Last week’s National Energy Dialogue hosted by this paper’s sister publication Financial Mail was quite something to behold. It was more like the national straw man arguments convention.

The event — which seemed more like a therapy session personally for minister Gwede Mantashe to be surrounded by coal and gas voices — saw a barrage of whataboutary and the like. For instance, how could you construct all these lovely new renewables without the mystical “baseload”. Or weren’t people aware that there were so many jobs and so much tax to be lost from this transition.

The minister seemed to enjoy lecturing everyone else on how a dialogue should happen, yet seemed completely closed minded as to the actual debates that were needed.

The point, of course, is everyone by now in SA is well aware of the complexity of the just energy transition, the need for social and labour support through the transition, for a glide path over the coming 28 years (that’s a long time — it bears repeating, though, decisions have to be made now). The vast majority of those involved in the just energy transition are calm and rational and willing to trade off speed for getting the social aspects right. The vast majority understand gas will play some role, though they debate the extent of that role.

There are complex decisions for SA to make that are not well served by a defensive minister. For instance, does a gas domestic use case actually make sense in the context of the transition given the risks of stranded assets and how the global funding and stakeholder dynamic (as well as global concern for embedded carbon in exports) risks shifting faster against gas?

The recent National Business Initiative (NBI) report on the subject laid out in a huge amount of detail various ways this could work while recognising the risks.

But if a gas domestic use case doesn’t work, can SA still gain from export of its gas (and coal) reserves to other countries that are on their own credible paths towards net zero, but — say — don’t have the solar and wind resources of SA?

As I have mentioned in these pages before, I think the answer should be yes to that question, and I’ve had many readers engaging me offline on the pros and cons of such a view in honest debate. Yet such debates are absent in a highly charged, partisan and defensive “dialogue”.

The global frontier of power systems research is shifting incredibly quickly. Yet the department of mineral resources & energy does not seem to be shifting with it or doesn’t want to.

Mark Jacobson at Stanford has modelled the viability of 100% renewable plus battery systems for 143 countries. In SA engineers in the private sector are debating how inverters can change in renewables-led systems to be supportive of system stability. Eskom itself and even the new Itsmo (Independent Transmission and System Market Operator) bill understands that the role of procuring such axillary, grid integrity services will be crucial.

Locally Clyde Mallinson has shown consistently how a renewables and battery-led system can be least cost and a workable plan towards its realisation. Yet all this can just be dismissed with sweeping statements that renewables-led grids are unworkable. Sure, they have been, but what about along this path of the next 28 years? Policymakers ultimately should be about looking forward not backwards.

Similarly we have seen the department’s views on a new Integrated Resource Plan (IRP) oscillate over the past six months for and against an update. Perhaps there is a realisation that a credible exercise would come out with the ‘“wrong” answers.

Battery and renewables costs (and we are talking all in lifetime costs, including grid auxiliary services) have shifted so much since 2019 that shoehorning in carbon capture and storage (CCS) costs that sit on top of underlying coal costs simply cannot work in a least-cost system.

Herein is another contradiction as the minister seems happy with the National Energy Regulator of SA’s (Nersa) “low” tariff award to Eskom, because it will support consumers and yet least cost is somehow meant to go out the window for new energy procurement.

Another straw man appears — riding the CCS or modular nuclear cost curves down like the Renewable Independent Power Producer Programme (REIPPP) did with renewables. Yet this simply isn’t applicable. CCS costs may well fall over time but sit on top of underlying coal power generation costs making it uneconomical, while those underlying costs will start going up as carbon taxes ramp up in the not too distant future.

Similarly with nuclear there is no curve because there are simply no viable commercially proven examples of modular reactors yet. The fact the minister is willing to quote the Institute of Race Relations despite normally being so antagonistic to its world view should raise some serious question marks. Renewables rode a forecastable, knowable curve because it was a viable, workable technology where the “learning curve” was the amount of kilowatts you could get from a square centimetre of silicon wafer per dollar of cost.

The attitude of the department is in stark contrast with the National Treasury, which quietly upped the ante in the budget. The most overlooked (and long-term impactful) part of last week was its establishing of a carbon price curve for SA into the future. 

Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.

Intellidex’s Head of Capital Markets Research Peter Attard Montalto has called for policy certainty and a new energy plan that maximised jobs, minimised costs and was consistent with net zero in the National Energy Dialogue webinar alongside expert panellists and the Mineral Resources and Energy Minister, Gwede Mantashe.

“We really need a very rational and technocratic process that lays out least costs, that lays out jobs maximisation and lays out a very clear carbon envelope that closes down towards net zero in 2050. I think that is what investors are looking for from DMRE and from the Presidential Climate Commission.” Says Attard Montalto.

Watch the full video below.

Watch Intellidex’s Head of Capital Markets Research Peter Attard Montalto as he reviews the 2022 Budget speech on Newzroom Afrika‘s Budget 2022 news special.

“I think that overall the markets, business is quite happy with the Ministers balance of a little bit of extra spending, coming through, a little bit of consolidation, and some sensible chatter on taxes.”

Watch the full interview below.

Watch Intellidex’s Peter Attard Montalto, and other expert panelists, discuss the state of South Africa’s economy as they preview the 2022 budget. They join Michael Avery on BDTV’s Business Watch.

There is low transparency but the problem is the sheer logistics on the government’s end. The ability to prioritise what’s more important. Is it an extra rand for a nurse or an extra rand for a skills development program…” Says Peter Attard Montalto on where South Africa’s budgeting process is breaking down.

Watch the full video below.

It is easy to pick out single causes for moments in history in which the course of events was altered.

Our brains crave simple narratives that fit our existing world views. The assassination of Archduke Franz Ferdinand was the “cause” of World War 1; the end of the Cold War caused the end of apartheid; trading in derivatives by banks was the cause of the global financial crisis. Those are the answers you get from Google.

The algorithms never result in “it’s complicated” because Google knows what our brains crave, and for the same reason columnists are sticking to simple issues that provoke emotional responses.

So grant this columnist some reductive simplicity for a moment. We all know its complicated. But when it comes to this week’s budget from finance minister Enoch Godongwana, there will be one issue among all others that will be the fulcrum on which opinion will turn: social grants. We will ignore the maelstrom of competing policy objectives, political horse trading and bits of evidence that informs the R1.9-trillion budget process in all its complexity and potentially wide-ranging consequences.

The Treasury has faced enormous political and social pressure to open the taps on social spending. The social relief of distress grant, introduced at the start of the Covid-19 pandemic for those unemployed during lockdowns, has ignited a strong push for a permanent grant. The lobby has come primarily from those on the Left, but also some in the centre, who highlight the poverty facing the growing numbers of unemployed and their dependents.

The presidency has been one source of pressure, as have many on the ANC’s radical flank. There have been screeds written on how it is both a moral imperative (which is easy to sympathise with) and somehow fundable without damaging economic growth (which is much harder to sympathise with).

Depending on the particular suggestion, this fiscal impact could be modest at R20bn extra per year permanently, or rather more extensive with numbers often over R300bn/year on top of the budget.

The Treasury has tried to impose some order on this debate, calling for research on how poverty can most efficiently be addressed (costs per unit of poverty eliminated) but such calls have fallen to a stampede of moral indignation.

How the Treasury copes with the pressure will be an important bellwether. A move that is perceived as a concession to a permanent grant will be reduced to an abandonment of the fiscal restraint that the Treasury has been trying to impose for at least the past four years. That would be harmful to growth.

What we are likely to see is a move by the Treasury to kick the can down the road (“studies are being conducted on the feasibility …”) which will probably get some level of grumbling acquiescence from all sides. We are not likely to see a strong rejection of spending demands that are not properly costed and consequences not fully thought through, though that would be the most positive from a growth perspective.

The problem is that it really is complicated. An elegant exposition of conflicting causes of SA’s weak economic performance was provided in a comprehensive paper released by Ricardo Hausmann and his colleagues from Harvard’s Kennedy School last week reviewing the past decade of SA’s economic performance.

