The Investor December 2024

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ShareFinder’s prediction for Wall Street for the next 3 months (top) and the JSE (bottom).

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Leaders never learn!

By Richard Cluver

As a child of nine I had my own Damascus moment when I read with ever-increasing alarm the auto-biography of a young boy whose comfortable middle-income lifestyle life had been dramatically up-ended in the Great Depression.

The shocking realisation, that the events I had just read could just as easily strike my own family and those of my friends, has stayed with me all of my life and was a primary reason why I made a future career for myself in finance…….because I realised even then that being unaware of how those in charge of the monetary system were discharging their responsibility would not shield me from its potentially catastrophic impact on my life!

Aged nine, I had heard my parents talk about the Great Depression but I had no idea what it was really about. Now I was reading about it through the experiences of a young boy just like myself. When the company which employed his father went under in the aftermath of the 1929 ‘Wall Street Crash,’ the family could no longer meet the mortgage payments on their home and were forced, like millions of other American families, to mail the front door key to the bank and for the next decade make the family car their home as they roamed the country seeking work!

The parallels between the time that I was reading that autobiography and the onset of the 1929 depression were clear even to a nine-year-old. World War 2 was behind us. South Africa was booming and my parents’ friends were all filled with optimism that a glowing future lay ahead. So had the US apparently been in 1929. The New York stock exchange had been roaring upwards on a rising tide of new money pouring out of the US Federal Reserve……And then Thursday, October 29 1929 happened when the Dow Jones Industrial Average fell 13 percent in a single day.

That single day launched the Great Depression which put millions out of work throughout the world, shuttered banks, shops and factories everywhere causing economic misery wherever its economic tentacles touched throughout the following 15 years.

It was the primary cause of World War 2 and its sequel, the Cold War. Indeed, that single day in 1929 changed the course of history. And now I fear that similar events might soon unfold because the people who manage our global financial systems have never learned the lessons of the past. Precisely the monetary follies which collapsed the Roman empire, the Spanish Empire, Imperial France, China’s 19th Century Qing Dynasty and the British Empire, have been repeated over the past quarter century by most of the world’s leading nations and the consequence, has been a debt mountain of unprecedented proportions which, in the view of the highly-respected Wharton School of economics, could result in US Government debt reaching a tipping point of around a 160 to 170 percent debt to GDP ratio as soon at late 2025.

History will thus eventually blame Donald Trump’s incoherent tax reduction policies for pushing US debt to levels where the sum of all collected taxes will be insufficient to meet the interest payments and some form of debt default will result, but the truth is that it is a global problem of steadily-rising debt which the politicians are blithely ignoring!

Buoyed furthermore by the sophisticated advances made by monetarists everywhere in the century which followed the 1929 Crash, many economic observers – and politicians particularly – have long become complacent. After all, 1929 was nearly a century ago and the world has somehow survived many harrowing times since then. But the bitter truth is that politicians never learn and so another, even greater, depression might be staring the world in the face.

The likely cause of the problem is incoming President Donald Trump’s campaign promises to cut taxes and replace them with import tariffs something which echoes the Smoot Hawley Act of 1930 which turned the outcome of the Wall Street share crash into an economic depression by initiating a global series of tit for tat tariff barriers which in turn up-ended world trade for the next 15 years.

Consider as an example, that the US imports 4.3-million barrels of crude oil a day from Canada which the incoming president has threatened with a 100 percent import tariff. That’s 60 percent of its gross crude oil imports. Furthermore, similarly facing a 200 to 500 percent tariff are the 2.5-million motor vehicles the US currently imports from Mexico.

And the list is endless, making it clear that if Donald Trump is serious about his threats, the US faces extraordinary domestic inflationary pressure. All of which explains the currently cautious approach of the US Federal Reserve which disappointed markets this month by only announcing a 25 basis points reduction. Clearly, everyone is watching and waiting to see what the Trump administration is likely to offer the world in 2025. But for so long as world interest rates remain high, the world will remain in effect in economic recession!

Thus, although debt is rising everywhere, the crisis is likely to begin in the US where government spending is already out of control. The graphic below tells why:

Trump’s plan to bring in South African-born billionaire Elon Musk to head a team that will seek to cut the US Government’s bloated civil service and reduce the costs of the administration is thus a sensible step. Indeed it is probably past urgent as my next graph illustrates. But will it succeed?

To put the numbers into perspective, the US National Debt reached $36 172-trillion this month: the equivalent of $107 169 for every single person in the country or $275 204 per household. That is something like twice the cost of an average American house.

