Who can turn South Africa’s lights on?
Finance minister Nhlanhla Nene looked nervous when he delivered his first budget speech in February at Cape Town. As well he might.
It is an insider enrichment scheme disguised beneath the mantle of the so-called ‘developmental state’
“The South African economy is facing a difficult few years,” Nene told parliament, where President Jacob Zuma and deputy president Cyril Ramaphosa sat watching.
For the first time in more than a decade, the government raised taxes, while debt levels continue to climb beyond 40% of gross domestic product (GDP).
Key parastatals in power and transport require multimillion-rand bailouts.
The public wage bill is ballooning, and millions of people continue to live below the poverty line.
In March, South Africa was ranked by Bloomberg as the third most painful economy in the world to live and work in.
The survey data that makes up the so-called misery index for 2015 is the unemployment rate plus the change in the consumer price index.
For trade and industry minister Rob Davies and economic planning minister Ebrahim Patel, the glass is half full.
“The broad trend line of investment in the past four years has been positive, recovering from the dramatic loss of investments during the global economic crisis,” said Patel in an address to parliament.
That opinion is not always widely shared.
Ratings agencies warned South Africa that it had three months to prove that the government will rein in public sector spending and raise taxes to avoid a junk credit rating.
Davies and Patel believe the economic plans they have authored, which President Zuma announced in his state of the nation speech on 12 February, will get the economy moving.
Zuma trusts these two ministers, who are members of the ruling African National Congress’s (ANC) Economic Transformation Committee and have the backing of senior cabinet ministers like Thulas Nxesi and Blade Nzimande.
Their ascendency marks the slow victory of the ‘planners’ over the more ‘orthodox’ economic decision-makers within the ruling party.
With the redeployment of Pravin Gordhan, the former finance minister, to the local government portfolio, the last remaining heavyweight voice from the more liberal side of the party has been quietened.
The nine-point plan announced by President Zuma includes a renewed approach to resolving energy problems, revitalising agro-processing value chains and adding value to mineral wealth.
President Zuma’s top economic priorities
South Africa set up a ‘war room’ to work with power utility Eskom to address the ongoing blackouts in December. Within the next few years, the Kusile, Medupi and Ingula power plants should increase national electricity production by 10,000MW, but they face delays.
President Zuma sent a draft minerals and petroleum bill back to parliament in January for revision. It proposed to define certain resources as strategic and increase the government’s stake in mines. The bill has proved to be controversial and may be substantially changed through new consultations.
At the 12 February state of the nation address, Zuma promoted the development of the proposed Agricultural Policy Action Plan. Its goal is to develop 1m hectares into production within three years. The government will back the development of agro-industrial parks and cooperatives in underdeveloped regions.
Zuma’s government says that the employment tax incentive for youth employment has gone a long way to improve the number of young people with jobs, but the opposition Democratic Alliance says that 1.6 million people have become unemployed since Zuma was elected in 2009.
The government is providing R9bn for the development of public transportation networks in 13 cities, while 108 new schools are under construction. Finance minister Nhlanhla Nene’s 2015 budget includes $1bn for broadband connectivity for government buildings and schools.
In a word, the focus is on beneficiation, or ensuring that the country creates products that are not simply raw materials – a classic ‘development state’ approach.
“Even if we wanted to, we are not going to be able to simply revert back to the things that drove growth in the past, like the mineral commodity cycle and credit-fuelled consumption growth,” Davies tells The Africa Report.
This plan has drawn the ire of the opposition, who see graft instead of progress.
Democratic Alliance (DA) leader Helen Zille argues that the nine-point plan was aimed at making ANC members rich.
“It is an insider enrichment scheme disguised beneath the mantle of the so-called ‘developmental state’, a word which, in ANC-speak, means precisely the opposite of what the English language intended it to.”
Government-linked corruption concerns run from the top down: from the president’s upgrades to his Nkandla home to political elites at all levels, who former President Thabo Mbeki calls rent seekers “whose only asset […] is access to state power”.
But perhaps because it has become apparent that this corruption could sink the entire enterprise, there have been strong moves within the ANC to stem it.
One of the less noticed points in the recent budget was the introduction of a centralised office to deal with government procurement, the beating heart of the ‘tenderpreneur‘ graft issues dogging the ANC.
Where there had been more than 600 offices that previously deal with government tenders, now there is just one, which should increase transparency, the ANC argues.
The political champions for this move have been the very same people who are keenest on the development state.
They include the South African Communist party, Davies, Patel and the head of the ANC’s Economic Transformation Committee, Enoch Godongwane.
Other less partisan voices point to more binding constraints on development.
It is not so much a case of over-planning or corruption but of the lack of basic economic building blocks like infrastructure.
