Costs of big state projects spiralling

South Africa is notorious for its propensity to embark on ambitious megaprojects without, some argue, first doing the necessary number crunching. Minister of Health Aaron Motswaledi has announced that his department would spend about R10 billion upgrading hospital and university infrastructure to enable them to churn out increased volumes of health care professionals, especially doctors, who are in dire shortage. Whether the government has done the maths properly only time will tell. History, though, tells us that when the South African government embarks on a major project, the bean-counters get it horribly wrong. Often this is discovered too far into the project for any possibility of pulling out.

In some of these projects, the costs steamed out of control like a runaway train. The Gautrain, 2010 World Cup, Eskom power stations, arms deals and toll roads are all case studies of how budgets were underestimated into the billions, and tender winners have – well, flourished. “The arms deal was approved at R29.9bn. Then they added extras which took it to R43bn,” said government accountability activist Terry Crawford-Browne. “When we objected we were smeared as racists.” Crawford-Browne said contributing greatly to the spike in costs were exchange rates and inflation. In 2001 the rand collapsed to the dollar. But he believes the rise in cost could have been avoided.

“It was problematic with all these foreign currency liabilities. The government was warned that 75 percent of the cost was in foreign currency. “It was a hellishly risky proposition to borrow funds for 20 years with a weak rand,” said Crawford-Browne. “It was plain reckless. The treasury was warned by an accountability study and they went again and did it anyway. “The arms deal has institutionalised the culture of corruption, lack of accountability and the attitude that tax payers are there to be fleeced,” he said. Crawford-Browne said what was meant to cost R7bn had rocketed to R47bn. “Now Minister of Defence Lindiwe Sisulu is trying to get back a deposit of R3.7bn from Airbus, which seems to be stalling,” he said. “But the Eskom power station contracts make the arms deal and (Airbus) A400m project look like petty cash,” said Crawford-Browne.

Eskom, in a bid to meet future energy needs, plans to build two new power stations – Medupi and Kusile – by 2012. When the construction was first announced, Medupi’s price tag was widely reported as being about R70bn and Kusile’s R80bn. The cost, including other items such as interest during construction, puts it closer to R125bn and R142bn respectively. According to Eskom’s annual report this year, Medupi, excluding interest, is costing R98.9bn and Kusile R121bn. Hennie van Vuuren, director of the Institute for Security Studies, whose work includes monitoring corruption in governance programmes, noted that the Eskom power station contracts were controversially awarded to the consortium Hitachi Power Africa, which is 25 percent owned by ANC investment vehicle Chancellor House – recently accused of not meeting its end of the contract.

“The list of inflated government projects is endless,” he said. “The arms deal, Fifa World Cup and Gautrain – all of these suggest a need for more responsible management of government contracts.” “The costs of major government projects are spiralling out of control. Is it allowed because political connections have enabled this? “And are the public convinced by one set of costs which are not realistic, just so we buy into the grand projects? Although they may be beneficial, they constitute vanity projects,” Van Vuuren said. “Big projects may benefit the economy, but they are also big projects politicians leave behind as a legacy,” Van Vuuren said. “We want to project ourselves as the most developed nation in Africa. But at what cost does this come?

“Mega contracts make some people wealthy. Arms deals are the best example,” he said. “Aside from systemic corruption, there are also elements of mismanagement. “We should look at what we can afford and consider smaller, more sustainable projects. “It’s important to carefully embark on projects, so a mixture of corruption and mismanagement of funds doesn’t allow costs to spiral out of control,” he said. “The public needs to make politicians accountable, so they don’t just become rubber stamps approving these projects. Because ultimately there is a trade-off: we are not spending money on other social services.” Van Vuuren said he was wary of the recently proposed high-speed train link between Joburg and Durban, if the Gautrain project was anything to go by.

Gautrain was announced in 2000 and estimates came in at about R4bn. This figure was revised to R20bn in 2005 after the successful bidder for the project was announced and a contract was drawn up. ANC MP and South African Communist Party deputy general secretary Jeremy Cronin has been quoted in Parliament saying costs of the rapid-rail project were spiralling towards R35bn. Gautrain management agency CEO Jack van der Merwe publicly denied this and said, “The Gautrain Project would like to reiterate that the total cost of R25.2bn for Gautrain’s public-private partnership contract, as approved by National Treasury on September 26, 2006, is a fixed price, fixed scope and fixed period contract.”

The controversial Gauteng toll road system will cost taxpayers even more than the Gautrain. The toll system costs have skyrocketed by R1bn in a year and it will now cost an additional R2bn to build the roads. In September, Minister of Transport Sibusiso Ndebele announced the costs had escalated to R19.8bn – a R2bn increase over the R17.5bn that Transport MEC Ismail Vadi had earlier said the roads cost. This phenomenon of exceeding budgets is nothing new. In the lead-up to the 2010 World Cup Soccer City went almost a billion rand over budget, costing R3.3bn to complete, a sharp increase from the estimate of R2.5bn.