“They Eat Money.”
This was the eye-catching headline of an excellent story in yesterday’s (April 16) New York Times, on the growth of corruption in post-apartheid South Africa. The secondary headline was “How Mandela’s Heirs Grow Rich Off Corruption.” The story centers around a dairy farming business that was promised to a Township in South Africa’s Free State. Two politicians, one who has since become Minister of Mineral Resources and the other the ANC’s Secretary General, were identified as promoting the venture. Tens of millions of government funds were paid out to a company contracted for the farm, which turned out to be owned by the infamous Gupta family, and while a few cows did appear they all soon died, and nothing else came of the promises to the Township. A follow-on story today notes that the South African Asset Forfeiture Unit seized some $21m from a Johannesburg residence owned by the Guptas.
One could no doubt go on at great length about this story, or a raft of similar stories that surfaced during and now after the recently-ended Presidency of Jacob Zuma. This column will focus on one casualty of the political turmoil which has surrounded all these tales of corruption in South Africa in the last decade: infrastructure.
Turn the clock back say, five years. Around 2012, yes South Africa has its share of infrastructure problems. Legacy issues still abound in lower-income urban and rural areas with non-existent or decayed transport infrastructure, and alarming and expensive blackouts have become a too familiar reality, the result of decades of underinvestment in generation. But in other important ways, South Africa has become, and is becoming increasingly, the envy of the infrastructure world. Especially investors looking at how to find more deal flow in infrastructure. The post-apartheid national electrification program is a clear success, with electrification at over 85%. South Africa’s Public-Private Partnership (PPP) unit is widely seen as world-class, with a major program of expansion for toll roads and possible railway PPPs on the drawing board. The crown jewel, however, which is just beginning to bloom, is South Africa’s renewable energy auction program. These auctions, while seeing high prices offered in the first round, soon became a classic “how to” in increasing infrastructure investment, and especially in attracting private capital to infrastructure. In five years, the auctions attracted $19 billion in private investment into energy. Africa as a whole, from 2000-2010, attracted on average $1B a year in private infrastructure – South Africa quadrupled the continent’s average. Prices fell dramatically over the four years of auctions, 46% on wind power and 70% on solar PV – in practice, going from some 25% higher than the alternative of a greenfield coal plant (about 8 cents a KwH based on the experience of South Africa’s last new coal-fired plant), to less than half the cost of coal. And on top of all this the Government attracted unprecedent economic development commitments alongside the power generation from bidders. It would have been hard to make this a bigger success story.
For infrastructure investors around the world, the big issue is finding transactions. Structuring investments is challenging and complicated, but the expertise exists and is available to solve that problem. While some investors and lenders occasionally stumble, the track record of infrastructure investment worldwide is clear – it’s a relatively safe asset class, with lower non-performance rates than anything other than financial institutions, and with good returns. A major study by Moody’s a few years ago underlined this message from OECD and Emerging Market data, and further noted that infrastructure asset quality is less affected by economic downturns than most other asset classes. On top of this, the long-term nature of most infrastructure assets makes them attractive to managers of long-term savings, such as pension funds and insurance companies. In principle, this should the stage for large and ongoing flows of capital to infrastructure projects. The reality, however, is… not really. The problem practically every infrastructure investor and lender faces is a lack of projects, lack of investment opportunities.
Lack of investment opportunities also means, of course, that countries continue to have infrastructure problems. Unless countries have ample fiscal space, which has not been the case in most of the world in recent decades, and they have strong institutional capacity. For low-income countries, this lack of investment opportunities therefore has become a policy issue, for them and for the development assistance community. Various G-8/G-20 configurations, have supported “project development facilities” as a means of increasing investment opportunities, working either with governments or business developers. While having many individual successes, these have yet to have a large-scale impact on infrastructure investment opportunities. What has made a bigger difference in terms of aggregate infrastructure investment numbers, and in terms of deal flow for investors, is when a large or medium-large country opens up a new sector, and introduces policies aimed to encourage private investment: Mexico and Argentina in the 1990s, Brazil in the early 2000s.
For infrastructure investors and lenders, the opening and growth of a large new market is a bit like Christmas. It’s not always clear what presents are going to be under the tree, but someone else has done the work, and there’s no other day quite like it for getting what you wanted. South Africa, in the heyday of its renewable energy auctions, was like this – a big Christmas present. In one year alone, South Africa generated more opportunities for investments in energy than the entire continent of Africa had presented in the entire previous decade (or for that matter, the decade before that one). And it seemed to have all the ingredients to keep generating more opportunities: plenty of need, an established procurement and regulatory framework, and increasingly a track record.
Then the wheels came off. Eskom, the state-owned utility, belatedly woke up to the impact all this new private generation might have on its long-term role, political power, and ability to keep running large-scale, opaque, procurement for assets to be run by it. Various political figures began championing a completely different energy policy, to rely on Eskom and a raft of large nuclear power plants. With the recent track record around procuring large, government-owned coal-fired generation (Medupi, the latest coal-fired plant to be brought on stream by Eskom, was years behind schedule and several billion dollars – yes, billion – over budget), it was easy for most people to draw the line between the changes in policy and opportunities for corruption. The big picture, as the Times report illustrates so well, was not good. And the renewable energy auctions were halted in mid-stream.
Today, while there is a new President, and there seems to be much-delayed progress on concluding the last round of the country’s renewable auctions, there is also vastly greater political uncertainty around this program that was a global showcase. PPPs in transport have also completely disappeared from the agenda. Headlines on infrastructure are today only on Capetown’s water crisis. For infrastructure investors, the promised Christmas from South Africa turned into a lump of coal. After three years of climbing the lists in terms of drawing private capital to infrastructure, 2017 saw essentially zero for South Africa. A classic, and highly regrettable, example of a government shooting itself in the foot.
Governments shooting themselves in the foot while hoping to ramp up private investment in infrastructure is, also regrettably, something investors see frequently. One could easily make a list of two dozen or more countries which have announced and/or made plans to attract much more capital to help tackle their infrastructure problems, and found themselves – not investors, or infrastructure companies – to be their own main obstacle. The US in 2017 is an obvious example, but many Emerging Market governments would also be on such a list. Future Infrastructure Ideas posts will discuss other cases of shooting oneself in the foot, and the smaller list of examples of solving – as opposed to creating – problems. For infrastructure investors, seeing less of the first, and more of the second, is the main way to find more investment opportunities.
And as a P.S., let us be thankful that the New York Times, in an age where more and more newspapers are either shutting down or making large layoffs among their staff, remains at least one paper with enough good, professional reporters to put together the kind of in-depth piece they just did on South Africa.