Here’s how Gordhan can ease fiscal pressure in mini budget

18 October 2016

Cape Town – One way Finance Minister Pravin Gordhan can ease the country’s fiscal pressure is by halting the proposed Wild Coast N2 highway in the Eastern Cape, which could cost over R8bn to construct.

That’s the advice from the Organisation Undoing Tax Abuse (Outa) on Monday. It was responding to a report that recommended the suspension of the N2 toll road project over concerns about its economic benefits.

Gordhan is under pressure to contain government spending in his bid to reassure rating agencies and prevent a further downgrade of South Africa's sovereign debt rating, which Standard & Poor's (S&P) and Fitch Ratings have at one notch above junk status.

S&P saved the country from a downgrade, pointing to Gordhan's February budget speech that promised a reform of state-owned enterprises, which have experienced poor governance issues and high debt evels.

South African National Road Agency (Sanral) is already facing pressure over its e-toll system in Gauteng, with Outa taking the agency to court over what it believes is an illegal system.

The proposed N2 highway may be far away from the urban lights of Gauteng, but the community most affected by the project believes it won't bring economic benefits.

Report questions economics of highway

The release on Monday of the N2 Wild Coast Toll Road Today report, which was compiled by economists Professor Gavin Maasdorp and Allen Jorgensen and commissioned by Sustaining the Wild Coast (SWC), evaluated whether state spending of a new 85km highway is justified by the benefits, and if it is worth the risks.

While the road would shorten the trip from Durban to East London, the economists question the costs involved in creating a new road with exorbitantly-priced bridges compared to upgrading the current route. The report recommends that a new study be conducted which takes into account social costs and uses updated financial assumptions.

Construction of the multi-billion rand N2 Wild Coast toll road was given the green light in January this year. The project promises to create more than 6 700 direct jobs over a period of five years.

Mbulelo Peterson, manager of Sanral’s southern region, said: “Mtentu and Msikaba bridges are expected to cost in the order of R2.5bn and the remaining green fields section an additional R5bn to R6bn.”

However, the latest report shows that assumptions made with regard to projected revenue and traffic volumes simply no longer apply while costs have mushroomed, invalidating the original cost benefit analysis.

It reveals that construction costs increased by 45% to 55% over the past eight years, pushing up the cost whereas the growth rate in the economy has declined dramatically. Projected growth in traffic volumes is consequently way below the forecast, it showed.

Project would be extremely reckless - SWC

SWC chairperson Margie Pretorius said that given the enormous fiscal pressure on Treasury and requests from local communities to spend money on upgrading the existing road network, it is self-evident that it would be “extremely reckless” to build a high speed toll road and two huge bridges now.

SWC represents affected residents of the Amadiba Traditional Community who are directly impacted by the new road.

“Sanral boasts about the magnificence of the mega bridges over the Msikaba and Mtentu gorges, but their justification for the R2.5bn price tag is ludicrous,” said Pretorius.

“It would be far better for that money to be spent on alternative lower cost, small-scale road improvements and bridge building that could bring the desired economic growth and development to the area and be more appropriate in these challenging economic times.”

Pretorius said Sanral had secured Treasury funding for the bridges, but admitted it has no approved plan yet for finding the R6bn needed to connect them up.

“It would be highly irresponsible for Sanral to proceed with the contracting process without clear funding in place for the road, as this would leave stranded assets that have cost billions and are useless,” said Pretorius.

“Sanral is acting highly inappropriately by advertising for tenders and raising expectations within the construction industry before all legal objections to the toll road have been heard.”

Gordhan should intervene in mini budget - Outa

Outa, which funds SWC, called on Finance Minister Pravin Gordhan to intervene in his mini budget speech next week.

Outa chairperson Wayne Duvenage pointed to the report's link between the N2 project and the proposed Xolobeni mining project in the area.

“It is interesting that Professor Maasdorp and Mr Jorgenson do not pussyfoot around whether there is any connection between the feasibility of this scheme and the future of the proposed Xolobeni mining project nearby,” he said.

“They take that as a given. That project is now on hold, and it makes sense that the N2 Wild Coast Toll Road should be shelved as well, and the expressed development needs of the local residents heard.”

He called on Gordhan to read the report because it gives him a rational option to reprioritise government spending.

“It is not too late for Minister Gordhan to announce in his medium-term budget speech that he has taken note of the report and that he is committed to putting a stop to what would amount to another monumental tax abuse if this new construction project went ahead.”

This article first appeared on Fin24, see here.