In Britain a national debt of three-trillion pounds divided evenly over 28-million households means that every one of them is responsible for a million pounds of debt. That figure could buy four average British houses.

And if you think that is bad, consider South Africa where our latest tax statistics indicate that just 1.37-million people pay 76.2 percent of all personal income tax. Given a population of 64-million, that figure implies that just 2.1 percent of South Africans are carrying the main burden of our R5.7-trillion national debt. Care to work that out, each member of this tiny percentage, which earns an average monthly income a shade over R40 000, carries responsibility for some R4.17-million of Government debt. Given the average SA house price of R1.4-million, each of these top earners is responsible for the mortgage equivalent of nearly three homes in addition to their own!

Meanwhile there are 27.78-million South Africans receiving Government grants. So each of South Africa’s 1,37-million top earners is also responsible for 20 grant recipients. Worse, these top tax-payers are leaving in droves. The country has lost 200 000 of them since 2020!

That ordinary folk everywhere are either unaware of the magnitude of the debt problem, or unwilling to take action, was well illustrated by the fall of the Barnier government in France earlier this month because it tried to pass a budget that would correct a yawning €60 billion budget deficit and tackle a colossal €3.2-trillion public debt that is equal to 111 percent of France’s GDP.

To the French government’s credit, it tried to spread the pain evenly (though not equally) across the board through a mix of tax increases and spending cuts. In Britain, efforts by the new Labour government to tackle the country’s £50-billion annual budget deficit and its £2.9-trillion national debt are similarly facing revolt from the public.

It was debt that caused the fall of Britain’s Tory government earlier this year, and debt had much to do with the ANC’s failed service delivery problems which cost it this year’s election as it also did India’s Narendra Modi. Meanwhile, Canadian Prime Minister Justin Trudeau is hanging on by a thread after his finance minister—and until recently, his closest ally—Chrystia Freeland resigned. In her resignation letter, Freeland cited differences over how to handle the “grave challenge” posed by Trump’s tariff threat.

Also on the ropes is German Chancellor Olaf Scholz who has just lost a parliamentary vote of confidence. As Europe’s largest economy thus heads for a snap election in February, Friedrich Merz, leader of Angela Merkel’s centrist Christian Democratic Union, is leading polls and will likely be the next chancellor. “You are leaving the country in one of the greatest economic crises in postwar history,” Merz said to Scholz.

It is a problem right across the planet. A total of 76 nations face a national debt which far exceeds the 60 percent of GDP level at which, until a few years ago, economists generally believed a debt default would become inevitable. The list on the right gives you an idea of the worst offenders.

South Africa is 47th on the list with a debt as of the end of September of $315.7-billion which equals 74.6 percent of GDP. This means that South Africa will spend roughly R1.06 billion a day on servicing its debt. Over the Medium Term Expenditure Framework, which runs to 2026/27, these interest costs are expected to reach R1.3 trillion.

Although South Africa’s high debt-to-GDP, which is hoped will stabilise at 77% of GDP in 2025/26, is not uncommon for emerging markets, there is usually something to show for it. Here, however, in the words of Stanlib Chief Economist Kevin Lings, the government’s R1-billion per day interest bill is coming at the cost of other services, including education, health and infrastructure.

“If we walk around the country a bit, we’ve taken up debt enormously, but what do we have to show for it, other than stadiums? You’re going to struggle to find something to demonstrate (value for money),” Lings said.

“If you look at China, go back to the same time period, government debt was 28% of GDP (in 2009), and now it’s at 80% – slightly higher (than South Africa). “But if you walk around China, you can see what they spent the money on. The development over that time period is just phenomenal. They put themselves in a position to sustain decent growth for many years – those assets are going to last for decades. They will reap the reward for undertaking the investment.”

What does this mean for ordinary folk like you and I? Well as a first imperative one should endeavour to minimise all debt because the cost of money is likely to soar to unaffordable levels. Furthermore, since the only effective means governments can employ to get rid of their debt is to monetise it; to in other words print more currency which is another word for a devaluation or, as most of us understand it, to create high levels of monetary inflation, You need to avoid holding your savings in cash.

C:\Users\admin\AppData\Local\Temp\image.png To protect the cash value of one’s assets, the traditionally best inflation hedges have always been to invest in items like gold coin, Blue Chip shares, property and, in recent years, crypto currency! Best of all, though it might be painful for a few years, are quality shares, the following graph illustrating the 125-year performance of New York’s Dow Jones Industrial Average, shows that for those who held on throughout, the Black Thursday losses were merely an ugly but relatively brief bad memory! Since 1957 it has delivered an average annual gain of 10.5 percent! Over the past 110 it has averaged 6.26!


