SA needs qualified, untainted leadership to take it out of its current spiral of poor growth and load shedding, argue Kaizer Nyatsumba and Henk Langenhoven.
Johannesburg - For a country that once held so much promise internationally following the end of apartheid, South Africa has seriously under-performed on various fronts and may be at the tipping point. While examples of our under-performance abound, it is when attention is turned to the economy that the extent of our failure is breathtaking.
We are among the most violent societies in the world, with all who can afford private security left with no option but to invest significantly in it.
Twenty years into our democracy, by and large, our police service continues to be aggressive in its approach, even violent, while its investigative capacity and professionalism is not what it should be.
Our government and its allies in the trade unions have reduced the country’s education system from a poor, racially skewed one to one on its knees, with a growing number of schools in the townships deserted en masse as parents and children lose confidence in them.
Our health system is in no better shape, with public hospitals poorly resourced and running out of medicines, manned by an increasingly hostile nursing and medical cohort working under challenging conditions.
Now, for the second time under a decade, we find ourselves confronted by rolling blackouts – euphemistically called load shedding – in a country that has traditionally considered itself the premier economy on the continent.
Since the first round of blackouts in 2008, our economy has not registered near-decent levels of growth. And it will not do so for as long as the enormous challenge of sustainable energy supply is not addressed. No economy constrained by unreliable energy supply can realise its full potential.
At the root of our challenges is uninspiring leadership. While the government makes impressive pronouncements about the need to stimulate manufacturing, to improve international competitiveness, to grow our economy and to create jobs, the priority for some is ensuring politically aligned individuals are placed in strategic positions in the civil service and the broader public sector, regardless of education and competence. The SABC, SAA and PetroSA boards come to mind.
In 1942, the South African historian CW de Kiewiet coined the phrase that South Africa progressed “politically by disaster and economically by windfalls”. Thankfully, we have since succeeded in reversing this trend.
The political disasters of the past were self-inflicted, but democracy brought a self-correcting mechanism that has so far stood us in good stead.
However, the electricity crisis confronting us suggests economic windfalls have turned into disasters – and these disasters are equally self-inflicted.
Until Eskom’s new base-load capacity comes on stream, energy will continue to be a significant growth constraint. While myriad plans have been made, these solutions will take time.
The productive sector can’t continue subsidising failing local authorities, through surcharges on electricity prices. With some municipalities relying on 40 percent of their income from this source, price increases dressed up as savings incentives – to be repeated when budgets again fall short – are a perverse cycle that slowly destroys the economic base in many local authority jurisdictions.
The collapse of the coal silo at Majuba came as a surprise because that power station is one of the youngest facilities.
The conundrum is buried in a simple accounting term – “depreciation”. When the fixed investment in power-generating capacity is dissected, it is important to take into account a continuously adjusting trend allowing for new investment and depreciation. If allowance has not been made for sufficient maintenance, this trend is downward.
This trend in the value of the total fixed investment in generating capacity relative to the size of the economy reached a peak in 1985/6 – and by 2006/7, it had deteriorated to 1960s levels. The trough has been reached, but we still have a long way to go.
What is the likely impact of the load shedding over the short term, a year?
The metals and engineering sector remains our reference point in answering the question. At the end of the month-long metal workers strike in July, the Steel and Engineering Industries Federation of South Africa (Seifsa) calculated that during those 20 working days, R6 billion worth of direct value-add to the economy was lost. In its quarterly bulletin for the third quarter of this year, the SA Reserve Bank reported that, after the numbers had been plugged into their models, the estimated impact of the strike on the economy amounted to half a percentage point loss in GDP growth.
This was the result of one sector being taken out of production.
Seifsa’s calculation is that for one month, with an induced electricity demand management saving of 10 percent, with two hours of load shedding, and allowing for the differential impact on the sub-industries within the sector, 23 percent of output (R6bn of R26.5bn) and value-add (R1.5bn of R7bn) have been lost. This means for the metals and engineering sector alone, four months of load shedding will have the same impact as the month-long strike.
We have not bothered with the multiplier effects circling out from metals and engineering, as it is assumed that all sectors will be affected. We have also not taken account of opportunity costs, such as investments in energy efficiency or the costs of standby capacity or the repair costs for damaged electronic control systems, among others.
However, there are even more important long-term consequences. The most severe potential loss is that of markets due to production uncertainties. For metals and engineering, exports constitute 60 percent of production and imports have captured a similar share of the domestic market. Markets lost due to non-performance may never be regained.
The key factor is global competitiveness. Without a sufficient and secure supply of energy, this is extremely difficult. When investment patterns in manufacturing and metals and engineering are overlaid on electricity supply, the inconsistency of supply and the cost of energy trends, it’s clear that investment is held back by this constraint. Local manufacturers are importing more components for assembling due to cost advantages and security of supply.
Actual or realised economic growth in the economy has fallen substantially below its potential. While energy provision should be in support of growth, we are now in danger of a decoupling or reversal of the causality between the two factors.
Two studies published in 1984 and 1993 estimated the potential growth rate of the economy to be in the order of 3.5 percent. Two more studies last year and this year found the country’s potential growth rate had declined to 2.5 percent.
The energy constraint is potentially crippling and can relegate South Africa to the pedestrian growth-trap league in which so many middle-income countries find themselves. The opposite is also true: Having sufficient supplies of energy should result in substantial, long-term productivity improvements. They would free up tremendous resources currently employed by electricity users to provide their own energy. They would allow for certainty, flexibility and expansion in productive capacities, which is the only sustainable avenue to longer-term growth and employment.
We waited too long. Now we are bearing the brunt of waiting too long with these base-load investment decisions.
What we need is inspirational leadership, with men and women of integrity – whose qualifications are beyond question – appointed into strategic positions.
* Kaizer Nyatsumba and Henk Langenhoven are respectively the chief executive and chief economist of Seifsa.
** The views expressed here are not necessarily those of Independent Media.
The Star