It makes clear the path to our current fiscal predicament: a failure to consolidate after the countercyclical fiscal splurge during the financial crisis of 2008/2009. High spending into the post-crisis recession became permanent, leading to the major deterioration of government’s balance sheet and its loss of investment credit grade.

That triggered behavioural responses: the private sector reduced borrowing and spending, anticipating that the government’s weakening fiscal position would have to paid for in higher taxes at some point (in econospeak, the Ricardian reaction trumped the Keynesian one). Hausmann and colleagues find this approach explains some of the GDP growth weakness particularly in the mid-2010s.

But they pin most of the blame for weak economic growth post 2008 on microeconomic policies that damaged productivity. The finger points squarely at Eskom and Transnet, both of which have made it more expensive to produce each unit of output in SA. Policy uncertainty in mining, deteriorating municipal services, and the apparent undermining of property rights through the land reform debate are also identified as causes.

This micro story is a powerful one for the Treasury to refer to. It makes clear that the real drivers of SA’s poor economic growth outcomes are not those within its control. Indeed, it puts the burden of proof back on those pushing for it to let go of the fiscal reins, demanding they shift attention to the real growth blockages in the SOEs and policy uncertainty.

It is a loud “it’s complicated” answer to those trying to reduce SA’s travails to a narrative that fiscal spending, particularly of the social welfare type, can solve all problems.

• Theobald is chair of research-led consulting house Intellidex. This article first appeared in Business Day.

We spend 110 minutes listening to the state of the nation address.

In December of this year, maybe just before the ANC elective conference, we will have had third-quarter GDP and some October manufacturing data and a range of labour market indicators. What will we think of the 110 minutes we spent in February?

My biggest fear here is not that the president can’t give the “right” speech (yes there were some contradictory elements — especially the department of trade, industry & competition agenda of negative reforms versus the positive Operation Vulindlela reforms — but it was broadly “fine”). It is more that the dial is not moving, especially on inequality and unemployment — and that such a long speech indicating so much action (most of it though not all of it “real”) will look decidedly odd when the dial is still not moving in December.

We know the usual reasons: slow or partial implementation, the ossified state, load-shedding and other input factor constraints.

A key example has been the sub-100MW licensing exception gazetted last year. Since then little has actually been rolled out — just six projects in the second half of last year and then all below 10MW. Uncertainty over the process, hurdles still being thrown up with registration looking like licensing and wheeling modalities still not sorted (albeit being worked on) were all partly to blame. It was a classic example of the fact that a whole host of bold-on issues are required to make an initial reform announcement work.

There is no doubt that a huge amount is going on within the machine of the state now — in particular in a ninja-style presidency, which pulls in capacity and funding and goodwill (à la Thuma Mina) from a wide variety of sources. Such a route, however, may strain the relations between the presidency and other departments, though one might see this as a good thing and a fallout of (attempted) positive change. Nevertheless it is a risk to watch.

The real problem, however, seems to be that business and investor sentiment is not shifting in advance of reforms — certainly not on reform speeches such as the state of the nation address — but is waiting for actual implementation (fully, like a large number of 100MW projects being registered) and is also stymied by new issues being thrown up such as the National Prosecuting Authority and its lack of speed or the seemingly total lack of justice served after the July 2021 unrest.

This is of course unusual. Economic cycles that occur due to productivity shocks generally have a strong sentiment kicker early on from animal spirits. SA is not experiencing this and as such it’s a key constraint that the president is concerned with.

A recent paper by Ricardo Hausmann on SA showed yet again that microeconomic issues and their intersection with the political economy were the key constraints on growth, not macroeconomic policy, despite the endless alternative views expressed in these pages.

Perhaps this year, after such a bloated state of the nation address and with the dial still stuck in neutral, we need a fuller explanation of what the microeconomic restrictions are.

My colleague Stuart Theobald started expounding in these pages two weeks ago some of the constraints for infrastructure around the procurement problems that were a key part of this frustration. Ann Bernstein, on the other hand, spoke about the infrastructure pipeline’s lack of movement.

These reports contrasted with the state of the nation’s positive tone and data-heavy section on the subject.

