least 183 infrastructure and construction projects worth more than R63bn (USD3.7bn) were affected by disruptions across the country.
Quoting from Safec, Fitch said in January 2020 the organisation estimated losses due to these disruptions amounted to R40.7bn nationally.
“And more recently, Safec CEO Webster Mfebe said a total of 404 construction sites of projects collectively valued at R51.1bn were disrupted in the period from 2018 to end-April 2022. In April 2022, Mfebe said the height of these disruptions occurred in 2019, with the annual number of disruptions declining since then,” Fitzpatrick said.
Fitzpatrick added that frequent reports of intimidation and violent attacks affecting construction projects, while the capability of state security forces to guard against these risks is limited, largely due to corruption risks and underfunding.
“An understaffed, underfunded and perceptibly corrupt police force is a fundamental aspect in the continued operation of organised criminal groups, and these practical challenges undermine the regulatory changes seeking to boost investment. Security services are often overstretched and unable to efficiently combat criminal activities,” Fitzpatrick said.
Fitzpatrick said high crime vulnerability reduces investment attractiveness and increases costs, especially for private security.
Implications for firms in the sector include the potential loss of income through disruptions, delays and forceful co-operation as well as elevated expenditure on private security to protect projects, he said.
Another risk highlighted by Fitch Solutions is that of navigating political uncertainty.
“Persistent domestic policy uncertainty and political instability will serve as a hindrance to stronger private sector participation in SA’s infrastructure sector,” Fitch Solutions infrastructure analyst Tim Kerckhoff said.
Kerckhoff said to account for the risks surrounding the presidency, Fitch’s country risk team recently revised down SA’s scores in the “policy continuity” and “policy-making process” components within their short-term political risk index.
Other risks mentioned include rolling electricity blackouts, SOEs’ uncertainty as well as political risk.
Kerckhoff said Eskom’s rolling blackouts remain the main strategic threat to SA’s economic performance impacting all sectors, including construction.
“We believe that load-shedding risks will remain high until at least 2024,” Kerckhoff said. “And In the absence of a sound recovery plan to stabilise the market’s power supply, infrastructure investments such as smart cities, new railways, roads and ports, and energy-intensive upgrades — risk losing their viability, while electricity shortages will increase the risk of cost overruns over the lifetime of the project,” he said.
He said there is also considerable uncertainty surrounding the structure and status of several key state-owned entities and related projects, as well as the government’s fiscal position, policy implementation risks and future infrastructure development plans.
Fitzpatrick added the expected depreciation of the rand also has the potential to stifle local investment prospects in favour of offshore investing.
He said this will result in fewer private participants in the country’s infrastructure sector, particularly since Regulation 28 amendments increased the limit from 30% to 45% for retirement funds to invest offshore.
“A longer-term outlook going into 2024 will also most likely see rand volatility in the months leading up to the country’s May 2024 election and if the ANC fails to secure a majority of seats in parliament,” he said.
But it is not all bad news.
Fitch Solution’s associate director for operational risk Derrick Botha said the government’s amendments to Regulation 28 of the Pension Funds Act open up new opportunities for power sector investment, particularly as the country confronts record high levels of rolling power outages.
Botha said the Act, which came into effect on January 3 2023, introduced a new definition of infrastructure and set a limit of 45% for exposure in infrastructure investment.
To further incentivise greater uptake of solar energy, in January 2023, President Cyril Ramaphosa has stated that Eskom will develop rules and a pricing structure (feed-in-tariff) for all commercial and residential installations on its network'
In addition, efforts to reduce administrative procedures and bureaucratic red tape and the relaxation of local content rules for solar panels (from 100% to 30%) boost the business case for investors in the market’s renewable energy sector.
“With this in mind, investors in SA are well positioned to capitalise on the competitive costs of both solar and wind power, the comparatively short project turnaround times, increased policy support and the country’s conducive climate for these technologies,” he said.
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