Fixed investment by public enterprises would grow by about 17% a year over the medium term, the National Treasury said on Tuesday in the 2009 Medium Term Budget Policy Statement (MTBPS).

It said that the low levels of public debt had enabled a "rapid increase" in infrastructure spending, much of it supported by government-guaranteed borrowing by State-owned enterprises (SoEs).

Gross fixed capital formation by the public sector increased from 5,9% of gross domestic product (GDP) in the second quarter of 2007 to 9,4% in the same period of 2009.

The Treasury noted that the nonfinancial public enterprises, principally freight logistics group Transnet and power utility Eskom, were expected to continue the strong expansion of their capital infrastructure programmes. As a result, expenditure on public sector capital was expected to reach 9,8% of GDP by 2012/13.

This represented a "considerable" investment in the productive capacity of the economy and the ability of the State to provide goods and services, the Treasury noted.

Public infrastructure expenditure was expected to remain strong over the medium term, totalling R872-billion. Major funding by government included further investment in school buildings, public transport, housing, water and sanitation.

The MTBPS noted that South Africa had the fiscal space to be able to run a significant deficit to support the economic recovery. However, it warned that over the medium term, a phased moderation of the borrowing requirement would be required.

In the first half of 2009, real fixed investment by SoEs increased by 50% compared with the previous year, driven by an 83% rise in spending on electricity, gas and water.

The MTBPS noted that significant investment was also taking place in transport infrastructure, including air, rail, ports and buses.

Between 2009 and 2012, capital expenditure by Eskom, Transnet and the South African National Roads Agency Limited would total about R441-billion.

The borrowing of enterprises, such as Transnet and Eskom, would continue to increase in support of their capital expenditure programmes.

The Treasury estimated that Eskom would have to borrow about R120-billion over the next three years, although this number might change depending on the level of tariff increases.

Development finance institutions (DFIs) were also playing a greater role in supporting companies through the downturn and providing infrastructure finance.

The Development Bank of Southern Africa (DBSA) would leverage its borrowing up to R140-billion, while the Industrial Development Corporation intended to invest more than R70-billion in the economy over the next five years, of which R6,1- billion was set aside to assist distressed companies.

The government was providing additional support to the major DFIs. By increasing the callable capital of the DBSA, the bank was able to increase lending by about R102-billion over the next five years.

The Land Bank would be recapitalised to allow it to focus on the extension of development lending.

"Both public enterprises and development finance institutions need to operate on a financially sustainable basis. Improving coordination, oversight and governance of these entities, as well as enhanced monitoring of their financial performance and development impact, is a policy priority," the MTBPS noted.

Public-sector borrowing was expected to widen to 11,8% of GDP, or R285-billion in 2009/10.

POLICY PRIORITIES

The MTBPS noted that increases in public spending over the past decade had enabled government to broaden social transfers, increase access to education and health, and deliver housing and basic services, such as water and sanitation. Expenditure on economic infrastructure, including public transport and roads, had also risen sharply.

Government planned to continue investing in the built environment and infrastructure over the next three years to expand public transport and to build more schools and hospitals.

To speed up housing delivery, coordination between provinces and municipalities was being improved. Responsibility for sanitation was also likely to shift to the Department of Human Settlements.

The main budget made available an additional R78-billion for allocation to new priorities or to respond to new pressures over the next three years. This amount was less than in previous years, reflecting the more difficult economic environment, the MTBPS stated.

Of the additional resources, 51% would go to provincial government, mainly to accommodate higher personnel costs and for spending on education, health and housing. Municipalities would receive 16%, the majority of which compensated for the rising costs of providing free basic services and to sustain spending on infrastructure.

The MTBPS stated that municipalities played an important role in the built environment by expanding basic infrastructure services to households, replacing or rehabilitating assets, and responding to growth in demand for infrastructure.

The municipal infrastructure grant been revised upwards by R2,5-billion to provide more poor households with access to basic services, with the intention of meeting government's target of universal access to services by 2014.

This brought the total amount allocated for the rollout of basic infrastructure through this grant to R45,9-billion over the medium term expenditure framework (MTEF), augmenting municipal capital budgets.

The neighbourhood development partnership grant receive additional resources over the three-year period for projects that focus on the regeneration of townships through the development of social and economic infrastructure.

A total of R8,2-billion has been added to the local government equitable share over the MTEF period to cater for the increased costs of bulk services such as electricity, and to increase the number of households that receive free basic services. The latest increase in the electricity bulk price for 2009/10 was 31,4%, and further increases over the three-year period were proposed.