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Operation Vulindlela: Why South Africa’s structural reforms have been so slow

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Dr David Masondo is South Africa’s Deputy Minister of Finance and principal of the ANC’s OR Tambo School of Leadership. He writes in his personal capacity.

Unlocking the potential of the South African economy to create much-needed employment and tax revenue is one of the urgent tasks identified in the recently delivered State of the Nation Address by President Cyril Ramaphosa. Growing the economy, however, requires business investment.

Business confidence has been very low in South Africa since the pre-Covid period due to a failure to supply reliable electricity, water, telecommunications and transport logistics to move goods and people. 

These network industries are important in reducing the cost of doing business and living in South Africa by lowering production costs, thus making South Africa attractive for investment.

The implementation of structural reforms to unleash South Africa’s economic growth potential has been very slow. As a result, the government has put together Operation Vulindlela – a joint initiative of the National Treasury and President’s office to unlock economic growth and transformation. 

The current coronavirus situation worsened the economic crisis, which shows itself in high levels of unemployment, poverty and an impending fiscal crisis, which has the potential to precipitate the implementation of structural reforms and transformation.   

There are some reforms, such as the restructuring of Eskom, that are progressing well, and we are focusing our attention on those reforms which are progressing slowly or not at all. There are several reasons for the slow pace of implementation of reforms. 

The first reason is policy contention. While there is a widely held view that South Africa is good at developing policies but weak at implementing them, the reality is more complex and nuanced. 

Policies are often developed and approved at a high level, without deciding on the detail of exactly how they will be implemented. More detailed policy questions often arise during the course of implementation and when these are contentious and difficult to resolve, they can result in delays or even paralysis in implementation. 

For example, while the reform to increase the efficiency and competitiveness of the ports is not contentious, the detailed actions required to implement this reform are contentious, particularly whether or not the Transnet National Ports Authority (TNPA) should be corporatised, as required by the National Ports Act of 2005. 

The contention as to whether corporatisation of the TNPA is necessary to improve the efficiency of the ports has resulted in this reform action not being implemented for more than 15 years. 

The debates are complex. 

There are concerns raised about the impact of corporatisation on Transnet’s balance sheet, its loan covenants and its ability to provide an integrated freight transport service, and how private sector concessions can block access to new, particularly black, exports on the one hand.

On the other hand, there are concerns about Transnet’s conflict of interest in regulating port operations (as the Ports Authority) at the same time as being one of the port operators.  

While these discussions are under way, the government is undertaking measures to make SA ports contribute towards reducing the cost of doing business in South Africa. 

Similarly, while the reform to enable more private sector investment in embedded generation is not contentious, some of the detailed actions required to implement it are. 

There has been considerable debate about whether to raise the licensing threshold for embedded generation from 1MW to 50MW. Again, the debates are complex, with the need to reduce demand on the grid to address the immediate shortfall in electricity supply juxtaposed with concerns about the readiness of Eskom and municipalities to manage increased numbers of grid connections for small-scale generators. 

In the meantime, private sector investment in embedded generation remains far below its potential, and load shedding continues. 

Second, there is the perennial issue of “a lack of capacity” in government. In fact, the current economic crisis, exacerbated by Covid-19, will not automatically lead to structural reforms, Much depends on the capacity of the state to undertake these reforms.  

State “capacity” has several dimensions including skills, leadership, governance, institutional systems and processes, information management systems and resources. 

There is a tendency to be fatalistic about this “lack of capacity”, as though we are powerless to change it. However, it is possible to address this challenge. 

There are examples of remarkably successful turnaround programmes in government, such as the turnaround of the management of tax returns by SARS, and the turnaround of the issuing of ID books and passports by the department of home affairs. 

While a crisis can set the necessary conditions for reforms, it can also make the reforms more difficult because it may worsen the hardship of the beneficiaries of the status quo. It is not always the case that crises are blessings in disguise.

