Policy uncertainty can have a debilitating effect on a country. On economic matters, it can retard investment as business becomes reluctant to make costly decisions that may soon need to be reversed.
In worst-case scenarios, such as we have seen in the US recently, it can lead to the shutdown of government and put the job security of thousands of workers at risk while stalling the delivery of government services. The US government shutdown provides a clear warning to all about the negative effects of policy uncertainty and the indecision and inertia it spawns. It is worse when it is fueled by political polarization.
For government agencies like South African National Roads Agency (SANRAL) SOC LTD that use capital markets to raise funds for their operations, policy uncertainty increases risk premiums, thus raising the cost of borrowing for them and the country in general. South Africa would do well not to stick its head in the sand on these matters.
Faced with the debate – and the policy uncertainty it generated – whether or not to nationalize the mines, the ruling party at its elective conference in Mangaung last year ditched the concept of nationalisation in favour of “strategic state ownership where deemed appropriate”, and thus provided policy certainty on the issue.
Similarly, after a sustained period of debate and controversy about tolling sections of the Gauteng freeway network, President Jacob Zuma recently signed the Transport Laws and Related Matters Amendment Bill into law. The stroke of his pen paved the way for e-tolling in Gauteng. Most critically, it provided certainty on tolling as part of government’s transport policy.
Not that SANRAL was ever in doubt about tolling as government policy, but when you have elements of the ruling party and some of its allies speaking against government policy, it is unsettling. Lost in the debate was the fact that this is government policy.
Tolling, which is one form of the user-pays principle, was not invented by SANRAL or its CEO Nazir Alli. It is contained in the White Paper on National Transport Policy that was published in 1996, even before SANRAL was formed (the agency was established in 1998). The application of the user-pays principle is authorised by law and has been carefully considered – in this and in many other instances – as a matter of policy by Treasury in collaboration with other departments and agencies of State.
In the case of SANRAL, this policy has enabled us to provide roads sooner than the conventional tax‐based revenues which would traditionally fund these roads. But for the funding model applied to the Gauteng Freeway Improvement Project (GFIP), there is no guarantee that the project would have been delivered.
Where was the money going to come from? The last time South Africa had a budget surplus was in 2007/08. Following the 2008 recession, that surplus has since swung to deficits in excess of 4% of gross domestic product (GDP). In the meantime, government debt as a percentage of GDP has risen – to more than 35% – and just this past week the International Monetary Fund cautioned us to stabilize our public debt.
While we are nowhere near the staggering debt-to-GDP ratios of some countries in Europe, the fiscal space is getting narrower and where we can apply the user-pay principle, with sufficient cushion for the poor , we should. At any rate, given the R81 billion owed to municipalities and the more than R1 billion owed to Eskom, South Africa needs to recommit itself to the user-pay principle.
The President’s signature was necessary not only to get the GFIP out of the state of inertia it had been thrown into but to assure foreign investors who enter into agreements with South Africa that we do not have an almost uncontrollable proclivity not to like our own contracts when it suits us. That would not only negatively impact on the operations and activities of SANRAL and those it has contracted with but would send a bad signal to investors. No country that hopes to attract foreign investment behaves like that.
Also, his signature was an assurance to private sector capital that its participation in the country’s infrastructure development programme is welcomed. SANRAL raised a debt of R20 billion in the capital markets to finance the GFIP. Given the demands of the social wage bill and social infrastructure on the fiscus, South Africa needs private sector capital to boost funding for our strategic infrastructure projects.
The capital is there and so is the appetite. This much was confirmed this past June by the Association for Savings & Investment South Africa – whose members include asset managers, life insurance companies and other collective investment schemes – in a meeting they had with Treasury. The industry already holds R700 billion in government bonds.
But, would infrastructure investment in future be attractive to both domestic and international long-term investors had our commitment to the GFIP been found wanting? If the private sector cannot see the cash flows and a reasonable rate of return, debt financing for our infrastructure projects would dry up. I suspect these are the considerations, besides the constitutional imperatives, the President took into account before he signed the Bill.
The populists might be angry but future generations, irrespective of their political affiliation, might thank him.
*Vusi Mona is the head of communications at the South African National Roads Agency.