11 minute read
DEVELOPING A HIGH VELOCITY DELIVERY MACHINE
THOUGHT LEADERSHIP
DEVELOPING A HIGH VELOCITY DELIVERY MACHINE
South Africa will always have a unique set of issues, especially in the current environment of jobless recovery, powered by the windfall of significantly increased revenues and driven by strong exports of our mining and agricultural produce, higher commodity prices and lower imports. This has led to a healthy multi-year trade balance where we are not overly dependent on foreign capital inflows - with an ability to fund government’s deficit. There is a need to lift investment significantly, especially by the private sector particularly because our construction sector is still practically decimated from the hay days of the 2010 Soccer World Cup. This is buoyed by the recent developments in economic reform, which have seen South African Airways partially privatised; municipalities allowed to procure electricity from sources other than Eskom; companies allowed to generate their own electricity up to 100MW; and private sector participation in our ports actively encouraged. Our GDP growth, sitting at around 5 percent, is still pedestrian, coming from last year’s contraction, and CPI around 4.5% is following global trends.
There remains some upside risk presented by the global supply chain pressures, weakness of the Rand, oil and food price shocks, and some downside risk presented by, amongst others, lower energy prices. We have also witnessed a marked lift in labour productivity whilst keeping our inflation contained, albeit with about 1.5 million fewer employees. The repo rate forecast includes the potential for additional hikes in 2022. A real interest rate that is deeply negative is both uncomfortable and bothersome.
Our debt to GDP ratio forecast is improving even with both revenue and expenditure overrun - not helped by the R350 Social Relief of Distress grant extension. Offshore investors and analysts have brutal outlooks on South Africa’s future prospects, especially because there are many more contenders for capital and emerging markets, who are now outperforming our own projections! Even though we now have capital for infrastructure, the South African story is no longer attractive, mainly because government policy is standing in the way.
The pandemic presents a rare but narrow window to reflect, reimagine and reset. Even though the global economy has recovered faster, global debt is currently at staggering levels. This massive 2021 bounce has led to the average wealth and income that has doubled. There is uncertainty around interest rates, as well as short and long-term inflation that has increased significantly, with the USA and China experiencing cyclical versus longterm trends that are now moving back to previous trends. Inflation, at about 4% is significantly above the 2% target and is expected to ease towards the middle of 2022. The recovery demands and expectations are now relatively anchored with both inflationary and disinflationary secular themes. With income (wealth, asset and opportunity) inequality, high debt levels, automation, digitisation, artificial intelligence and demographics - driven by a high number of retirees - only the top 10% earners are benefiting hugely and owners of businesses are taking home much more. The expectation is that interest rates will rise in the wake of increasing uncertainty about policy makers’ reaction functions.
What does Busa (Business Unity South Africa) want to deliver and how then do we define our strategic interventions within the political economy in the coming three years? This is also a sufficiently long period we believe to take us through to after the 2024 national elections, and through an ANC internal election year in 2022 because politics determines economics. This would require a new social compact! The criteria must be the importance in delivering an outcome of sustainable labour absorptive growth, that reduces the stubbornly high levels of unemployment (which then lead to increasing levels of poverty and consequent increasing levels of inequality).
The priorities must align with the scale of the unemployment crises in order to correct historical injustices, leveraging Busa’s strength as a strategic apex body that builds on the abilities of its subcommittee structures, and the swath of sectoral and industry bodies that sit under Busa, to assist Nedlac (National Economic Development and Labour Council) in its original mandate. Some key priorities, amongst others, are ensuring that top state capture miscreants are sent to prison; ensuring a reliable energy supply; urgently tackling youth unemployment; accelerating the vaccine rollout; as well as transforming and implementing the socioeconomic reforms.
One of the most immediate priorities is a reliable supply of energy. The risk is that the energy supply industry reforms stall in an inefficient place. The government needs to see and articulate a long-run endpoint which involves the ITSMO (Independent Transmission System and Market Operator) as a truly independent SOE, outside of the Eskom Holding Company. The time for excuses on this being ‘hard’ and requiring difficult decisions is wearing thin.
The private sector needs to be clear that it can do cost effective generation. The unbundled Eskom needs to focus on running down the generation component. This must be done in a sustainable and socially conscious manner, in line with net zero, articulating what its distribution vision is. Then there needs to be a focus as an enabler for the electricity supplier industry in the ITSMO – which means transmission investment and grid level services such as storage and smart metering for wheeling. National Treasury and Eskom should be backed with experience from business on practical things like unbundling.
There needs to be a radical shift in the nature of the Integrated Resource Plan (IRP) and Integrated Energy Plan (IEP) as the central vision for SA’s energy development. These must stop being static forecasting exercises and become dynamic to encourage and enable development and flexibly respond to changing technology and pricing.