While South Africa does have a skills shortage in general, the lack of capacity in government is usually due to weak leadership and governance resulting in inappropriate organisation design, poor recruitment practices and a lack of retention of skills. 

If there is a general lack of capacity in the country, why are we able to implement some things well and not others? 

It can also be argued that we should not be trying to implement programmes we cannot afford, and therefore shortages of resources should not be a reason for a lack of implementation. 

The underlying problem is therefore generally weak leadership and governance, which in turn results in capacity constraints.  Addressing leadership and governance weaknesses is ultimately a political issue. 

Furthermore, reforms must be properly sequenced. For example, auctioning a spectrum without digital migration is tantamount to stepping on the accelerator and the brake at the same time.

Third, there is sometimes resistance to change due to anti-growth economic interests centred around the protection of turf. Some of which had to do with the fact that certain firms have chosen a specific path and sunk costs in that path, and they have become dependent on that path for profit-making.  

Structural reform agenda is disrupting certain interests, hence the potential resistance. 

The current economic crisis requires all South Africans to take seriously the need to undertake structural reforms to put the economy on a sustainable growth path. 

While a crisis can set the necessary conditions for reforms, it can also make the reforms more difficult because it may worsen the hardship of the beneficiaries of the status quo. It is not always the case that crises are blessings in disguise.

Yes, in a moment of crisis everyone wants something to be done. But they may not agree on what needs to be done. In a moment of crisis, bargaining and rapprochement may also be more difficult because of the risk of societal unrest. 

In the final analysis, the resolutions of a crisis depend on the balance of power between reformers and anti-reformers. 

Economic reform in China under Deng Xiaoping was necessitated by a crisis of mass starvation associated with poor economic growth during Mao’s Great Leap Forward and Cultural Revolution. In 1980, China’s GDP per capita was lower than Malawi and Chad. The Chinese economic reforms were enabled by pro-growth forces. Today’s China has become the world’s second-largest economy due to structural reforms since Deng Xiaoping.  

Opposition to the reform agenda also comes from the state itself, including from state-owned companies. 

Operation Vulindlela on its own cannot overcome the deep-seated anti-sustainable growth of economic class interests. 

This requires an organised sustainable growth path coalition around the minimum programme of structural reform, composed of labour, business, state and progressive civil society.  

The Vulindlela operation is already positioning the state to play a critical role in crafting economic growth and transformation centred around these structural reforms. However, managing Vulindlela or any state-led reforms is not like steering a ship in calm weather towards a particular goal. Our experience of the operation so far is more like trying to keep a compass heading against rough seas and countercurrents. 

Some of the turbulent waves are related to the perennial problem of coalition-building, which is a bargaining problem to resolve the questions of how to compensate losers who have already sunk costs into certain industries to be disrupted by the reform agenda. 

Opposition to the reform agenda also comes from the state itself, including from state-owned companies. 

The SABC has sunk its capital into analogue infrastructure. Therefore, the transition to a new digital television broadcast network, where the technology is different, means that the SABC’s costs are going to increase since the public broadcaster will have to pay Sentech significantly higher fees for delivering broadcast services. 

Surely, these are transitional costs that have to be agreed upon among the economic actors affected by the reforms. In the energy sector, coal-mine owners supplying Eskom power stations are likely to be displaced by independent power producers.  

However, the government has found a formula to address losses by the incumbents in the sector and organised the concept of transitional justice. Similarly, these transitional losses must be negotiated with the industry and economic actors.   

The combination of corporatist Nedlac dialogue and popular struggles from below can make a significant difference in tackling the anti-growth reform agenda. 

Operation Vulindlela should be used as our Deng Xiaoping moment, albeit within our constitutional democratic order, to drive economic growth and transformation. BM/DM

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  • Some fair points here. Nonetheless, it remains that a lack of leadership (ie right people in right roles) has been a constant problem for SA. This continues to be problem while the state puts skin colour ahead of merit. BEE is actually a big problem in modernising the country and it should be mentioned here.