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Funding constraints for road construction worsened during the past financial year because of a downturn in the global economy and a stagnant local one. Both have dampened the outlook of the South African construction and related industries.

One of the greatest challenges to the sustainability of the roads agency, writes SANRAL board chairman Themba Mhambi in this year’s Integrated Report, is the gradual expansion of the national road network in a constrained funding envelope.

In addition, low levels of payment of e-tolls have led the Treasury to approve the reallocation of R5.75bn from the non-toll portfolio to the toll portfolio that resulted in a 27% reduction in expenditure in the construction of road infrastructure.

Mr Mhambi states that the agency sets an example of what government wants to achieve in the transformation of state-owned entities and the creation of a capable state. It achieved its 15th consecutive unqualified audit report and is working towards a clean audit for 2020/21.

Highlights include:

• 201 SMMEs benefitted from community development projects, all black-owned;
• targeted development of black industrialists;
• continuous strides to better reflect the country’s diversity in the staff complement;
• and a range of projects to transfer skills.

The Chief Executive Officer, Mr Skhumbuzo Macozoma, writes in the Integrated Report that the prevailing economic climate is compelling SANRAL to utilise existing resources during a lean period. “Our decisions during this time would determine how well we would be positioned to take advantage of opportunities when the financial situation recovers.”

The first priority was to keep the programme of construction on toll and non-toll roads moving forward with little delays and to protect road assets through essential road maintenance work.

It also prioritised stakeholder relations, consensus-building in the planning and construction of roads, facilitation of economic participation and achieving a balance between the rural and urban economy.

Mr Macozoma stressed that the agency’s black empowerment agenda meant that emerging contractors were actively involved in the construction industry, small businesses were favoured, often rural ones.

The constraints of lack of access to capital, difficulties in purchasing equipment and building expertise, were addressed by leveraging partnerships with important role players in the construction industry.

More than 70% of contracts went to black-owned companies, of which 25% were owned by black women.

During 2019 it ensured that there was no need to sacrifice its commitment to social justice and economic transformation in spite of fiscal constraints. This included its investment in human capital, road safety and the development of rural communities.

The ratings agency Moody’s has changed SANRAL’s outlook from negative to stable.

This follows on the government’s decision to grant additional funding to SANRAL to make up for the continuing under-collection of e-tolls. This had caused cash-flow problems but now the roads agency will be able to fund its operating requirements as far as its e-toll operation is concerned.

But, says Moody’s: “The rating is constrained by very high debt levels, high capital expenditure requirements as well as ongoing liquidity pressure related to low cash collections on the Gauteng Freeway Improvements Projects (GFIP).”

The ratings agency added that an upgrade is dependent on the government introducing an alternative funding model which will include collection and enforcement strategies for GIFP – if this results in an improvement of SANRAL’s cash flows.

What government’s approach on this matter is, was to have been announced at the end of August but it has since been delayed and was not known at the time of publishing of this edition.

Moody’s made it clear that it kept the roads agencies debt rating unchanged but its outlook had improved. This could be downgraded if there was a change in the level of government support – which it did not expect.

Another R2.2bn a year was set aside for SANRAL in the 2019-2022 toll budget to compensate for the low-level of e-toll payment compliance. Moody’s avers that “the decision to stabilise SANRAL’s outlook reflects the SA government’s decision to earmark additional funding” and this “re-affirms the strategic importance of SANRAL” and its close link to the government on the operational and financial level.

The modernising of network industries – including transport – is essential if South Africa is to achieve higher and sustainable growth that can contribute to economic transformation.

This is one of the issues highlighted in a comprehensive strategy document released by Finance Minister, Tito Mboweni. The document, “Towards an Economic Strategy for South Africa” sets out far-reaching structural reforms.

However, South Africa cannot fully harness the productivity benefits due to the absence of efficient economic regulation, backlogs in infrastructure investment and maintenance, lack of access to quality services and poorly managed state-owned companies.

Economic institutions that support growth require a capable state as well as a functional relationship between the state and the private sector.

A new compact is required between the government, the private sector and social partners. Government must prioritise the strengthening of the capability of the public sector and state-owned entities and achieve the right balance between policy progress and certainty to ensure the economy is able to attract foreign and domestic investment.

Competition and private sector participation in the transport sector can increase investment and improve service delivery without weighing on the balance sheets of state entities. This will encourage the development of new and small firms in the infrastructure space and promote economic transformation.

The direct impact of more competition on the balance sheets of SOEs will be outweighed by the efficiency gains in the rest of the economy.

Economic transformation and inclusive growth must be accompanied by an emphasis on building an economy that is globally competitive. For example, prioritising local procurement by state-owned entities can boost economic transformation and inclusive growth, but the short-run impact on competitiveness will not be neutral if local industries are unable to supply the designated products at the same price as their international counterparts.

Road freight transport continues to have a market share of about 70%.

The Treasury document supports the Department of Transport’s Green Paper which proposes:

• Stricter enforcement of traffic laws
• Full cost recovery from road freight operators
• Related external environmental costs
• Major improvements in rail services

While a road-to-rail shift may not have a direct impact on economic competitiveness, it will improve the efficiency of the transport system and support the viability of Transnet’s rail business.

The document calls for the finalisation of the Economic Regulation of Transport Bill which includes provisions to create a transport regulator who will oversee the entire sector including entities such as SANRAL, Transnet, Prasa and Acsa. “Several unregulated areas that are dominated by large state-owned entities or the government should have their economic activities regulated by independent agencies,” the document concludes.

In August SANRAL started issuing major road construction tenders to the value of more than R40bn. This will continue over the next two to three years.

“We expect a surge in road construction projects over the medium-term framework as part of the broader national efforts to invest in economic infrastructure,” says Louw Kannemeyer, Engineering Executive.

“We are confident that this investment will help to boost the construction sector which has been under severe pressure in recent years, and also cascade down to black-owned and emerging enterprises which will receive much larger shares of tenders in future.”

Treasury has allocated about R21.5bn per year for the maintenance and improvement of SANRAL’s 19 262km non-toll network. This will go towards a total of 940 projects, of which 325 are already under construction.

Kannemeyer says the new projects will include some 90 major capital works projects larger than R500m each which will go out to tender during the three year medium-term period.

Tenders to the value of R8.3bn for construction work on the N3 between Durban and Pietermaritzburg will go out to tender during the current financial year. This is financed through the infrastructure stimulus package announced by President Cyril Ramaphosa in 2018.

This will include seven major tenders on the N3 which will be issued within the next months once the regulatory approvals have been received and land acquisition finalised.

Smaller tenders related to routine road maintenance and periodic maintenance across the entire SANRAL network and in all nine provinces are also being issued. The more than 50 tenders will be released in a controlled manner so as not to flood the market.

Major tenders will be issued for work in Mpumalanga, Limpopo and North West – Moloto Road, the Thembisile Hani and Ephraim Mogale municipalities as well as Rustenburg.