We are among the most violent societies in the world, with all who can afford private security having been left with no option but to invest significantly in it. Twenty years into our democracy, by and large our police service continues to be aggressive in its approach and even violent, with its investigative capacity and professionalism not quite where they should be.
In 20 years of democracy, our Government and its allies in the trade unions have managed to reduce the country’s education system from a poor, racially-skewed one to one that is on its knees, with a growing number of schools in the country’s townships deserted en masse as parents and children lose confidence in them. Our health system is in no better shape, with public hospitals generally poorly resourced and running out of medicines, manned by an increasingly hostile nursing and medical cohort working under challenging conditions.
Now, for the second time under a decade, we find ourselves again confronted by rolling black-outs euphemistically called load shedding, in a country that has traditionally considered itself to be the premier economy on the continent. Since the first round of black-outs in 2008, when our economic underbelly lay cruelly exposed, our economy has not registered near-decent levels of growth.
And it will not do so for as long as the enormous challenge of sustainable energy supply has not been addressed. No economy constrained by unreliable energy supply can realise its full potential.
At the root of all our challenges is uninspiring leadership from those who run our country. Regrettably, increasingly it appears as though while good, impressive pronouncements are made from time to time by some in Government about the need to stimulate manufacturing, to improve South Africa’s international competitiveness, to grow our economy and to create much-needed jobs, by and large the priority for some is ensuring that politically-aligned individuals are placed in strategic positions in the civil service and the broader public sector, regardless of education and competence. Examples of the controversies in which the SABC, SAA and PetroSA boards have recently been mired come to mind.
In 1942 South African historian, CW de Kiewiet, coined the phrase that South Africa progresses “politically by disaster and economically by windfalls”. Thankfully, we have since succeeded in reversing this trend. The political disasters of the past were self-inflicted, but democracy brought a self-correcting mechanism that has so far stood us in good stead.
However, the electricity crisis confronting us suggests that the opposite became true in the case of economic windfalls: they have turned into disasters – and the tragedy is that these disasters are equally self-inflicted.
Until Eskom’s new base-load capacity comes on stream, energy will continue to be a significant growth constraint on our economy. While a myriad of plans have been made to solve the longer-term issues, these solutions will all take time.
The productive sector cannot continue subsidizing failing local authorities, through surcharges on electricity prices. With some municipalities relying for 40% of their income on this source, price increases dressed up as savings incentives – to be repeated when budgets again fall short – are a perverse cycle that slowly destroys the economic base in many local authority jurisdictions.
The collapse of the coal silo at Majuba came as a surprise because that power station is one of the youngest facilities in Eskom’s stable.
The conundrum is buried in a simple accounting term, called “depreciation”. When the fixed investment in power-generating capacity is dissected, it is important to take into account a continuously-adjusting trend allowing for new investment and depreciation. If allowance has not been made for sufficient maintenance, then this trend is downward.
This trend in the value of the total fixed investment in generating capacity relative to the size of the economy reached a peak in 1985/6 – and by 2006/7 it had deteriorated to 1960s levels. The trough has been reached, but we still have a long way to go.
What is the likely impact of the load shedding over the short term, such as a year?
The metals and engineering sector remains our reference point in answering the question. At the end of the month-long metal workers strike in July, SEIFSA calculated that during those 20 working days R6-billion worth of direct value add to the economy was lost. In its Quarterly Bulletin for the third quarter of this year, the SA Reserve Bank reported that, after the numbers have been plugged into their models, the estimated total impact of the strike on the economy amounted to half a percentage point loss in GDP growth.
This was the result of one sector being taken out of production.
SEIFSA’s calculation is that for one month, with an induced electricity demand management saving of 10% (our sector is highly electricity intensive), with two hours (stage 1) of load shedding, and allowing for the differential impact on the sub-industries within the sector, 23% of output (R6-billion of R26,5-billion) and value add (R1,5-billion of R7-billion) have been lost. This means that for the metals and engineering sector alone, four months of load shedding will have the same impact as the month-long strike.
We have not bothered with the multiplier effects circling out from metals and engineering, as it is assumed that all sectors will be affected. We have also not taken account of opportunity costs, such as investments in energy efficiency or the costs of standby capacity, or the repair costs for damaged electronic control systems, amongst others.
However, there are even more important long-term consequences. The most severe potential loss is that of markets due to production uncertainties. For metals and engineering, exports constitute 60% of production and imports have captured a similar share of the domestic market. Markets lost due to non-performance may never be regained.
The key factor is global competitiveness. Without a sufficient and secure supply of energy, specifically electricity, this is extremely difficult. When investment patterns in manufacturing and metals and engineering are overlaid on electricity supply, the inconsistency of supply and the cost of energy trends, it is patently clear that investment is held back by this constraint. SA manufacturers are importing more and more components for assembling locally due to cost advantages and security of supply.
Actual or realized economic growth in the SA economy has fallen substantially below its potential. While energy provision should be in support of growth, we are now in danger of a decoupling or reversal of the causality between the two factors.
Two definitive studies published in 1984 and 1993 respectively estimated the potential growth rate of the SA economy to be in the order of 3,5%. Two more studies conducted in 2013 and 2014 respectively subsequently found that the country’s potential growth rate had declined to 2,5%.
The energy constraint is potentially crippling and can relegate SA to the pedestrian growth-trap league in which so many middle-income countries find themselves. The opposite is also true: having sufficient supplies of energy should result in substantial, long-term productivity improvements in the economy. It should free up tremendous resources currently employed by electricity users to provide their own energy. It will allow for certainty, flexibility and expansion in productive capacities, which is the only sustainable avenue to longer-term growth and employment in the economy.
As a country, we waited too long. Now we are bearing the brunt of waiting too long with these base-load investment decisions.
What we need desperately is inspirational leadership, with men and women of integrity – whose qualifications are beyond question – appointed into strategic positions.
Kaizer Nyatsumba and Henk Langenhoven are respectively the CEO and the Chief Economist of the Steel and Engineering Industries Federation of Southern Africa.