OP-ED

We have to use this crisis to put South Africa on a new industrialisation growth path

By Dennis Davis and Mike Morris 30 April 2020

Wind turbines at the Gouda wind farm about 115km from Cape Town. (Photo: EPA-EFE / Kim Ludbrook)

Green energy is, arguably, the most viable and extensive industrial policy which can ensure reliable electricity supply, spawn new businesses and ensure considerable growth in employment. If the country is serious about a reboot of an economy that can work for 55 million people, here is one clear industrial policy mechanism which takes us out of the repetitively failing “business as usual” model we consistently revert to, and creates the potential for a new industrialisation growth path.

Writing in a recent edition of the influential journal Foreign Affairs, Harvard’s Stephen Walt has said “Covid-19 will also accelerate the shift in power and influence from west to east. The response in Europe and America has been slow and haphazard by comparison [with China, South Korea and Singapore], further tarnishing the aura of the western ‘brand’… We will see a further retreat from hyper-globalisation, as citizens look to national governments to protect them and as states and firms seek to reduce future vulnerabilities. In short, Covid-19 will create a world that is less open, less prosperous and less free”.

This line of argument has gained some popularity in contemporary political discourse. However, in our view, it is overstated and hence lacks nuance. The Covid-19 pandemic has resulted in national governments across the globe being compelled to eschew austerity in particular and neoliberal economic programmes in general. The crisis has elevated the role of the state in the provision of essential goods and services to those most in need. The question that now arises is whether the importance of the social will be coupled with a commitment to democratic governance.

While Donald Trump remains president of the US, the increasing erosion of the guardrails protecting American constitutional democracy is likely to occur. Elsewhere in the developed world, however, there is little indication that democracy is about to be jettisoned; to the contrary a move towards some form of social democracy suitably configured to the 21st century is more likely.

By contrast, in the developing world, Walt’s concern may be more applicable. Take South Africa. If the country cannot deliver significant economic improvement for millions over the immediate period following the Covid-19 pandemic, increasing social unrest, followed by further state repression may reconfigure the present system of constitutional democracy. For this reason, the imperative is the implementation of economic change that can align the constitutional promise of freedom, dignity and equality for all, with the required economic reality and growth to deliver on these promises.

For years South Africa has been promised that structural change to the economy, which can align constitutional promise with economic and social reality, is about to commence. But no tangible plan, let alone its implementation, has taken place of a kind which may power the sort of growth, in particular, to reduce unemployment and profound levels of inequality.

For example, in late January 2020, the Minister of Finance, Tito Mboweni, spoke at Davos and argued for adopting measures for South Africa to be placed on a growth path where GDP would increase by more than 2.5% a year; hardly the 5% required to dent growing unemployment figures. But even this modest prediction was gutted by subsequent events. By March/April 2020 the promise of these changes had been shattered, and the key assumptions upon which growth predictions were based, were eviscerated by the Covid-19 epidemic and its disastrous consequences for global growth in general and domestic growth in particular. 

 

… So how will the government respond to the structural defects of the economy, the resolution of which is central to long term economic and social stability?

 

Sachs and others estimate the lockdown will result in an approximate loss of R13-billion per day, and that South Africa’s GDP will contract between 5% to 7% in 2020. In turn, this will result in a massive shortfall in tax revenues, which some experts predict will be in the order of R200-billion relative to the February 2020 Budget forecast. One must add to this the cost of the R500-billion package announced last week, and the maintenance of increased social benefits, including the calls for their continued maintenance and a form of a basic income grant that is likely to prevail beyond the pandemic. The fiscal challenge facing the country after the Covid-19 pandemic passes is clear.

While welfare measures and support programmes are absolutely critical, these measures are not sustainable for very long without substantial increased economic growth, and certainly not in the present parlous economic state of the economy. The chasm cannot be bridged by only focusing on fiscal support payments and finding various domestic mechanisms and international funding agencies to pay for them.

State coffers have to be replenished, and welfare payments given to productive workers have to be replaced by wages and salaries in return for productive activities. So how will the government respond to the structural defects of the economy, the resolution of which is central to long term economic and social stability?

Any economic policy that is dependent on domestic spending is a definite non-starter in the current situation, given the knock that lockdown has given to disposable income. Major infrastructure investment requires sufficient state financial reserves, which we will not have. Stimulating export-led growth to bring in the major foreign exchange required is an obvious place to start, but given the global recession, such options are not viable in the immediate future.

Even before the coronavirus pandemic hit us, major exports were limited to the auto industry which is taking a global hit, minerals which were declining, agriculture which is shrinking, and the big success story of foreign tourism is hardly likely to be viable for the foreseeable future and will take a long time to recover. 