An economist and a former Competition Commission commissioner, Trudy Makhanya, tells The Africa Report that the government’s plans do not inspire confidence.
“We have a crisis in unemployment, and structurally the economy is not geared to be productive and efficient,” she says.
Davies disagrees. “When I meet investors and foreign companies that are coming here, they have a different view.
“They are doing their due diligence and are not oblivious to the fact that we have problems and challenges in the country but recognise that South Africa has a good story to tell,” he says.
Gavin Pieterse, a government programmes executive at IBM, says the doom and gloom are short-sighted.
“The opportunities are here,” he says, laying out how the information technology giant is investing R700m ($56.6m) in research and other technology projects in the country.
“South Africa remains the economic powerhouse in Africa […]and is a serious continental player. This is still your springboard, and from here you can expand your investment strategy.”
Nevertheless, for small and big business alike, constraints are muzzling growth and diverting revenue that could otherwise be used for expansion and creating new jobs.
In January the country’s power utility Eskom said it expected load shedding to occur on 70% of the days until April.
Olivia Adonis has been operating her hairdressing business in Cape Town for the past five years.
Her largest expense is electricity, and now with the power cuts she has to invest in a generator.
“I need electricity to survive as a small business owner. No power means no work, so I have no option but to invest in the smallest generator on offer.
“Its going to cost me about R20,000. Not sure where the extra money will come from, but I have to find a way to ensure constant power.”
The electricity crisis took centre stage in Zuma’s February speech, and he announced that Eskom will receive R23bn to stabilise its operations.
He confirmed that government would support Eskom’s application for a tariff increase to bring the price of electricity in line with generation costs.
Patel, meanwhile, continues to be hopeful about the country’s electricity sector and told parliament two renewable energy power plants “will bring 200MW to the grid, which is roughly equivalent to the annual household consumption of Newcastle, Grahamstown, Stellenbosch, Knysna and Mossel Bay combined.”
Another reason to be cheerful about prospects for electricity provision is that the long-delayed Medupi power station started generating in March.
Eskom said that Medupi Unit 6’s full potential of 794MW would come online within the next three months. Meanwhile, transportation parastatal Transnet’s R350bn modernisation drive will reduce costs across all sectors.
Whether or not you need an interventionist state to fix power and transport, things do appear to be moving in the right direction in the medium-term.
In his budget statement, Nene said: “Fiscal support to state-owned companies over the period ahead will be financed through offsetting asset sales so that there is no net impact on the budget deficit”.
What might be sold remains a mystery, though the government’s stake in Vodacom may be a target as well as some of Eskom’s assets.
But while the DA and commentators welcome this and call for less state intervention, a coalition of forces on the left including the United Front, the Economic Freedom Fighters and the Congress of South African Trade Unions (Cosatu) are calling for more.
Cosatu said it was alarmed at the lack of any sign of how the government is advancing the “radical economic transformation” path it has pledged to pursue.
Cosatu spokesman Patrick Craven tells The Africa Report that there is a need for an overhaul of the country’s macroeconomic policy in line with the radical economic shift that all the key partners had agreed needs o happen.
“We need a macroeconomic policy review and require that the treasury, which we see as the biggest obstacle to the government’s economic programme, must be urgently realigned.”
The United Front, a faction that hopes to take on the ANC from the radical left, takes a much stronger stance than Cosatu.
They say they want “massive state investment of at least 5% of GDP for building decent housing located in active economic zones that can stimulate the depressed downstream indus- tries and create the millions of jobs we desperately need”.
Davies is betting that the course being charted between these two extremes – bringing in both state and private sector – will pay off and reboot a faltering economy.
One example is in manufacturing. The government has already committed more than R2.8bn to companies in the sector through the Manufacturing Competitiveness Enhancement Programme.
Manufacturers themselves have planned more than R12.4bn in private-sector investments.
The Automotive Investment Scheme has led to private-sector investments of R24.5bn and generated R103bn of exports in 2013.
The country has built a world-class auto sector that exports to more than 152 countries.
Other sectors are also growing. The leather and footwear sector now produces 60m pairs of shoes a year.
Agribusiness is a key plank of the industrial reboot of the country too, Patel said in a recent speech, with a focus on creating jobs for black farmers.
For all the grip on policy-making currently held by Patel and Davies, things could change if deputy president Ramaphosa emerges as leader in 2019, or earlier if Zuma falters.
Ramaphosa – a former union activist turned businessman – is likely to favour a more business-first framework. On labour issues, for example, he was reported to have ratcheted up pressure on striking miners ahead of the Marikana massacre in 2012.
He remains tight-lipped about his intentions. ●