Robbed Cover_page-0001

Because we believe the information in Richard Cluver’s latest book should be essential reading for everyone who wishes to survive the monetary chaos that likely lies around the corner, we have made it available as a FREE DOWNLOAD

Click here to get your copy

Richard writes: “It is my considered belief that mankind has freely down the centuries given ourselves into successive forms of slavery because we have individually lacked the self-confidence to take leadership of our own lives into our own hands!

“This book is accordingly given free to all the people of Planet Earth in the hope it might promote a healthy discussion among all of us about the manner in which we have chosen to govern ourselves in the 21st Century.

“If the thoughts I have expressed in it resonate with you, I encourage you to pass it on freely to everyone you know.

Richard Cluver

November 2024



Demanding Energy

By John Mauldin

Energy is everything. Or, if Einstein was right, you and I are just energy in material form. Accelerate us to light-speed squared and we might become something else.

All economic activity involves converting energy from one form to another. This requires harnessing sufficient quantities of usable energy. That task is becoming more difficult, to the point economic growth would suffer if we weren’t constantly seeking new sources.

In other words, energy isn’t just another market sector. It’s the foundation of every sector. And you know what happens when the foundation gets shaky.

I started my research with a long, fascinating phone call (with some of my colleagues) to Mark Mills, one of the world’s top energy authorities. He recently joined with an all-star cast of other energy experts to launch the National Centre for Energy Analytics. The research they’ve published so far is extremely valuable. Mark told me a little about what else is coming. Suffice it to say, you should pay attention.

Through the magic of AI, we were able to transcribe my conversation with Mark. Today I’m going to share with you one short section (of 30 pages!) in which he masterfully explains why energy demand is a much more complex topic than many people think.

Mark has an amazing ability to riff on almost any energy-related topic. What follows is a mostly verbatim transcript (with a few minor edits) extracted from a much longer conversation, along with some additional charts and comments [in brackets] from me.

I’ll share some more excerpts in future letters along with my thoughts, but I think it is important we start with energy demand. You need this background to appreciate the magnitude of our challenge. Energy is getting harder (or at least more expensive!) to find at the same time we need an ever-growing amount of it.


Unlimited Demand

by Mark Mills

C:\Users\admin\AppData\Local\Temp\Chart_1_20241214-TFTF.pngThere’s no period of human history where economic growth, set aside population growth, isn’t correlated with more energy demand. This is a one-to-one correlation. There are no wealthy nations that are low energy consumers.

[See this chart of the growth of global GDP. Then see the chart of energy consumption. It’s no mystery why they look so similar.] Source: Our World in Data

C:\Users\admin\AppData\Local\Temp\Chart_2_20241214-TFTF.png Now, in the wealthy nations, there’s variability in the per capita energy use, but that’s dictated more by geography than it is by behaviour. In tiny countries with short distances, small buildings, and punitive taxes, the per capita energy use is lower than in the United States because we have less punitive taxes on heating and lighting and all the rest. But the correlation is one-to-one.

The important part about predicting demand is you have to bifurcate it to just two separate buckets. They’re related, but different. One bucket is obvious: Population grows very predictably, give or take small variables. Even if there were no economic growth, you would get more demand.

The world has had reliable economic growth for three centuries since industrialization and the fossil fuel era. Everybody wants to be wealthier and more wealth is correlated with more energy use.

You can measure that by the OECD’s “deprivation index.” They actually have an index that measures the percentage of people in different countries who don’t have a toilet, a TV, a car, own a house, or rent a house—the set of the things we would consider in wealthy nations that are basic products we all take for granted.

There’s a remarkably high percentage of people, poorer people, who have a high deprivation index. They’re not wealthy enough to have a car or wealthy enough to own their own house or have air conditioning. So, wealth naturally brings more demand for the things that already use energy. Wealth brings more demand for the really poor countries that want to use what we have.

I mean, only one in 700 people in the poor part of the world have ever flown in an airplane. And in the poorest parts of the world, only one in 800 people own a car. So, you don’t have to be a mathematician or an economist to know it doesn’t take much growth to create incredible demands for energy to manufacture and operate cars and airplanes, even if only 10 percentage points more of those people get wealthy enough to want to fly and drive cars.

So, lots of people don’t have what we have. Roughly three billion peoples’ annual energy consumption is equal to the annual energy consumption of your refrigerator. Their total energy consumption for all purposes over the course of a year does not exceed the energy consumption of your refrigerator. If you think about how much more energy they could use, well, you can do the math. Two-thirds of the world population could increase its energy use tenfold if they lived at close to European or US levels.