The president still doesn’t realise that the goal here isn’t “infrastructure is happening” but rather it is far faster than before. The former is true, the latter certainly not as we sit down here at 12.5% of GDP investment levels still.

But to continue with Stuart’s chain of thought, I think procurement and especially the Public Finance Management Act and Municipal Finance Management Act are actually a far deeper microeconomic problem here. Entire institutions have been built up around them at every level of government and in the SOEs, which have started complaining about the impact the regime has on their ability to do maintenance in a timely manner.

The Public Finance Management Act also did not prevent state capture yet there seems to be a continual attempt to gold plate it through circulars issues without public comment to try to close every convictable hole. More broadly it has spawned a culture of audit fear and compliance at every level of government. The public–private partnership infrastructure problems under Public Finance Management Act are just one example.

The point here is that even if there was capacity in the government, it would be drowning. Hence development institutions and other outside bodies are a much easier route to funding change, yet this works only in narrow cases.

The Public Finance Management Act and the Municipal Finance Management Act as broad institutional beasts then need a rethink as a microeconomic blockage — a new streamlined system that is responsive, uses modern technology and is enabling rather than blocking non-corrupt activities. Instead, we see little general discussion of them and instead much defence of them (as pieces of legislation) without acknowledging the broader cultural and institutional consequences they have led to.

Thinking more deeply like this beyond the “obvious” can start to unlock things such as the greater involvement of the private sector and NPOs in local government for instance in actually doing things rather than just capacity provision.

This may seem like an obtuse example — and indeed it’s only one of many — but I think it shows we need to look beyond the obvious. Turning this boat around needs to be cognisant of the fact you don’t have the animal spirits kicker and so we need to think more creatively. It’s going to be hard.

Otherwise, come December with so much reform notionally happening we will still be wondering why the dial still isn’t moving.

• Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.

Watch Now: Peter Attard Montalto provides insight on the basic income grant on SABC’s ‘The Full View‘ ahead of the SONA 2022.

“The SONA will probably talk and give hints of the guide path for the basic income grant but not really talk about the hard trade-offs between saving and investing in the economy. And neither does the budget want to allow that because the budget and treasury’s view is more of a one year srd extension as opposed to a permanent policy changes. Permanent policy changes and permanent expenditure changes require very very different levels of detail in terms of tax an how we’re going to fund things.”

Is a basic income grant sustainable? Peter Attard Montalto weighs in on the topic on Radio 702′s ‘The Money Show‘ with Bruce Whitfield.

“Ultimately the issue on whether or not the basic income grant is sustainable comes down to politics,” says Attard Montalto. “To fund this you are taking money away from savings through tax, you’re going to have a negative impact on investments in the country. We have to consider a full equilibrium view. We have to consider the impact of funding the policy as well as what the money is used for once it is given to me.”

The formal sector now employs just 9.6-million people. The last time it employed this few was 2010. The formal sector is in trouble.

The informal sector has done rather better. In the Covid-19 era, both formal and informal sectors experienced a sharp decline in employment when lockdowns started in March 2020, but then there was a quick recovery in the second half. The problem is that recovery was short-lived for the formal sector, which saw employment slump throughout 2021, to levels below the lockdown. In contrast, the informal sector has sustained its recovery trend.

It suggests that formal businesses are struggling to resume operations with previous employment levels, but informal businesses are not. Why the difference? Is it because formal businesses are being constrained by Covid-19 regulations such as social distancing from resuming full operations and therefore staffing levels?

That is part of it. Generally, the constraints imposed on businesses throughout the pandemic have been haphazard and unnecessarily damaging. But I fear that this is a symptom of a deeper problem — a complete lack of political support for the formal sector.

There has been an intense, continuous ratcheting up of regulations that formal businesses face. It is complex and expensive to run one. The informal sector faces fewer such headaches, and entrepreneurs can pursue profits relatively unfettered. It is also helped by the growth in social grants that tend to find their way more to informal and rural economies.