We must urgently implement the suggestions made in 2019 by Nedlac for a rolling two-year IRP/IEP process - getting the lowest costs within the carbon envelope should be the only driving factor, with jobs maximisation as a tie-breaker. Eskom decommissioning is an output, not an input – a plant is retired as quickly as possible as other cheaper power comes on stream, where the highest cost and reliability should be utilised to determine what is decommissioned. Technology curves (particularly storage) should be transparently laid out and up to date.
Hydrogen must feature in a new IEP and the generation for it must feature in an IRP to ensure scalability of this key export good in the future. Small modular nuclear should only be included if there is accurate price transparency, and there is commercial demonstration of technologies. We also need to encourage localisation through a clear demand pipeline. We must combine all energy issues into one argument over IRP/IEP which sees energy as an enabler.
Regulators in general need to be reimagined, recapacitated and brought into a more responsive and interactive part of the political economy where they are not islands, where things can go wrong and no one can touch them. This is true obviously of so many of them, but none has quite the short-term dramatic impact as Nersa (National Energy Regulator of South Africa). An increasing focus is needed to ensure that Nersa, amongst others, does not delay Eskom unbundling in the granting and shifting of licences for the companies that will ultimately be unbundled.
Nersa must provide a best in class tariff for future of the electricity supplier industry, and for an unbundled Eskom - giving price transparency and clarity that allows Eskom to recover costs but does not show bias towards Eskom, and away from the private sector. They also need to deal effectively in short timelines (90 days maximum) for generation registrations and streamline the concurrence process for s34 and the IRP. We must transparently track a scorecard of issues around Nersa and track its distance to success, utilising feedback from members to the energy subcommittee. While Nersa is an independent regulator, it is legally required to consider the interests of end-users and Busa can be a powerful voice in representing the business energy end-user.
The single systemic risk is high youth unemployment! The focus should be on the review of the ‘one-size-fits-all’ nature of current regulations, costs of current legislation to business and how it drives inefficient outcomes. We need to rebalance the focus to consider the employe- unemployed boundary as the key marginal cases that effect labour absorption and the small-big company boundary that is crucial for firm growth.
More must be done in helping labour to become ‘fit-forthe-future’, rotating them more towards skills training, member welfare etc. And much more suited to the Just Energy Transition and 4IR (fourth industrial revolution) , in wanting more workers in unions that care about the unemployed and their members welfare as opposed to just status quo and wages. This would mean some give and take overall to shift the labour conversation.
We need to encourage a deeper conversation about barriers to entry and barriers to entrepreneurship. The broader mindset change is to view the conversations about ease of doing business and lowering barriers as a better and more sustainable path. It should link closely with the industrial policy work and a move away from just sectoral master plans that mandate certain SME involvement. We must be explicit that dynamic economies should have a majority of employment in SMEs.
We have to shift focus to industrial and trade policy as a process. This should include incentive programmes (for value for money and structure and if they are fit for the future) as well as trade policy. The focus should be on how the DTIC (Department of Trade, Industry and Competition) can better support current and emerging industries. Also, how we go about making it more nimble - the institution and the legal and policy framework it feeds off. It would include all factors that affect the ease of doing business and how DTIC can become an enabler.
The aim is to make industrial policy a positive intervention. We have seen the Competition Act’s mandate grow from fostering competition in the economy, to an interventionist public-interest mechanism. Public-interest considerations should be addressed by the wider legislative agenda, rather than shoehorning them into the competition law that focuses on the moment of transactions between company owners.
There are genuine competition issues that should be the focus of competition legislation and Busa can play a role in moving the spotlight back to these. This will involve challenging conversations with members. The IMF and others have highlighted competition issues in SA as an area that needs focus for more dynamism. The end-goal should be a focus on SMEs and labour growth.
As the Climate Bill makes its way into parliament, business must think of what comes out of the other side. Climate affects the country as a whole, the private sector and individual businesses will have to adhere to it, so that all converge towards net zero emissions. The process of this trickling down is going to be hugely complex and needs significant negotiation resources, as well as intellectual and modelling capabilities.
The negotiation and coordination function is going to land firmly with all social partners given the nature of Nedlac. We will all have to think carefully about how we can undertake such coordination and cross-sector negotiations with government, that balance various interests, play to fairness and have member buy-in. At issue here is the fact that the outcomes of the Climate Bill will mean, in effect, that binding envelopes are pushed from top down. We see this process starting at a very high level through 2022 before the Bill reaches assent but the actual negotiations will start from 2023. The country should use this time to get its ducks in a row on the issues and start to socialise these issue with all stakeholders, consider and put in place the right capacity.
In the final analysis, business must ask itself truly courageous questions: How does business benefit the rest of South Africa, not just a select few? How does it conduct its business in an ethical, humane and transparent way? Is the management structure of business broadly reflective of the demographics and does it contribute towards the upliftment of the stakeholders it serves?
.... and like a hawk, monitor the implementation of these. Business needs a significant intervention to steer itself back! It is incongruent to talk about a just society when business is still perceived to be at the apex of injustice. This needs incisive, bold leadership that only business itself can bring.
