Ageing infrastructure: a risk to developers
Who carries the cost of crumbling municipal infrastructure?26th Mar 2021
Before starting projects in areas with ageing municipal infrastructure, developers should beware of the indirect – or, in some cases, direct – costs.
Crumbling roads and waterworks, networks that haven’t kept pace with growing populations … local municipalities have a massive asset renewal challenge. Ross Homeniuk, a KPMG Partner, summed up the situation best when he wrote recently that, despite the recent distractions of the COVID-19 pandemic, the clock is still ticking on the country’s municipal infrastructure.
‘That is, while the country is renowned for world-class communities and its enviable quality of life, stats show that 13% of [its] core municipal infrastructure assets (e.g. roads, pipes, treatment plants) are in significant decay and considered unreliable or unfit to meet our current needs,’ Homeniuk wrote, adding: ‘The risks of inaction cannot be taken lightly. Ageing infrastructure has the potential to make municipal services less reliable, less effective and more costly to deliver.’
The country he was writing about was – surprise! – Canada … but he may as well have been talking about South Africa.
Speaking ahead of 2021’s Water Week, Department of Water and Sanitation spokesperson Sputnik Ratau lamented that no matter what progress was being made with water provision in South Africa’s communities, it was always going to be hampered by its ageing infrastructure.
‘That has been some kind of an Achilles heel for the country,’ he sighed. ‘Even as the bulk continues to grow, as does the cost of the ageing infrastructure, the actual percentages in terms of reliable water supply will always come down.’
For property developers, the problem is even more complicated.
Picking up the costs
In some cases, usually determined by apartheid-era spatial planning and budget allocations, municipal infrastructure is well designed. It’s just old and falling apart. Ageing or poorly maintained municipal infrastructure carries massive repair costs. Those costs – either directly or indirectly – become a burden for developers who haven’t considered them in their project budgets.
As long ago as 2015, James Oppenheim and Ric Snowden – both engineers, and both directors at consulting firm Arup – told Engineering News how developers were increasingly being asked to make significant contributions to bulk services and road improvement.
Therein lies the risk for developers who work in areas beset by ageing municipal infrastructure. As Oppenheim explained: ‘Poor planning and a lack of proper maintenance result in budgets often being used to repair broken or damaged infrastructure, rather than to develop new infrastructure to support the growth of society and its developments proactively. Poor planning also means that plans and solutions to tackle problems are often short-term and ineffective.’
‘Professional civil servants must be in place in the central and local authorities to ensure good planning, quality installations, continuity management, monitoring and oversight,’ Snowden added. ‘We need planners and engineers in these positions, not politicians or managers – regardless of political vacillations.’
As anybody who’s done basic home DIY would tell you, infrastructure maintenance has an affordability tipping point, where it becomes cheaper to replace than to repair. ‘Cheaper’ in this case can be misleading: the costs can in fact be prohibitive, and many South African municipalities simply don’t have the money or resources to cover them.
Recent budget speeches have highlighted huge investments in South Africa’s infrastructure, with billions of rands earmarked for energy projects, water and sanitation, roads and bridges, and so on.
In his October 2020 medium-term budget policy statement, Finance Minister Tito Mboweni pointed out that ‘government has initiated a process to review Regulation 28 [of the Pension Funds Act] to make it easier for retirement funds to increase investment in infrastructure, should their board of trustees opt to do so.’ (No doubt anticipating the howls of protest around prescribed assets, he quickly added: ‘At all times, trustees are expected to put the interests of retirement fund members first.’)
But property developers could see past the headline-grabbing infrastructure announcements. The reality at a local level remains that, as Minister Mboweni was making his speech, the country’s municipalities were reporting that they were owed more than R127 billion by struggling households. Those municipalities, in turn, owe more than R53 billion to their own creditors.
There’s an opportunity here for developers to step in and contribute toward rebuilding those municipalities’ crumbling infrastructure … but there’s an even greater risk that they might not get paid for their work, and – even more so – that the private sector projects they’re already working on will have to pick up some of those municipal infrastructure repair costs anyway.