Treasury targets infrastructure underspending

Cape Town – Government will in the course of 2017 establish an infrastructure fund, managed by a technical unit in National Treasury to assist state departments which undertake large infrastructure projects with cost analysis and budgeting processes. 

At a briefing to Parliament’s two standing committees, Ian Stuart, chief director of fiscal policy at National Treasury responded to a question of why government keeps on borrowing money if there’s such significant underspending on infrastructure projects for example. 

Stuart pointed out that under-spending is around R6bn, which is a significant amount, but actually a small share compared to an annual budget of over R1trn. 

“Underspending is an issue that National Treasury takes very seriously and therefore we will introduce an infrastructure fund of sorts. Through this fund, we propose a new budgeting facility for multi-year infrastructure projects – partly to respond to persistent underspending in infrastructure, but also in part to respond to the issue of the low levels of maintenance of existing infrastructure, which is different to building a new project.” 

READ: Underspending of more than R4bn expected in current year

Stuart said maintenance of existing infrastructure has been neglected although it is “hugely important”, as it extends the life of an asset. 

“In addition, maintenance, create ongoing employment and in general it doesn’t require the same highly technically skilled type labour as with entirely new infrastructure projects. In our view it’s a no-brainer that we should spend more on maintenance.” 

The pace of infrastructure spending in South Africa has been “an issue” in South Africa for some time now, Stuart said. “Budgets for infrastructure spending have expanded rapidly since the mid-2000s, but the ability to spend this money hasn’t caught up with the budgets.” 

He pointed out though that infrastructure spending is a complex issue. “The reality is getting a project up and running require pre-feasibility and feasibility studies even before you start building a new asset.” 

READ: Govt budgets R987bn for infrastructure spending 

What National Treasury’s new technical team that is to work with infrastructure budgets will do is do cost-benefit analysis of projects, such as working out what the discount rates will be.

“That will address the fact that large projects take up to 10 years to complete, whereas government only budgets over a three-year cycle. You need a process to budget over the life cycle of the project.”

Improved primary deficit 

National Treasury was  of the view that South Africa’s overall fiscal numbers are positive, given the current circumstances of lower tax collection and subdued economic growth. 

“One of the key measures of fiscal sustainability,” Stuart said, “namely our primary deficit has been improving. This is significant, as it is a determinant of our debt to GDP ratio over time and it increases the likelihood that debt as a percentage of GDP will stabilise.” 

READ: Trade deficit improves by R9bn - SARS 

When government raises taxes or reduce the spending ceiling it impacts on the primary deficit. “We believe this deficit is going to narrow again this year and there’s a good chance that we could get into surplus by the next fiscal year. We had a surplus last before the great recession in 2008/09 and if we can get there it would be a huge boost to our credit worthiness,” Stuart said. 

He called the narrowing of the primary deficit “an important milestone”. 

“That means our debt to GDP issue will become less pressing.” 

This is positive, as ratings agencies are particularly concerned about debt stabilisation. On the domestic front, the debt outlook has a direct impact on the exchange rate and interest rates, while it also influences investor opinion.