Any new industrial growth path has to be able to bridge the gaps between the need for productive investment, stimulating industrial localisation (hence employment), facilitating new forms of domestic demand and providing some necessary infrastructure. The latter is especially important as stable energy supplies are a necessary foundation for any mature industrial growth in South Africa. We have to overcome the energy crisis which has crippled industrial and services sectors alike, but which has been forgotten in the wake of the corona crisis.

To make matters worse, Eskom has now indicated that it intends to return to load shedding once the corona crisis is resolved and economic activity starts to return to normal — a move which will surely put a major brake on a return to any semblance of normalising economic activity. Simply put, the electricity crisis has to be resolved or no economic growth will be possible.

It is clear that Eskom cannot meet this challenge and the carbon-intensive path characterising South Africa’s previous industrialisation path has to be superseded. So what better place for imaging a new growth path than starting with stabilising and expanding electricity supply, and building a new green industrial transition through this process? 

However, any new growth path has to begin with finding a solution to Eskom’s disastrous debt crippling the economy. Debt finance which cannot be raised either domestically or internationally on the basis of the current state of Eskom’s structure and operations. In turn, this makes it almost impossible for Eskom to build the necessary capacity to power a rapidly growing economy. 

A viable proposal to resolve this problem has been made to the government by climate finance experts. It is set out here in skeletal form: Green Climate Fund resources can be tapped for blended finance loans, based on shifting from the current carbon-intensive emission path to a substantial commitment to a renewable energy path. A decision to embrace this model allows for access to capital from international sources focused on funding alternative sources of energy at a time when the cost of raising capital on foreign markets has become prohibitively expensive for South Africa following the recent downgrades.

Eskom, with the support of the SA government, should take the initiative by offering potential international and domestic counterparties a verifiable trajectory of additional emission reductions. In return, the parties will establish a large climate finance structure consisting of a blend of concessionary and commercial finance, which on-lends to Eskom at affordable commercial rates under clear emission-reduction covenants. The covenants are achieved through the accelerated phase-down of the coal fleet (enabled by the necessary energy policy changes and roll-out of a large clean energy programme) and are accompanied by credible remedies for non-compliance.

By itself, this will not ensure a green industrialisation growth path creating new industries and employment. Doing so will require mainstreaming renewable energy initiatives, including a substantial set of green economy measures, into South Africa’s industrial policy (ie making them a central plank). The objective would be to resurrect and accelerate the renewable energy programme that withered away under Zuma’s State Capture project, which included the wide-scale looting of Eskom’s financial resources.

By 2015 South Africa was a global renewable energy leader, in terms of its highly successful auction bidding policy framework. This led to large foreign-owned utilities investing in a vibrant wind and solar renewable energy sector, bringing around $20-billion in investment. Large MNCs (eg Siemens, Vestas and so on) in wind energy, which controlled the global renewable energy value chain, entered South Africa and encouraged their international first-tier suppliers (eg in tower and blade production) to set up local plants.

The knock-on effect for localisation was substantial, facilitating the emergence of suppliers in manufacturing, logistics and services – ie local backward linkages. This fledgeling green industrialisation path impacted not only new raised levels of employment, but also skills and managerial capabilities, especially in services, feeding into this growing renewable energy sector.

However, it all came to an abrupt halt, because a corrupt predatory elite (in the private sector and government) diverted funding from state-owned enterprises into their own pockets and saw this green industrialisation path which they were unable to capture as a threat. In the process, they not only bankrupted Eskom, but also blocked the burgeoning private sector-driven renewable energy path, which they regarded as an energy competitor.

The bidding process and the renewable energy programme ground to a halt. Risk and insecurity for foreign capital pouring into the country suddenly multiplied; it withdrew and new FDI dried up. This rippled down the supply chain and the localisation momentum in manufacturing and services which showed such promise was literally stopped in its tracks.

For example, in the wind energy sector, the major wind blade MNC shelved its plans for setting up a plant. The tower MNC established in Atlantis, with its deep pockets, cut manufacturing output and resorted to exporting to other markets while waiting for a new bid window to be opened.

Local supplier firms which had geared up, installing new equipment and employing new labour, either went bankrupt or found ways of servicing other sectors simply to try to survive, but with shrinking capacity. Service sector firms supplying the MNCs scrambled to maintain operations, and some managed to use their trust relationships built with their MNC customers to export services into their other European operations.

But the promising renewable energy industry, the central plank of a domestic green industrialisation path, has not recovered and a potential new economic growth pathway, so much needed and showing promise to attract FDI and create a localised supply chain, has been diverted into a cul-de-sac. 