Formal employment has been struggling to grow for more than a decade — the Covid-19 crisis has just worsened it. This is reason for alarm, not just about unemployment, but the wider impact of a troubled formal sector.

Falling profits

The other way to see the decline of the formal sector is in tax receipts. In 2020, 704,000 companies were assessed. That is down from 980,000 in 2017. The tax raised has obviously fallen too — from R212bn to R125bn. That reflects the general decline in numbers as well as profitability of formal enterprises. Overall revenue collection has become much more reliant on VAT and personal income tax.

The annual financial statistics released by Stats SA in December showed that profits have been falling — dramatically in 2020, but generally on a downward trend for more than a decade. There are many reasons for that, most obviously the dramatic rise in energy costs. Companies now spend twice as much as they did 10 years ago on electricity, the biggest contributor to the erosion in profitability. Anecdotally, companies are also spending much more on accessing basic services such as water and security.

The divergence in performance of the formal and informal sector recalls Thabo Mbeki’s notion of two economies that was much discussed in 2003. Then he said the first economy “is modern, produces the bulk of our country’s wealth and is integrated within the global economy”. The second economy “is characterised by underdevelopment, contributes little to the GDP, contains a big percentage of our population”.

If we look at things through Mbeki’s prism, it appears that the first economy is facing strong headwinds, while the second economy is in rather better shape. While it has long been a development objective to reduce the chasm between the two economies by promoting cross-linkages, I don’t think any serious policy thinker in SA sees the shrinking of the formal sector as a good thing.

Salaries disclosures

We talk far less about the deformalisation of the economy compared with other themes such as its deindustrialisation. The formal sector — with its banks, mines, manufacturers, retailers and so on — carries the weight of employment and tax generation. If it is in trouble, much follows from that, particularly the effort to create high-quality jobs.

The trouble is that the formal sector has few political champions. You might expect the department of trade & industry to be focused on creating a positive environment for both formal and informal sectors, but instead it is a fountain of business-unfriendly regulations.

The latest are proposed amendments to the Companies Act including requirements for lots of additional salaries disclosures. It has also made the competition authorities into a vehicle to pursue all kinds of social objectives, rather than strictly the competitiveness and openness of the economy to new entrants.

The National Treasury through its wider economic policy and financial sector oversight does obviously consider the impact of various measures that could stimulate formal business activity. Its effort to consolidate various tax breaks available to businesses into a simplified one percentage point cut in the corporate income tax rate to 27% is a good example. It is meant to start in April, but is facing pushback.

It will be a good test of whether the rest of government is able to take seriously the need to support the formal sector, or whether the proposed cut will disappear amid calls for higher social spending.

The formal sector needs a political champion now. The first target should be Covid-19 regulations that continue to impose expensive and unnecessary burdens on formal businesses. Delivering the promised tax cut would also help. But then the painstaking business of building a policy environment that would reduce the costs of operating a formal business must begin.

That is the sustainable way to improve employment and wider compliance in the economy.

• Theobald is chair of research-led consulting house Intellidex. This article first appeared in Business Day.

Dr Stuart Theobald joins SAfm’s ‘The Talking Point‘ with Cathy Mohlahlana, as a panellist, to discuss the role of B-BBEE in addressing inequality and creating access to economic opportunities for black entrepreneurs.

“It is important to recognise that B-BBEE has had some successes and there are unfortunate narratives that tend to take hold sometimes that B-BBEE is a failure or just leads to corruption, which we hear parroted often. But we have to step back and look at what has been achieved.”

Listen to the clip below.

Intellidex’s Head of Capital Market Research, Peter Attard Montalto, appeared on CNBC Africa‘s ‘Closing Bell‘ with Tania Habimana to share his views on the Basic income grant – ahead of the Finance Minister Enoch Godongwana’s much anticipated budget speech.

“The key thing is no one is against more social security given South Africa’s inequalities and the poverty that exists. The affordability question is the balance of paying money to people vs spending more on healthcare vs spending more on municipalities to create spaces for SMME development and the informal sector etc. It is the balance of those different issues really where the affordability question is most biting and where I have been a more sceptical voice on the path towards a basic income grant.”