Speaking on Monday 14 October at the FT Africa Summit in London, President Cyril Ramaphosa discussed several of the dilemmas South Africa can no longer avoid.
The first issue revolves around the role the private sector can play in state-owned companies, many of which have proved to be inefficient and prone to corruption. As a result, several – including SAA and Eskom – are facing a mounting debt burden that is unsustainable. The situation is so dire that the government now appears ready to consider buyers for Eskom’s older power stations to extend their life-span. This is a massive step forward from only a few years ago when any potential sale of state assets was deemed to be a sell-out. Eskom will consume R49-billion in taxpayers’ money in the current fiscal year, which ends on 31 March 2020, and R56-billion the following year.
If the situation is not stabilised, it will repeat in the years to come.
The president was at pains to state there was “no way” South Africa would sell Eskom’s new power stations. That is fortunate, as I suspect those stations are unlikely to find buyers given they are years late, massively over budget, fault-ridden, and commissioned units are generating at well below name-plate capacity. The resultant plan is quite clever. Eskom doesn’t put the new stations up for sale – and no one mentions that they are unsaleable.
The second issue is the need for unions to (grudgingly) accept the macroeconomic reforms required to raise confidence and encourage investment, despite the fact that these moves may cause short-term pain. This will include cost-cutting at state-owned companies like Eskom and much slower wage growth in the government. Since 2009, the government wage bill has exploded with no commensurate improvement in productivity. This is partly due to employee growth, but the bulk of the problem is the promotion of government employees into higher bands with higher wages. Given the yawning fiscal deficit, the national government is increasingly left with a choice – freeze wages or cut jobs.
In his address, Ramaphosa noted that he is persuading (badgering?) his “allies” in the unions to accept the need for reform. He likens the situation to having a rotten toe from diabetes: “It could well mean that your whole leg and your whole life could be at risk. You have to make choices.” This is not a message that will be willingly received – but it is unavoidable if we are to steady South Africa’s finances.
While these two areas have been discussed in great detail, the third point I noted from the president’s address was the need for a “just transition” for those living in coal-producing areas. A fact we all tend to ignore is that South Africa is highly dependent on coal for electricity production, petrol production (Sasol’s coal to liquids accounts for more than a third of petrol production) and exports. A report by the Climate Policy Initiative estimates that the cumulative impact on South Africa of a global low-carbon transition by 2035 is likely to be around $120-billion in present value terms. That is enormous.
Fortunately, the public balance sheet only faces 16% of the downside risk, while investors in South Africa face the rest. Nonetheless, the risks cannot be ignored. The president has begun to address the potential for the country in taking a proactive approach to our reliance on coal. There are entrenched interests – hence the need for a “just transition.”
These three conversations do converge. The need to reform state-owned enterprises involves boosting governance and increasing the role of the private sector. Improving efficiency and cost control is only sustainable if jobs are created elsewhere in the economy. The carbon transition is both an opportunity and a threat.
There are costs that need to be understood, but the focus from the rest of the world offers multiple opportunities, including funding options for Eskom if it commits to build no further coal-powered stations, the potential to build a thriving renewables industry in South Africa that supports the continent and ultimately lower funding costs.
We just need to be brave enough to have difficult conversations – and make difficult decisions. BM
Winston Churchill gave Charlie Chaplin bricklaying lessons. The activity was a hobby for Churchill.