The private sector accounted for about 72% of total investment in the first half of 2008.

It was important that fiscal policy provided a balance between reducing external vulnerability by supporting domestic savings and investing in infrastructure and public services that would contribute to higher growth and a broadening of opportunities in the future.

The National Treasury stated that the accelera- ting capital investment programmes of the public sector, together with the more challenging operating environment, resulted in the cash position of the public sector moving from a surplus in 2007/8, to a borrowing requirement of about 3% over the medium term.

The main factors driving this were the budget deficit and borrowing by nonfinancial public enterprises to fund their capital invest- ments. A significant portion of the short-term increase in the main budget borrowing requirement was to support power utility Eskom, the National Treasury said.

Capital expenditure would reach almost 11% of total government spending by 2011/12. Capital spending as a percentage of total government spending increased from 6,3% in 2004/5, to 9,3% in 2007/8.

Public enterprises were absorbing a large share of the capital investment programme. Having grown by an average of 15,9% in real terms over the last four years, investment by public enterprises would accelerate and was expected to average about 20% a year over the medium term.

Eskom’s infrastructure programme (R340-bil- lion over five years) accounted for the largest share of this expansion, followed by Trans- net (R80-billion), the Central Energy Fund (R30-billion) and Airports Company South Africa (R17-billion). Investment spending by the large water boards also contributed to rising public-sector capital spending.

New and upgraded public infrastructure – including power generation and transmission, rail, ports, roads and pipelines – was needed to boost the growth potential and expand private investment.

Some of the capital spending had a high import intensity, which would put upward pressure on the current account. Over the long term, however, these investments would ‘help to unwind economic imbalances’ by lifting the growth potential of the economy.

The four main areas of general government capital spending were in built environment infrastructure, such as housing, water, sanitation, electrification, roads and public transport, including bulk infrastructure and distribution networks for water and electricity; social service infrastructure, including schools, further education and training colleges, health facilities and welfare service facilities; network infrastructure in the economic services sector, including broadband Internet connectivity and signal distribution, and investment in research and development infrastructure; and improving the capacity of the public service through investing (mainly in telecommunication and information technology networks) in Home Affairs, the South African Revenue Service and the criminal justice sector.

Real growth in general government investment gathered pace over the medium term, averaging 7,3% a year.

The National Treasury said that increased capital budget allocations reflected government’s priorities, with more funds flowing to public transport, education, health, social development, justice and protection services, and housing. A number of new prisons were also being constructed through public–private partnerships.

The National Treasury noted that the publicsector borrowing requirement increased mainly because of the significant increase in borrowing by State-owned enterprises to finance their much-needed capital programmes.

Financing the infrastructure investment needs in a time of diminished access to global credit was a challenge, and South Africa’s domestic capital markets would be important sources of finance.

Government said it would support the investment programmes of State-owned enterprises by strengthening the role of development finance institutions, such as the Development Bank of Southern Africa, in financing large infrastructure projects, and through targeted guarantees and support for borrowing programmes. In this way, government selectively assisted several State-owned enterprises to gain access to capital markets at a lower cost.

“The cost of borrowing abroad has risen significantly in the past month due to tight credit conditions in developed-country capital markets. A year ago, South Africa was able to borrow at a spread of 0,65 percentage points above the rate of the US government, but today the spread has increased to more than four percentage points. The depth and resilience of the rand-denominated capital market and government support for the borrowing programmes of State-owned enterprises are therefore significant advantages in present circumstances,” the National Treasury added.

The National Treasury also said it recognised that utility prices “have to be adjusted to reflect the economic costs of delivering public amenities, while ensuring subsidized support for poor households”.

The MTBPS provided considerable support for Eskom to finance its large investments.

“However,” noted the National Treasury, “the correct pricing of services is crucial to balancing supply and demand, and generating the resources for higher investment. “The realignment of electricity tariffs will encourage more efficient consumption of energy by residential and business users, and provide an incentive for investment in new production capacity”.

Treasury has already committed R60-billion to Eskom for its new-build programme worth some R340-billion over five years. The loan would be dispersed in tranches, with R10-billion in the 2008/9 financial year, and R50-billion over the next two years.

Eskom was initially expected to sell bonds, largely on the international markets, to raise capital for the rest of its capital requirements, however, it was now likely to focus more on the domestic markets to raise funds. It was still to be decided whether or not the National Treasury would guarantee the bonds issued by Eskom.

South Africa’s electricity crisis was viewed as the most glaring example of historic underinvestment in critical infrastructure, while constraints to faster growth were also evident in the ports and rail sector, roads, and in the refining of petroleum, which this investment would seek to rectify.

The main Budget allowed for additional allocations of R170,8-billion over the next three years. Eskom received government support through its R60-billion loan. Of the remaining R120-billion, the largest share, R59-billion, was allocated to offset the effects of higher inflation. The expanded public works programme, the school feeding programme, and municipal infrastructure also received significant allocations.