 

The process of finding a green alternative economic path has been given recent impetus by a potential game-changer within the Eskom executive which has long been obsessed with finding and putting obstacles in the way of any attempts to transition towards a green industrialisation path.

 

This entire green industrialisation path depended on government guaranteeing and casting in stone two central policy planks:

  1. Ensuring and guaranteeing the continuity of the renewable energy bidding process well into the future, so that FDI could enter in the form of independent energy power producers (IPPs).
  2. Setting out a pathway of guaranteed predictability of the policy process, with clear sequencing markers specifying when each step would occur, so that all players in the supply chain could feel secure in their efforts to establish and ramp up their technical and human capacity. In other words, raising the necessary capital, bringing in the necessary machinery and equipment, building their capabilities, expanding their workforce, and training them to undertake new skilled operations with the security that what was promised in policy programmes would actually occur in the specified time frames.

But if continuity and predictability is to be ensured then it has to be deeply embedded in state economic policy. This means it cannot be the sole preserve of a Department of Energy, dependant on the diktat and whims of that department’s minister. Embedding it in state economic policy means making it a central plank of the government’s industrial policy, its survival and future the responsibility of a cluster of economic ministries, rather than a sideshow of the department of energy and minerals excluding the central ministries responsible for industrialisation and economic growth.

It means an industrial policy setting out clear local content specifications which focus on products and not simply local spend (so as to avoid activities which would have been necessary in any case such as landscaping, for example), and local employment policies, with agreed institutional implementation mechanisms, all of which can be aligned with the drivers of the renewable energy value chain to achieve realistic targets. Without ensuring continuity and predictability in this embedded manner, to which the state is committed at the highest level, this green industrial path will always be subject to risk and potential failure.

This process of finding a green alternative economic path has been given recent impetus by a potential game-changer within the Eskom executive which has long been obsessed with finding and putting obstacles in the way of any attempts to transition towards a green industrialisation path. Eskom’s CEO André de Ruyter has recently accepted in an interview with Chris Yelland that “there is going to be a very wrenching adjustment from an economy built on cheap coal and cheap energy to an economy that is far more resilient and far less reliant on carbon.”

In this, he committed Eskom to the repurposing of decommissioned coal-fired power stations and providing a future for attendant communities based on coal – ie the Mpumalanga coalfields region. To ensure this, he proposes that the renewable energy programme follow that of the automotive sector and adopt customised local content and employment plans; and that government set up special economic zones in the Witbank/Middelburg area for manufacturing renewable energy products to ensure a just transition for these areas. 

To put it graphically, the new CEO of Eskom, which has been notorious for obstructing any activity regarded as competitive to the carbon emission pathway with “malicious compliance”, now appears to be exhorting the supporters of the old coal energy world to take up the new challenge and “beat our coal shovels into wind turbines and solar panels”. If this is not done he warns that not only Eskom, but also the South African government, will leave ghost towns in the coal mining areas of the country which will become “festering political, social and economic wounds”. 

We have focused our attention on green energy as, arguably, it is the most viable and extensive industrial policy which can ensure reliable electricity supply, spawn new businesses, and ensure considerable growth in employment. If the country is serious about a reboot of an economy that can work for 55 million people, here is one clear industrial policy mechanism which takes us out of the repetitively failing “business as usual” model we consistently revert to, and creates the potential for a new industrialisation growth path.

If successful, it also has the potential to deal with the chasm between increasing welfare expenditure and shrinking fiscal resources we identified at the outset. It allows us to provide some economic policy meaning for, to put serious flesh on the bones of, the call not to waste the lessons of the pandemic and move towards inclusive growth. However, failure to initiate the green industrialisation path and its attendant policy requirements will be disastrous if the country is to respond to the immense social and economic challenges posed by Covid-19 and the wasted decade of State Capture. 

In turn, this brings us back to the fundamental issue we posed at the outset: Will the government post Covid-19 continue in a state of semi paralysis, or is the same commendable decisiveness exhibited in dealing with the lockdown to be shown in the reconstruction of the economy as the country moves out of the grip of the corona crisis?

If the former is the case, and the economy goes into a tailspin with increasingly deleterious outcomes for economic activity, unemployment, and inequality then the danger of the erosion of constitutional democracy becomes increasingly probable. After numerous claims that fundamental change is about to happen, it is well to remember what our politicians continuously gloss over as they repeat the dictums of the past: Talk is cheap, money buys the whisky (even under lockdown)! DM

Dennis Davis is a Judge President of the Competition Appeals Court, a Judge of the Western Cape Division of the High Court, and Chairman of the Tax Commission.

Mike Morris is Emeritus Professor in the Policy Research in International Services and Manufacturing (PRISM Unit ) and the School of Economics, University of Cape Town. 

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