​SA’s economy can be fixed – but it requires a renewal of political leadership

COMMENT

South Africa may have avoided a technical recession as a result of better than expected growth in the second quarter, but the country’s medium-term prospects for growth and development are bleak.

One would have thought that the most serious election setback since 1994 would have re-energised the ruling party and prompted a commitment to improve government performance, especially around actions that would facilitate economic development and widen opportunities for all South Africans. One would have hoped for a more co-ordinated and purposeful commitment to implement sensible policy, improve governance of key economic sectors and deal with corruption.

Instead we see a doubling down, a going for broke by factions in the ruling party. Its most obvious manifestation has been the takeover of the Hawks and the blunting of the investigation by the South African Revenue Service of those close to the president and the party leadership, and the crude attempts to undermine the integrity of the finance minister and the effectiveness of the treasury. At a time when South Africa faces its most challenging economic conditions, as unemployment and poverty worsen, these actions are both reckless and shocking.

We should understand that they are the culmination of years of aggressive rent-seeking, particularly in our large economic infrastructure sectors such as energy, telecommunications, transport and water.

Here’s a brief, and incomplete, catalogue of critical areas where government remains fatally complacent around policy implementation, where governance is systematically being undermined and where corruption is out of control.

Amendments to the Minerals and Petroleum Resources Development Bill, first published in 2012, remain unresolved, creating uncertainty not only for mining investments but also for the exploration of potential petroleum and gas resources.

A single off-shore well costs upwards of R1.5-billion. Deep, off-shore drilling is also technologically complex. We need large, experienced companies to invest but local antipathy to these international firms, and disputes around government’s share, frustrate development.

Neither the department of mineral resources nor the department of energy show any urgency in clearing the regulatory, licensing and environmental impediments to on- and offshore drilling that might discover economic gas resources that could transform our energy economy through a more sustainable energy mix, and lead to an improved balance of payments and more employment opportunities.

One of the Central Energy Fund’s companies recently sold 10-million barrels of our oil reserves at below market prices without the permission of the energy minister or treasury. Insufficient funds are available for purchasing new strategic stocks, which the International Energy Agency recommends should cover 90 days of consumption. No one has yet been prosecuted.

Eskom is the largest of South Africa’s state-owned enterprises, with annual revenues of R160-billion. Its largest expenditure item is coal. Contrary to recent Eskom press statements, its long-term cost-plus contracts with tied coal mines were cheap. But these contracts are not being renewed and are instead being given to smaller, new mining entrants. That, in itself, is positive for empowerment, but little investment is being made in new mines and Eskom has openly defied treasury’s scrutiny of these contracts.

Government has not acted on the recommendations of the Coal Road Map published in 2013 and the risks of coal shortages and steep increases in coal and electricity prices are real.

There are also allegations of corruption in Eskom contracts for the refurbishment of Koeberg nuclear generators and the construction of its new power stations, such as Ingula. Eskom tariffs have increased four-fold in a decade, mainly as a result of cost and time overruns on its new power plants.

Restructuring recommendations in the Energy Policy White paper of 1998 have not been implemented and Eskom now frustrates the entry of cheaper private independent power projects through delayed and inflated transmission connection costs, and through refusing to sign new power purchase agreements.

Certainty around our energy future could be created through publication of an updated Integrated Resource Plan. All the latest models pick renewable energy and gas, not nuclear energy, which is more expensive, has larger risks of cost overruns and is difficult to finance. Yet government stubbornly sticks to its nuclear plans with its rent-seeking opportunities for a connected few.

Government interventions in the telecommunications sector have been either misdirected or dilatory. Telkom was partially privatised while still enjoying a monopoly in fixed-line telephony and other services. The result was price-gouging and the frustration of competition. Huge budgets dedicated to universal access were wasted as Telkom lost more phone connections than it gained.

Telkom’s control of the “last-mile” in copper, and slowness in moving to fibre-optic cables, Broadband Infracos’s sclerotic performance, among other policy and regulatory failures, have resulted in South Africans having slower and more limited internet access than many of our African neighbours. South Africa has missed the deadline set by the International Telecommunications Union to migrate our television services from analogue to digital signals by 2015, which would have freed up radio spectrum for broadband, but few in government seem to care. There is no urgency. Instead, the fight seems to be about which companies will benefit from contracts.

While Transnet has produced reasonable financial results, it has come at a cost to the South African economy. Transnet is unique in being an integrated rail, ports and pipeline utility. Few other transport companies around the world enjoy such protected market share. Unsurprisingly, its ports, general rail freight and pipeline charges are way higher than international norms and, so, it costs more for South African companies to export or import. Meanwhile, treasury studies and proposals for transport reform, dating from 2007, gather dust.

Allegations of corruption in rail tenders abound. Shell companies, with no experience, were awarded multibillion rand tenders. It is alleged that some of this money went to the ANC. The transport minister has tried to close down investigations. Like the arms deal, these allegations will not go away. There will be court cases. In the meantime, the renewal of rolling stock and other infrastructure is delayed and is much more expensive than it should have been.

SAA lurches from crisis to crisis, with naïve and crude attempts to extract rent as it desperately seeks new funding. Its management has been decimated and whistle-blowers victimised. Yet President Jacob Zuma has insisted on retaining its chairperson, who was quoted in court papers as saying: “You are not feeding me, when other chief executives are feeding their chairpersons.”

And the future of water supply to the Johannesburg region is threatened by delays to the second phase of the Lesotho Highlands Water Project, caused by political interventions, which seek favoured access to contracts for party-connected individuals.

Each of the above incidences of policy inaction, poor governance or potential corruption has been documented. But the full catalogue of indifference or malfeasance reveals the extent to which the governance of key infrastructure ministries and state-owned enterprises has broken down. The boards and management of these entities now openly defy the public enterprises ministry and treasury. This would have been inconceivable a few years ago.

None of the recommendations of the presidential review committee on state-owned entities, which was tabled in 2013, have been adopted. The one recommendation that the president has said he would follow – that he should chair a new state-owned companies’ co-ordinating council – is a fiction and was not in the committee’s report. This does not augur well, given previous actions to undermine good governance in state-owned enterprises, including blocking the appointments of reputable, principled and experienced people to the boards.

South Africa does need to enhance economic opportunities for black-owned companies, but current rent-seeking attempts are a zero-sum game that will destroy the financial sustainability of state-owned enterprises and ultimately cripple the economy.

The president, his Cabinet and the ANC’s national executive committee have to take responsibility for this failure in governance and economic management. Either they have to demonstrate seriousness in growing our economy and employment or we have to conclude that their failure to make progress in obvious economic and infrastructure policy areas, or to speak up against blatant corruption, is a tacit acceptance of the inevitable decline of our infrastructure, our economy and, ultimately, of a once principled and proud liberation movement.

It is entirely possible to make systematic and measurable progress across all these identified infrastructure areas. An updated, least-cost electricity plan could be published tomorrow. Irrational plans to procure costly nuclear power that we don’t need could be abandoned. The migration from analogue to digital signals could be expedited and radio frequency allocated for broadband, which has large economic multiplier effects. The boards of our state-owned enterprises could be renewed to improve governance, root out corruption and improve infrastructure services. And policy recommendations to reform our state-owned enterprises could be implemented: pragmatic restructuring options are on the table.

A government that was serious about economic development could initiate credible actions in all of these areas. It would create a positive shift in investment flows and optimism in South Africa’s ability to rise to the challenges of unemployment, poverty and inequality. But that would require a renewal of political leadership.

Anton Eberhard is a professor at the University of Cape Town’s Graduate School of Business. Follow him on Twitter @AntonEberhard.

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