That’s not going to happen overnight. So, the variable in forecasting energy demand is then a tough one. How fast do you think economies would grow if the global growth rate were to rebound back to say 3.5% instead of 2.9% or 2.7%? That is a delta [change] of 500-hundred-plus basis points. As you know, John, that’s huge.

C:\Users\admin\AppData\Local\Temp\Chart_3_20241214-TFTF.png Ten years of half-percentage-point increases in GDP growth would be a monster increase in global GDP which drags up energy demand. So, energy demand follows economic growth. Energy demand shrinks if you have a depression. It’s just one-to-one.

The other factor, of course, is that we invent energy demands. The invention of the car was the invention of energy demands to make cars and drive them. The invention of the airplane was the invention of energy demands to manufacture planes and fly them. The invention of the computer was the invention of energy demands to make computers and run them.

The invention of pharmaceuticals was the invention of energy demand to make pharmaceuticals. Pharmaceutical energy demand is as great as semiconductor energy demand, roughly five to tenfold more energy per square foot of manufacturing space for pharmaceuticals than industry at large.

There is no limit to what we can imagine we might want to invent for entertainment, for luxury, for healthcare. Imagination translates into tools, things that we invent, services we want, entertainment we want. All those things consume energy. You can’t make Amazon work without trucks. Trucks take energy to build and run. You can’t make Amazon work without computers and a communications network to make one-click work.

So, if you were a curious person, you’d ask how much energy is consumed when you go online to Amazon, then search and hit Buy Now with one click. What you do when you click that button on your computer is you light up computers all over the United States. There is no other service that exists that when you make a decision, you personally cause energy consumption by machines instantaneously, all across the United States.

You light up computers and communication networks all across different disparate parts of the supply chain. And you cause a truck to be driven, a warehouse to be used, a human or a robot in that warehouse to move a good. These are all energy-consuming activities.

So, we invent demands. We’ll continue to invent demands. And for all practical purposes, there’s no limit to our demands. And the demand limit is not from the limited number of people. The demand limit is how much wealth there might be, which I think is unlimited because that comes from technology and productivity.

So, the demand limit is unlimited because it’s not how many people are in the world. It’s how smart we are in inventing new things and wanting new things, including entertainment. I keep adding entertainment because depending on how you measure it, entertainment is something like a $4 trillion global industry which didn’t exist as an industry at scale a hundred years ago.

If you unbundle the architecture of the entertainment industry which includes tourism, by the way, it’s a monster. In fact, sticking with tourism, which is a purely entertainment industry, people who study the aviation industry know 85% of air travel is non-business. Only 15% of air travelers are business travelers.

That means 85% of air travel is for fun, for tourism, for entertainment, for personal pleasure. It is not a business serving some business. It’s a business servicing entertainment and human pleasure. It was an invention that people liked because who doesn’t like to go somewhere fun? Who doesn’t want to fly and see their relatives assuming you like your relatives?

So, that means over 80% of all the energy used by aviation has nothing to do with a human “need” like survival. It has to do with what humans do. They invent products and services because they like to do things. That is unlimited.

Growth drives a lot. And then you have to ask yourself, “Will we invent any new things that will be net energy consumers?” Well, the question answers itself. Sure. The easiest one of course is AI and clouds and data. But the magnitude of that infrastructure’s energy appetite is so huge that only now are people beginning to wake up to it. I’ve been writing about it for two decades. It is a monster infrastructure. The existing cloud infrastructure is equal to Japan’s worth of electricity demand.

C:\Users\admin\AppData\Local\Temp\Chart_4_20241214-TFTF.png [Think about that. “The cloud” as an industry did not exist 30 years ago, except in imaginations and on drawing boards. Today, it is the equivalent of 124 million people in a highly developed country in terms of energy consumption. And quantum computing is getting ready to explode.]

The cloud’s energy consumption falls into three categories. And the most important category is not the electricity used by your smartphone. That’s the least of it. The networks that connect your phone to the data centers consume far more energy. And the data centers themselves do all the logic, the processing, the analysis. And of course, the networks that take the things back to the market.

And the third part is the energy to manufacture all that stuff. Because unlike other infrastructure, the underlying infrastructure of the information economy has a refresh rate like your phone, but in the data centers and communications networks it’s about three to five years.

