Financial Mail

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

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