State must abandon infrastructure monopoly

‘Eskom could stop its debt from rising to unacceptable levels by sharing ownership of new power stations’

ALARM bells are ringing about the health of SA’s economy. Recent data reveal worrying signs of weakness. The hoped-for pick-up from last year’s anaemic growth of 2.5% now looks unlikely. Growth is likely to be even slower this year than last.

Weak domestic demand is confirmed by a plunge in consumer confidence to a nine-year low in the first quarter. There is also evidence of a substantial slowdown in retail spending. This is the result of sluggish employment creation combined with dramatic rises in electricity, petrol and food costs. Income for discretionary spending is shrinking.

Business confidence is also very low. The Rand Merchant Bank-Bureau for Economic Research business confidence index showed a slight improvement in the first quarter, but the overall confidence level it measures remains low. In contrast, the South African Chamber of Commerce and Industry’s business confidence index fell last month to its lowest level in 13 years. Its current weakness is astonishing, surpassing levels recorded during major traumatic events such as the global financial turmoil of 2007-08, 9/11 and the subsequent rand exchange-rate crisis.

Fears that the electricity blackouts of 2008 may be repeated are weighing heavily on confidence levels. Eskom has maintained electricity supply only by paying major consumers not to produce. We are all aware of how the imperative of economic growth is compromised by the inability to provide the electricity such growth needs, and this must negatively affect investment decisions.

Manufacturing production provides further evidence of the economy’s weakness. Last month’s purchasing managers index revealed that manufacturing is contracting.

Falling manufacturing output suggests the much weaker rand has not yet sufficiently increased the global competitiveness of South African business, which would allow local demand weakness to be compensated for by increased exports.

Some positive news is provided by the recovery in recent months of mining production from the strike-induced losses recorded last year. Mining output in February was 7% higher than a year ago. But there are worrying signs of fragility, with mining output in February 2.5% lower than in January. The possibility that union rivalry will lead to renewed strikes during scheduled wage negotiations later this year is weighing heavily on the mining industry.

What can be done to turn around the weakness? The traditional fiscal and monetary tools of macroeconomic policy are largely exhausted. It is not surprising that the Reserve Bank is concerned about the inflationary effects of the weaker exchange rate and higher fuel prices. So a further cut in interest rates is unlikely for now. Fiscal policy is tightening because government spending is being squeezed by rising debt-service costs and weak tax revenue.

Instead, the government is relying on its large infrastructure investment programme to drive growth. However, we are yet to see the desired growth benefits. There are two reasons for this. First, consistent underspending by especially provincial and local government means that infrastructure investment has not risen as rapidly as the government intended. It will now have to be spread over a much longer period, thus delaying any boost to domestic spending and therefore economic growth.

Second, better domestic infrastructure is expected to enhance business competitiveness by lowering costs. But this is not happening because the funding for such investment is derived from large price increases.

The only way to change this is to require parastatals such as Eskom to fund investment by borrowing rather than from revenue. This would relieve pressure on households and businesses. But it would also drive parastatal debt much higher. The government might be required to guarantee such debt, placing its own credit rating under pressure.

There is an alternative: allow greater private-sector involvement in infrastructure provision. Eskom’s own proposals, drawn up at the height of the 2008 power crisis, projected far greater levels of private co-generation than have been allowed to materialise. Eskom could stop its debt from rising to unacceptable levels by sharing the ownership of new power stations with private partners. It could outsource much more in future to private providers. It could even sell some of its existing power stations and use the proceeds to fund new investments.

This can happen only if the government abandons its current ideological determination to maintain a monopoly on infrastructure provision. The economic costs of this ideology are camouflaged for now by rising user charges. Unless this changes, business competitiveness and consumer spending will remain crippled. It will weaken economic growth, constrain job creation and reduce tax revenue. We deserve better than this.