C:\Users\admin\AppData\Local\Temp\Chart_5_20241214-TFTF.png So, the energy used to manufacture all the semiconductors and all the communications devices, you have to amortize over the three- or four-year lifespan. It turns out they’re roughly co-equal. The energy used to make all the stuff, the energy used to operate the communications networks, and the energy used at data centers are roughly all about equal. All three of them together is a global network that uses roughly as much energy as global aviation right now.

Now we’ve created/invented a new feature: artificial intelligence. Artificial intelligence is not computing, it’s inference. If you’re driving a car or selecting a product, you want an answer that’s close, reasonable, but not exact. Inference is different than calculation. But inference is really hard, it turns out, in computing terms. So, roughly speaking, a computing task, if it becomes an inference task, the energy use goes up tenfold.

Say you do a Google search to find a document that John Mauldin wrote. If I convert that to ask a question and I’m having an AI engine answer it to find other things that John Maulden did, the energy cost of that search goes up tenfold, that one search. Everybody is already searching that way. And this is why there’s this explosion of energy demand for data centers.So, put in dollar terms, a billion dollar data center, which is becoming pretty common, consumes $600 million in electricity over 10 years. If I add AI to it, we’ll consume somewhere between $1.5 billion and $2 billion of electricity over a decade. Or put differently, energy consumption over the decade will exceed the cost of building the data center which makes a data center more like a car in terms of energy consumption.

The energy cost to make a car is significant. It’s about 20% of the energy the car uses over its lifespan. But the car uses five times more energy over its lifespan than the energy used to make the car. Computers are now becoming more like cars for very similar reasons.

Another thing AI is doing is amplifying the need for conventional computer technology. So, the inference function doesn’t exist unless I have conventional computing and communications to collect data and store it and then put it into the AI engine. And when it comes out of the AI engine, it also has to be stored, manipulated, and sent to markets.

So, AI’s appetite for data is enormous, but the data itself is created and handled by conventional computers. So, it’s an amplifier. It’s not just that it’s using more power itself which it does by a factor of 10 to 100 per chip, but it produces more demand for conventional computing. So, it’s a double whammy which is why we’re seeing in the United States now, utility regions all over the country that were previously making forecasts for the next decade through 2030 showing demand electricity growth of maybe a few percentage points or 10%. All of the forecasts are now coming in at 50% to 100% increase in electric demand. The biggest vector for that are data centres.

Clear as Mud

While we’re thinking about energy, let’s talk about recent Middle East events.

Experts have been concerned for a year now the Israel-Hamas and Israel-Hezbollah conflicts would expand into a wider war, interrupting oil supply. It has already slowed down Red Sea shipping traffic. But the worst fears haven’t come to pass. They still could. We don’t know.

Last week brought a new development as rebel forces brought down the Russia-backed Assad regime in Syria. This seems very likely to produce other changes in the region, but what they will be is as yet unclear. My friend Renè Aninao sent a report last weekend noting how we shouldn’t rule out possible positive changes from this.

For example, what if the Syrian regime change inspires an Iranian regime change, removing the current nuclear sanctions and letting more oil flow? That would put downward pressure on oil prices, helping reduce inflation around the globe.

Then imagine if Assad’s fall helps Putin decide to leave Ukraine in exchange for the West droppings its sanctions? That should put some Russian oil and gas back on the market, further depressing oil prices. What would be the effects?

What if, despite historical precedent and my own trepidations, the new Syrian leader actually does what he recently said and allows people to pretty much live peaceably with each other? I hear you laughing in the background, and I have that same scepticism. But if he really followed through on his diplomatic approach, we could see an oil and gas pipeline from Saudi Arabia, Qatar, and the UAE going through Syria to Turkey and then Europe. That would lower the cost of transporting oil and gas and thus the price.

To be clear, I’m not predicting any such things. My point is that we really have no idea what the next few months or years will bring. It all depends on factors that are outside of anyone’s control. We may think we know what Trump will do but he’s still weeks away from office. We could be in a radically different world even before January 20.









  Energy is an area where the long-term trends are actually clearer than those for the next year or two. Which is why it’s important to both a) understand where the world is heading 5–10–20 years out, and b) not get too excited about the daily and weekly noise.And a quick side note: President-elect Donald Trump has said that he wants to expedite approval of any project where investors want to spend $1 billion or more in the US. Given the need for clean energy, why not make it possible to build 20 nuclear power plants over the next five years? We are going to need that power, and it would let us reduce our dependence on coal. Reducing the regulatory


Investment – pulling it all together
By JP Landman

Turning South Africa into 1 big construction site is the expressed ideal of ministers from the ANC and the DA. What is the state of play, and what are the prospects?

