Private sector needs more policy certainty before investing in saving SA

Before the ANC becomes too optimistic about solving the country’s economic woes, the governing party must tackle the tough job of enticing the private sector to invest in South Africa and deal with their poor track record of tackling corruption and mismanagement.

Although the Covid-19 pandemic has resulted in a global buckling of economies, the party is cautiously optimistic that this time presents an opportunity to develop principles to better spend money and utilise resources. 

This according to their recently released Economic Reconstruction, Growth and Transformation document, compiled with Business for South Africa (B4SA). 

Key points in the document include how to best respond to the Covid-19 crisis without critically damaging the country’s economy, government’s intended partnerships with the private sector, infrastructure development, ensuring that government’s response results in sustainable job creation and economic growth into the future, and possible changes to Regulation 28 of the Pension Funds Act. 

But the high levels of mistrust between the public and private sector, exacerbated by policy uncertainty and a lack of transparency, could make this process more rocky than expected. 

Private investment in the public sector 

In order for government to be able to entice the private sector to invest in their plans to improve the country, a true partnership must be formed.

Experts, however, believe this could prove difficult due to the State’s track record of corruption, wasteful expenditure and mismanaged funds. 

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However, the country’s precarious economic situation and high levels of government debt and budget deficits means it cannot fund the much-needed improvements it envisages in its plan, and will be heavily reliant on private sector investment, both domestic and international.  

B4SA explained that if the state of the country’s economy remained stagnant, government debt could exceed 100% of GDP by 2023. As it stands, the country’s GDP is expected to decline by up to 10% in 2020. 

University of the Free State vice-dean for the faculty of economic and management sciences, Philippe Burger, pointed out a contradiction in the ANC’s stance. 

“On the one hand they want a state-led economic recovery, but on the other hand, they want larger private sector participation. Why would the private sector increase its participation through, for instance, more partnerships with state-owned enterprises (SOEs) if the process is led by a government with an absolutely dismal record in managing SOEs?” Burger questioned.

He expressed concern that the state’s track record already indicates a potential lack of capacity in leading the economic recovery process. In addition, he explained that declaring, for example, infrastructure investment from the private sector, but declaring the process state-led, will alienate the private sector. 

“It is saying to the private sector, ‘We need your money, but we will tell you what to do with it.’ That’s not how partnerships work,” he affirmed. 

Head of the department of economics at the University of Pretoria, Steve Koch, pointed out that private investment in South Africa has been declining for some time, and he does not think it is likely that private sector investment would increase significantly or quickly. 

However, Koch said the document “is a strong signal that at least some factions within the ANC realise that the private sector is an important partner, possibly even the lead driver of change.” 

Making SA more open for business

B4SA’s document hopes to help “reset” the current path South Africa is on, economically and socially. 

But as Koch explained, “accomplishing big changes requires nearly everyone to be on board and in some level of agreement with the objectives.” This, he laments, requires a lot of work. 

For B4SA, reaching a new social and economic compact for the country will mean taking “decisive” action and clarifying and reviewing policies and legislation, to better attract sustained domestic and international investment.

South Africa’s current dismal rankings in the World Bank’s Ease of Doing Business Index, in which we rank 84th, and the World Economic Forum’s Global Competitiveness Report, where we are not even in the top 100 nations. 

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Burger suggested creating policy certainty, reducing red tape, and supporting innovation to make investment prospects more attractive for the private sector. 

“A heavy-handed state-led process will not result in increased private sector investment in public infrastructure.” 

Koch emphasised a clearer vocalisation of targets, objectives, and clear property rights.

He said that for the sake of transparency, government’s recognition of its failures and inherited infrastructure issues could help improve private sector relationships and mend mistrust. 

Infrastructure investment 

B4SA said if strategic choices are made by government and bold action taken immediately, the country’s economic growth rates could surge to 5% per annum or more, potentially doubling GDP over the next decade, and materially reduce unemployment, inequality and poverty. 

In addition, B4SA postulates that should their suggested top 12 Projects Initiatives across 10 sectors and policy interventions be followed, up to 1.5 million jobs could be created, tax revenue could increase by R100 billion per annum, and increase GDP by R1 trillion. 

Infrastructure is the “key enabler” for businesses to deliver “inclusive growth”, said B4SA, namely securing energy and water supply, increasing rail and port capacity, improving public transport and waste-water infrastructure, and establishing a strong manufacturing base. 

In the ANC’s economic plan, it sought to eradicate inequality stemming from “structural underdevelopment we inherited from colonialism and apartheid.” 

Despite attempts at improving this, Koch explained that corruption, poor public finance management and flaws in managing SOEs has interrupted government’s ability to mitigate the inherited lack of infrastructure, by not investing in infrastructure or being able to keep up with essential maintenance. 

A private sector investment boost would be beneficial for infrastructure development and improvement, but it would expect a return on investment, albeit lower than returns expected in the recent past, Koch explained. 

“As long as government manages to protect rights to those returns, the private sector should be happy to be on board.” 

This was reiterated by Burger, who explained that “opting for public private partnerships because of government’s own constrained borrowing capacity does not necessarily reduce government’s liabilities. It would only be an option if the government does not incur additional future liabilities.” 

In the eyes of B4SA and the ruling party, a significant investment from the private sector could assist in minimising inevitable economic devastation due to the pandemic. 

This requires increased transparency and tough leadership decisions that should have been implemented many years ago, in the hopes of creating more sustainable and consistent economic growth, better long-term job prospects, and by proxy, a widespread improvement of the country’s most vulnerable citizens. 

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