Mired in ideology
SA is stuck in a nonreformist stance, which will come at the cost of foreign investment and sustainable progress
e have reached “year seven”. According to Hollywood lore, in a marriage, the “seven-year itch” is when a couple either resolve their problems by adapting to each other’s differences, or their problems become insurmountable. Investors fell in love with emerging market debt in 2009. The inflows surged in 2010. By mid-2015, this relationship will be seven years old.
The rose-tinted glasses have been shed. The divergence between emerging market and developed market growth rates has closed. Global uncertainty has risen, highlighted by Citigroup’s CFO who, when discussing the results last week, said they were suffering from “volatile volatility”.
In this world, the reform agenda of key emerging markets has become pivotal. In his post on the Financial Times’s “BeyondBrics” blog, Jonathan Fenby examines the seven emerging markets where reform momentum is key. They are India, China, Indonesia, Mexico, Brazil, Turkey and SA. He ranks SA bot- tom, noting that the “president is focused on survival in [a] fragmented political landscape”.
Setting aside any political judgments, there is one inescapable fact: there is little or no reform momentum in SA at this time. This is encapsulated by the energy crisis.
Last week, Eskom CEO Tshediso Matona warned: “The question is not whether load shedding will be part of our lives, but it is how we cope with it. Eskom is unable to guarantee reliable supply on its own.”
He suggested it would take about 10 years to fix the maintenance backlog, the same time it took to accumulate it. The net result is that it is time to move beyond Eskom. Unless there are dramatic changes in the way the organisation is run, any solution to SA’s electricity shortfall will come from outside the entity.
SA has the building blocks to do this. The renewables programme provides a superb framework for energy procurement. It needs to be extended to coal-fired stations immediately.
This is where the reform appetite of government comes into play. Opening the door to private-sector provision of electricity is a huge leap for the ANC government, which includes many hard-core socialists who see private provision of energy as a defeat. Let’s hope the reality of daily load shedding will help overcome the ideological chasm. I’m not suggesting that Eskom be privatised, just that it lets new providers in.
There is also the potential for rapid growth of self-provision of electricity by businesses with solar and wind technology. A Financial Times article examines this in the US. It quotes a paper for the US Edison Electric Institute, which warned that “electricity utilities were facing disruptive challenges comparable to the way the fixed-line telephone industry was shaken up by mobile”. Government should be promoting self-provision of electricity aggressively.
A cynical friend encapsulated the impact of the power crisis by noting that daily load shedding would allow the portion of SA that lives in formal housing and drives motor vehicles to “touch the Third World”. This may be embellished, but regular load shedding is not great news for confidence and investment.
SA successfully rolled out mobile telephony — not far behind much of the developed world. The country can reestablish energy security in less than five years — by decreasing the proportion of electricity Eskom supplies. The key is whether we can implement the (minor) reforms required to boost private-sector participation in electricity provision. If government begins to show any sign of leadership in dealing with the electricity crisis, foreign investors’ assessment of SA’s reform agenda will rise.
Now that foreign investors have become more discriminating, this positive message is badly needed for SA to stretch the relationship beyond seven years — and fund its current account and budget deficits. Moola is an economist & strategist
at Investec Asset Management