2 sectors: public and private

2023 GDP IN CURRENT PRICES:

ABOUT R7 TRILLION

TOTAL INVESTMENT IN 2023:

R1 TRILLION, i.e. 15% of GDP

In 2023 total investment in the country amounted to just over R1 trillion. Total GDP was just over R7 trillion, which means investment came to 15% of GDP. It is below the 25% National Development Plan’s ambition but still an enormous number. It comes to R114 million per hour, every hour of each of the 365 days of the year!

(Just for fun, some context on numbers we use so glibly: If one counts at a speed of 1 digit every second, it will take 5 seconds to get to 5 and 10 seconds to get to 10, and so on. To get to 1 million will take 11.5 days; 1 billion 31.7 years; and 1 trillion 31 709 years! To get to R114 million will take 3.6 years.)

Traditionally, fixed investment in South Africa comprised about two-thirds from the private sector and one-third from the public sector. In recent years, the public sector share has declined, and the private sector share has increased. By 2023, the numbers came to 71% and 29%, respectively. The private sector is becoming ever more important.

A new UNU-WIDER working paper by Prof Philippe Burger from the University of the Free State found that a 1 percentage point increase in the private-investment-to-GDP ratio can increase economic growth by 0.675% per annum. That is a spectacular dividend. He also found that an increase in both government and public corporation investment to GDP did not translate into higher growth. It does not mean that public sector investment is unimportant or can be dispensed with; it simply means that the efficiency of public spending must improve. It resonates with common sense: Medupi and Kusile are prime examples of inefficient spending, as are the numerous reports of exorbitant prices often paid by the public sector, like R1 million for a borehole or millions of rands to tar a stretch of road. The efficiency of spending matters.

All the more so, because public-sector investment fulfils an important social role and often acts as a catalyst for private-sector investment. Both public and private sector investment are indispensable to the economy.

Public sector

A total of R943.8 billion is budgeted for public-sector infrastructure spending over the 3 years from 2024 to 2027.  It increased above the inflation rate and defies the often-stated truism that capital expenditure is the first to be cut when budget austerity occurs. The increase reflects political priorities.

Who spends the money?

State-owned enterprises (SOEs) are the biggest players (40%), followed by municipalities (23%), provinces (20%), national departments and their agencies (16%), and public-private partnerships (PPPs) (2%). One can expect the SOE share to decline over the coming years and PPPs to increase. Medupi and Kusile are nearing completion, and both Eskom and Transnet will rely more on private capital for further projects.

Though public investment is increasing, the R943.8 billion is still only equal to about 4% of the expected GDP for the 3 years. Using more private-sector money is indispensable if we want to increase public investment.

Quality

Of course, these numbers tell us nothing about the quality of spending. There is corruption, poor planning and budgeting and faulty execution. Much of the corruption in the public sector is committed by private companies, as revealed in the Zondo Reports and monies subsequently reclaimed from private companies.

Construction mafias also influence the quality of spending and sometimes block this completely. Government officials are talking about R63 billion in projects that have been blocked. (Using our earlier calculations, it will take nearly 2 000 years to count to that number!) Let’s watch this space over the next while and see how it develops.

Public–private partnerships

Although PPPs form only about 2% of the R943 billion budgeted for infrastructure, they punch above their weight when it comes to delivering good-quality outcomes. Toll roads are a good example – we all know the difference between driving on a toll road and driving on a provincial road.

The range of PPPs is now being expanded to include projects like the redevelopment of 1 Military Hospital in Tshwane and Tygerberg Hospital in the Western Cape, as well as the upgrade of 6 border posts between South Africa and its neighbours.

A small but unique PPP was concluded earlier this year between the Mpumalanga Tourism and Parks Agency and the British Aspinall Foundation to redevelop the Loskop Dam Nature Reserve. The partnership will upgrade infrastructure like roads, fences, staff accommodation and field ranger facilities. The agreement will run for 25 years and unlock R120 million in investment. The ambition is to expand the 23 500 ha reserve to 100 000 ha by incorporating community- and privately-owned land. That will make it bigger than Pilanesberg.

Budget Facility for Infrastructure (BFI)

A step to ensure better quality spending was taken back in 2016 when the Treasury created the Budget Facility for Infrastructure (BFI). It requires public sector projects to do rigorous planning and technical preparatory work before they will be considered for budget finance.

Up to now, the BFI has operated by way of an annual bid window, when public institutions could bid to have their projects included in the budget. The seventh bid window was run this year. In October, the Minister of Finance announced that the bid windows will now be run on a continuous basis to evaluate projects rather than just once a year. That should throw the quality net a bit more widely.

