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US$83b infrastructure spending fails to keep lights on in S Africa

[CAPE TOWN] South Africans suffering through their country's longest run of power outages ever can draw little comfort from how much the government has spent on infrastructure in the past five years: One trillion rand (US$83 billion).

That's bought improved roads, airports, ports and rail lines. What it hasn't produced: a reliable electricity supply. Rolling power blackouts have hit on average every third day this year. The National Treasury says "low and unreliable levels of electricity" are the biggest obstacle to faster growth. Data released Tuesday showed factory output grew 3.8 per cent in March, the first expansion this year after the fewest power cuts in any month since October.

South Africa accounts for almost a quarter of the 257 infrastructure projects of US$50 million or more being developed in Africa and half of the 10 biggest, said a study released by Deloitte in March. Yet the power constraints negate the advantage of improved transport links that should be boosting company sales and exports.

"The numbers are big but the effectiveness of the infrastructure spending has been very, very poor," Dennis Dykes, chief economist at Nedbank Group, South Africa's fourth-largest lender, said by phone on May 4. "Thus far, we have got no return at all from a number of capital projects. We have got a major problem" with the power supply, he said.

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The energy shortfall arose after the government stalled the approval of new power plants, leaving Eskom Holdings, which supplies about 95 per cent of the nation's electricity, with a plethora of malfunctioning plants.

The economy could have been 10 per cent larger had it not been for the power shortages, according to Dawie Roodt, chief economist at Pretoria-based advisory service Efficient Group. Twenty-one years after the end of apartheid, a lack of jobs keeps 10.9 million South Africans, or 22 per cent of the population, below the poverty line of 322 rand a month. A quarter of the work force is jobless.

Two new coal-fired plants being built by Eskom, the first since the 1980s, are running four years behind schedule due to technical failures and strikes. The plants, known as Medupi and Kusile, are expected to cost about 38 percent more than what was estimated in 2007.

The government should shoulder part of the blame for the infrastructure deficiencies, said Andre Pottas, southern African head of infrastructure and capital projects at Deloitte.

"We are short of engineering skills," he said by phone from Durban. "The procurement processes are very complex. We see a lot of stop-start on projects." The Geneva-based World Economic Forum's 2014-2015 Global Competitiveness Report ranks the reliability of South Africa's electricity supply 99th out of 144 countries. The quality of transport infrastructure, by contrast, is 32nd.

The government has acknowledged its shortcomings: On April 15 Public Enterprises Minister Lynne Brown apologized to the country for the power shortages.

On April 17, the government appointed Transnet Chief Executive Officer Brian Molefe as acting CEO of Eskom and directed him to resolve the energy crisis. It's also contracted with private companies to supply 5,243 megawatts of renewable energy to the national grid, and plans to buy 2,500 megawatts of power generated from coal and 3,126 megawatts from gas.

Transnet is an example of a state business that's making progress on infrastructure investment. The logistics company is in the third year of a seven-year, 312.2-billion-rand plan to upgrade railways, ports and fuel pipelines. It's moving record volumes of coal, manganese and freight via rail, and 60 trains now run daily between Johannesburg and the east coast city of Durban, up from 20 a decade ago.

State-owned Eskom is spending 280 billion rand on more than 8,000 projects over five years to increase its generation, distribution and transmission capacity.

Mr Molefe aims to use the experience he gained during his four years heading Transnet to end the blackouts by year-end by sourcing another 3,000 megawatts of electricity and boosting maintenance. He expects power shortages to ease within three to four years as the utility tackles a maintenance backlog and new plants come online.

"There is steady but sure progress that is being made," he said in an April 22 interview in Cape Town.

The government and state companies plan to spend a further 813 billion rand on infrastructure over the three years through March 2018, with 62 per cent of the funds allocated to energy and transport projects.

A committee headed by President Jacob Zuma was set up in 2012 to coordinate 18 integrated developments and address bottlenecks. Projects overseen by the panel, which range from new power plants, dams and pipelines to improving broadband Internet access, sustain more than 220,000 direct jobs and are already having a positive impact on the economy, the presidency said in an April 30 e-mail.

The Treasury forecasts that growth will be limited to 2 per cent this year because of the power shortages, up from 1.5 per cent in 2014 when strikes stifled mine and factory output. The government is targeting 5 per cent growth by 2019 as it seeks to reduce the unemployment rate to 14 percent.

"We will be in much better position by the time we get to 2020," Nedbank's Dykes said. "There is absolutely no intrinsic reason why South Africa can't grow much faster." The interventions to address the electricity shortfall have been too little, too late, said Gareth Ackerman, chairman of Cape Town-based retailer Pick n Pay Stores Ltd., which has installed backup generators to run its fridges and tills, a solution unaffordable for some smaller companies.

"This is damaging small business and damaging the economy as a whole," he said. "We need to find ways of getting that fixed quickly and the government needs to find solutions."