South Africa Infrastructure Report Q1 2013

BMI View: World Cup excesses, heavy bureaucracy and continuing political wrangles have weighedheavy on South Africa's previous glories. Though the country can still boast with the continent's mostadvanced infrastructure, we are now highlighting a significant relative regional decline. Despite a slowreturn to positive territory, with a real construction industry growth of 3.6% for 2013, the risks are stillplentiful: policy uncertainty, cumbersome bureaucracy, intense credit rating pressure and violent clashesin relation to several strikes at mines across the country. Hence, even the announcement of Zuma's newUS$462bn infrastructure plan does little to change our outlook for the country's construction sector.

Though we are seeing a slow return to growth, South Africa's construction industry is still lagging behindmany of its neighbours, registering a strong average growth of 6% for the same time period.

Following the 2010 World Cup government finances were pushed to the limit in order to completeprojects on time. Hence, a drawback in funding and subsequent activity was noticed almost immediatelyafter the tournament. Real growth decelerated from 7.8% year-on-year (y-o-y) in 2009 to 0.9% y-o-y in2010, and continued to weigh heavily on domestic construction companies in 2011, which resulted infalling share prices. That said, growth levels are unlikely to ever return to those seen before the WorldCup, as they were driven by an artificial stimulus and a front-loading of the project pipeline.

However, with economic growth slowly ticking up, we are seeing a gradual improvement within thewider South African construction sector. This has been underscored by the measured improvements seenin the performances of numerous construction companies.

Our medium-term outlook for the country's construction sector is one of cautious and modest growth.Statistics South Africa registered a weak 2.4% real growth for the first six months of 2012, in line withour full year 2012 estimate of 2.5%. On the back of this we maintain our 3.6% real growth outlook for2013. That despite President Zuma's announcement of a new infrastructure plan, which does little to alterour view. In fact, the 15year, US$462bn, plan contains little detail of how to overcome both theregulatory and the funding constraints which continue to block South Africa's infrastructure potential.

Furthermore, it remains unclear how this new scheme aligns with previous infrastructure plans, such asthe ZAR3.2tr announced in a budget speech in February 2012, where five geographically focussedinfrastructure development programmes were identified:

Develop and integrate rail, road and water infrastructure centred around the Waterberg andSteelpoort areas of Limpopo, to unlock coal, platinum, palladium, chrome and other minerals.

Improve the movement of goods through the Durban Free State Gauteng logistics and industrialcorridor by prioritising a range of rail and port improvements, supported by Transnet over sevenyears.

A new 'South Eastern node' in the Eastern Cape, to bolster industrial and agriculturaldevelopment and export capacity. Including construction of a dam on the Umzimvubu river anda 16mn tonne/year manganese export channel through the Port of Ngqura.

An initiative to expand transport and electricity infrastructure in the north-west of the country,including the upgrading of 10 priority roads.

A number of projects on the West Coast, including the expansion of the Sishen-Saldanha ironorecorridor to 100mn tonnes.

However, much of this plan drew upon huge capex schemes by the country's state-owned infrastructureoperators, including Eskom, Transnet, Prasa and Sanral. They all have multi-billion dollar plans in thepipeline; but, financing proved and continues to be a major obstacle. With little government fundingavailable, huge sums are required from the international financial community. For this reason, investmentis far from assured and thus we have refrained from incorporating these investment plans into ourmedium-term forecasts for the sector.