Apart from quality control, the BFI also increases access to funding by hooking up public projects with private funding where appropriate.

http://www.jplandman.co.za/content/images/BFIFunding.png Some 14 projects totalling R66.9 billion are financed through the BFI, an increase of 7% from last year. (Again, these increases are telling in the context of budget austerity.) About 38% or R25.7 billion comes from the budget, 52% or R34.5 billion from the private sector and 10% or R6.7 billion from third-party grants and equity. Examples of projects include social housing (some 14 000 units), 5 water and sanitation schemes, the revamping of 6 border posts, and student housing projects on 4 different campuses involving some 10 000 units.

Infrastructure Fund and Infrastructure SA

An important step change occurred in 2018 when President Ramaphosa took office. He launched the Infrastructure Fund with the intention of blending public and private funds and increasing the pot of money available for infrastructure. The fund became operational in 2020. (Things take time in the public sector).

To strengthen planning, budgeting and execution abilities, Infrastructure SA was created to work alongside the Infrastructure Fund on all projects of more than R1 billion. It is a one-stop shop for large infrastructure projects with a team of professionals to help unlock projects. In this year’s budget, R600 million was allocated to Infrastructure SA for technical and professional skills to prepare, manage and execute projects. Grand plans require grand skills. Infrastructure SA is now the co-ordinating point for infrastructure projects.

Currently, there are 31 projects under preparation by Infrastructure SA, among them schools in the Northern Cape and Eastern Cape and 4 hospitals in Mpumalanga and the Free State.

Water and sanitation

Water is an evermore present worry for many South Africans. I’ve therefore included some detail below on what is happening in that area.

With regard to bulk supply, the government has prioritised 11 projects across 7 provinces totalling about R139 billion (included in the above numbers for the public sector). Some examples:

  • The biggest single project at R42 billion is the Lesotho Highlands phase 2 project, for delivering water to Gauteng (Completion date 2028).
  • KZN will benefit from 3 different projects totalling about R46 billion, which will bring much-needed relief to the province, particularly the South Coast (completion dates 2027 to 2032).
  • An interesting one is the Olifants River project in Limpopo, a joint effort between Glencore, Amplats and the government. It will involve 400 km of pipelines and provide 250 million litres per day – equal to about one-third of Cape Town’s usage. Ten local and international banks are involved in the financing (completion date 2030).

However, water is not just about bulk supply. Municipalities distribute it, and that is where there is many a slip between the reservoir and the tap.

Leaks and non-revenue water

Following the template developed for renewable energy, the government has set up the Water Partnership Office (WPO) in the Development Bank to help municipalities raise private sector finance to fix their creaking water systems.

‘The WPO has begun to mobilise private sector financing for water projects in eThekwini, Mangaung, Buffalo City, Nelson Mandela Bay and Tshwane for the replacement of leaking municipal water distribution pipes, which are resulting in high levels of non-revenue water’, says Johann Lubbe, Head of the Water Office. However, he warns: ‘But it takes time. It’s not something that happens overnight. For the larger projects it takes 12 to 18 months to structure the project properly. You also don’t want to rush through something and put it out to the market, and then the private sector shoots it full of holes.’

Bringing private and public sectors together should instil some discipline and proper management in local water administration and ensure better quality. Last week, Treasury agreed to withhold municipalities’ equitable share (their transfers from the budget) where they owe money to water boards. This will ruffle a few feathers. It is also a feather in the cap of the Department of Water, which lobbied Treasury for this decision. (Now imagine if the same arrangement can be made for municipalities not paying their electricity bills.)

Private sector

Private sector investment in the economy runs at about 10% of GDP, below the NDP target of 15%. Thus, both the public and private sectors fall short of their NDP targets (public 4% to 10% and private 10% to 15%).

In 2023, 6 of the 9 economic sectors measured by SARB data invested less than they did in 2019 (measured in constant rands). First, Covid (2020) and then load-shedding (2021/2022) knocked the stuffing out of the economy and investment.

The three sectors that invested more are Agriculture, ICT (information, computer and telecommunications equipment) and transport, storage and communication. Agriculture led the pack with 33% more investment. Clearly, the noise around expropriation is not deterring the farmers from investing.

Even the biggest sector in the economy, namely finance, insurance, real estate and business services (they are grouped together), invested 11% less in 2023 than in 2019. Over the years, this sector has replaced mining as the biggest sector in South Africa. Financial institutions now play the societal role that big mining companies once played.

