Infrastructure budget cuts would be ‘devastating’ for the country

The possibility of budget cuts to infrastructure development poses a real threat to the currently improved outlook for the civil industry as tenders for infrastructure projects may be reined in, warns construction market intelligence firm Industry Insight.

Construction industry bodies have also expressed concern about possible budget cuts to government infrastructure expenditure, particularly as this expenditure is a catalyst for economic growth and job creation.

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Elsie Snyman, CEO of Industry Insight, said the more positive trend shown in civil project awards of late should continue to support higher levels of investment during 2023/24.

However, Snyman said the recent announcement by National Treasury to withhold advertisement of further infrastructure projects and a potential cut in infrastructure to be announced in November could significantly reduce the pipeline.

Snyman said the total estimated value of civil projects out to tender in the first eight months of 2023, excluding renewable energy sector projects, increased by 130% year-on-year – or by R41.2 billion – to R72.9 billion in current prices.

Momentum slowing

But Snyman said the momentum in tender activity seems to be slowing, with the robust growth in the first two quarters of 2023 slowing for the months of July and August.

She said that following an increase of 13% year-on-year in the first quarter and 42% year-on-year in the second quarter of 2023, average growth in tender activity slowed to 8% in July and August 2023 compared to the same period in 2022.

“Tender activity nonetheless is still higher by 20% year-on-year in the first seven months of 2023, translating to a 16% increase over the last 12 months (based on a running 12-month total) compared to a 19% decline in 2022,” she said.

Austerity measures ‘likely’

Snyman added that as the Medium-Term Budget Policy Statement speech approaches, not much near-term support should be expected from government finance.

She said Minister of Finance Enoch Godongwana will likely announce expenditure cuts as Treasury tries to narrow the gap between expenditure and declining tax revenue to arrest a rising debt burden and the rising cost of debt servicing.

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“Austerity measures are thus likely to be the order of the day while tax hikes aimed at increasing revenues are a possibility, if not now, then in February and the main budget speech,” she said.

‘Cuts will be devastating’

Master Builders South Africa (MBSA) executive director Roy Mnisi said their members are very concerned about possible budget cuts to infrastructure expenditure, particularly as everyone knows that infrastructure development plays a key role in ensuring economic growth and creating employment.

Mnisi said the effect of any cuts in infrastructure expenditure by the government will be “devastating”.

“All of those cuts will have a devastating effect, not only to us as the construction sector, but to the economic growth as a whole,” he said.

Mnisi added that MBSA is confused as to why government is even thinking about cuts to infrastructure development expenditure when it is held up to be a catalyst or an enabler of economic development and recovery from the impact of the Covid-19 pandemic.

He said another aspect that concerns MBSA about infrastructure expenditure cuts is that they will impact not only infrastructure development but also the filling of positions in government, particularly as government has battled in terms of technical capacity regarding project design, project management, project planning and so forth.

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“We will always hope that they [government] will be looking at increasing those capacities so that they are able to deliver on the infrastructure programmes that have been put in place.

“If there is no capacity, we will continue to have the problems that we have been having, and it will even get worse. We are worried about that,” he said.

‘Coffers have been dwindling’

Mnisi said the budget cuts are not just starting now – “government coffers have been dwindling year-on-year” and implementation of infrastructure development projects has been slow.

“In a situation where the implementation has been very slow, you also get the sense that there is intention to cut some of those projects. That is a cause for concern for us as the sector,” he said.

Mnisi added that there is also no sense of clarity within government about what exactly any infrastructure development budget cuts mean to the infrastructure development plan and the projects that everyone knows are in the pipeline.

South African Forum of Civil Engineering Contractors (Safcec) CEO Webster Mfebe said if the government cuts the infrastructure development budget, it will be “cutting off its nose to spite its face”.

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Mfebe said this is because investing in infrastructure will ignite the economy and is the best way for the government to get much-needed funds because of the multiplier effect of the construction industry in terms of direct, indirect and induced jobs.

He said this has been proven as a formula by the Bretton Woods Institutions – the International Monetary Fund and World Bank – and the rating agencies, which have told South Africa that to get out of its financial problems, it must invest in infrastructure, including in areas such as energy, water and sanitation.

Roads investment key

Mfebe said investment in road infrastructure is also key for the economy because of the impact roads have on the movement of goods, services, and people.

“It is a well-known formula internationally that for every eight foreigners visiting a country, one permanent job is created.

“So to have good road infrastructure actually facilitates the movement of goods and services and therefore contributes to economic recovery [at a rate] faster than would be expected,” he said.

Mfebe said he understands that the government needs to cut expenditure because of the financial strain it is under. His advice to government is that instead of cutting infrastructure expenditure, it must make cuts elsewhere and increase investment in infrastructure to get more money into the fiscus.

He said the constant requests for bailouts from state-owned entities, where they do not lend themselves to better management of those institutions, are no longer sustainable.

Mfebe said something has to happen with these state institutions because they are siphoning funds, which should be going towards road construction and building social infrastructure, such as hospitals and schools, and helping to improve social grants to children and the elderly.

He said these state institutions also contribute to the government’s high public sector wage bill and consumption expenditure.

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