Mining itself invested 2,2% less in 2023 than in 2019. In fact, it invested 9% less than ten years earlier in 2014. The country is really undergoing a big change from mining to other sectors. Perhaps gas discoveries will turn that around, but so far, the mining decline is both persistent and substantial.

The construction sector, critical to turning the country into a big construction site, invested 3,5% less in 2023 than in 2019. A bigger pipeline in both the public and private sectors is needed to propel this sector.

Energy

Like mining was a hundred years ago, energy is now the investment frontier in South Africa. It is not showing up in the official numbers yet, but it is happening. I count it all as part of ‘private sector’, because even the public procurement projects in electricity (bid windows) are all built with private capital, although with a public sector guarantee.

(The guarantee arrangement must change but is not a topic for this note.)

Generation

Six bid windows have been run to date, resulting in agreements for 8 000 MW of new generation capacity (all renewable) for a total investment of R270 billion. Bid Window 7 for 5 000 MW is currently in the market. Investors are clearly keen: Bids for 8 526 MW have been received; a final decision on the winning bids should be made by the end of November. Also in the market is a bid window for another 615 MW of battery storage and 2 000 MW of gas-to-power. These projects are estimated to involve R180 billion investment between 2026 and 2029.

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However, the bigger action is outside the bid windows. An important shift away from public procurement has occurred since President Ramaphosa opened up the market in 2022. A whole new energy system is now being developed, all of it with private capital (without government guarantees).

More and more companies are making their own arrangements on power: some are building their own facilities, some are concluding power purchase agreements with renewable facilities, some deal with energy traders who buy and sell power, some contract with energy aggregators who buy power from different generators and sell it to a range of customers, and so on.

Private power is no longer about load-shedding. It is now about the ever-rising cost of Eskom tariffs; having a green footprint to limit carbon taxes; and environmental, social and governance (ESG) considerations. The game has changed profoundly since 2022.

According to Operation Vulindlela data, 22 500 MW of private sector projects are currently in the pipeline, with an estimated investment of R390 billion. Even if we assume that not all of it will come to fruition, it is still a healthy dose of investment.

An often-forgotten fact is that even with recent postponements granted to some Eskom power stations, 8 of the 14 Eskom coal-fired power stations are going to close down over the next decade. Simply replacing that capacity will require significant investment.

Transmission

As is generally known, the transmission grid is a constraint and needs to be upgraded. The numbers required vary between R200 billion and R390 billion, depending on the time frames used by the forecaster.

The National Transmission Company of SA (NCTSA) has R112 billion earmarked over the next 5 years to build transmission capacity. To unlock further funds, the government has authorised the Independent Power Producers Office (IPP Office) to run a pilot programme to procure SA’s first independent transmission project. It will be a build-operate-and-transfer project running over 25 years. A new credit guarantee vehicle, developed with the World Bank’s help, will support the project so that private investors have some guarantee, but the government is not on the hook for 100% of the project.

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NCTSA projects that 56 000 MW of new generation capacity will be integrated into the grid over the 10 years between 2025 and 2034. The 31 projects currently under construction will connect 16 000 MW of capacity by 2028. A further 30 projects will enable 40 000 MW by 2034. That 56 000 MW can indeed be reached.

The overall trend on energy is clear: over the next 5 to 6 years, R1.5 trillion is needed for the energy transition, and in the 10 years after that, a further R3 trillion. That will surely take energy beyond mining and the finance, insurance & real estate sector as the biggest investment sector in the country.

So what?

  • The trick in making SA one big construction site requires that investment in both the public and private sectors must increase from 4% to 10% of GDP to 10% and 15%, respectively.
  • One of the consequences of state capture is that SOEs, once perceived as the engine of public investment, have suffered a severe decline. This necessitates the use of more private funds for public infrastructure.
  • Since 2018, the political climate on public-private partnerships and using private capital in the public space has changed significantly. There is a greater willingness to blend public and private money for infrastructure.
  • For this blend, one needs a pipeline of credible projects. The institutional architecture to plan and execute the projects is getting stronger and the pipelines are getting bigger.
  • More stringent project requirements and the use of more private capital will simultaneously improve the quality of spend and increase the pot of money.
  • Using private money will also maximise the public sector’s role. It is really a no-brainer.
  • Ironically, load shedding and water shedding are driving these changes ever more forcefully.
  • As for the private sector, all confidence metrics have improved since the formation of the Government of National Unity; and confidence is the foundation of private sector investment.
  • Of course, all this may become unstuck due to global events (eg Ukraine, Middle East, Trump) but that is beyond our control. Let’s focus on what we can control.


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