PETER ATTARD MONTALTO: Don’t cheer yet, we’ve only taken the first step towards energy reform

Posted in: Economics, Energy, i-Blog, SOEs, South Africa on August 23, 2021

We’ve only taken the first step towards energy reform, but it is a big step and we are now in a totally different era for the electricity supply industry.

This column is was first published in Business Day.

I am feeling greedy. In  the past two weeks we have got not one but two Electricity Regulation Act (ERA) Schedule 2 amendments gazetted.

While awkward for the department of mineral resources & energy — and we can moan about the language and fudge of the first version — we should recognise that in the end, thanks to unstoppable reformist forces overcoming (seemingly) immovable ministerial obstacles, we are in a totally different era for the electricity supply industry now.

For the first time in a long time we are going to see the private sector being allowed to solve SA’s problems of energy security and cost of supply, through deciding its own projects, getting its own funding, and doing all this in a jobs-maximising way that can establish sustainable pipelines of demand that create sustainable localisation opportunities that actually work, unlike the dictat command-and-control views emanating from the department of trade, industry & competition.

The amount of resistance that reformists got to such a step shouldn’t be forgotten. The piles of evidence that were required and nonsensical arguments that had to be rebutted in the past year are testament to a lack of imagination in energy policy-making  that is not fit for the future and does not provide for the agile change needed to address the scale of the Just Energy Transition and the role of Eskom within that. The fact that our comrades in Cosatu got it first is still amusing.

This introspection is required because SA has a habit of seal-clapping successes and making them seem like they were easy. We are only taking the first (albeit big) step here in energy reform. This is the beginning, not the end.

The next steps on other reform fronts such as water and visas are deeply challenging and complex, though progress is being made with the water issue. With something like spectrum, change may be impossible in any reasonable amount of time.

The emerging contrasts between policymakers who “get it” and those who don’t is stark and will continue to be problematic in the economic cluster after the reshuffle. Such divides were acutely seen at the end of last month at the Presidential Climate Commission as ministers contradicted each other — some were pragmatic, others off-piste. The split between minister Pravin Gordhan on the positive side and deputy minister David Masondo on the bizarre side, and between minister Barbara Creecy on the positive and minister Gwede Mantashe stuck in the mud, was glaringly obvious.

This matters because dealing with the implications and consequences of the ERA amendment, let alone with the wider  Just Energy Transition, is highly complex and cuts across departments. The Presidential Climate Commission is thankfully, strategically, at least starting to box in and paint out guide rails for where the bounds of rationality are in the policy response as we approach COP26.

The great irony of course is that these types of reforms — which the Left seems to show disinterest in — are exactly what is going to expand the tax base over time, and sustainably.

It is crucial to bear this in mind as the arguments rage over the social security green paper and the madcap and unworkable, unaffordable vision it lays out.

There seems to be a view floating out in the echo chamber that is Twitter that somehow “financial” economists are against everything.

Nothing could be further from the truth. I want a more generous wider social wage — broadly conceived, including health, education, income and employment support, and as fast as possible.

Maybe “financial” economists are forced to think in general equilibrium terms, to include the money and financial sectors in their modelling and analysis given that these are our daily bread and butter, in a way others need not and can miss out of their models. Maybe we are acutely aware of corporates and how they function and make decisions on investments and employment, which make up the largest portion of economic activity (not the public sector).

The point is not the provision of support — there can always be discussions about design and incentives — but the affordability of it, how it interplays with revenue and debt-funding constraints and the balance of risk, particularly with a nod to behavioural effects.

While I wouldn’t presume to speak on behalf of my fellow “financial” economists, I think many of them share this view or something akin to it. In other words, this is about choosing between options and seeing trade-offs. It’s not a magic tax that can solve all problems.

Reforms over time will generate the revenue to sustainably finance a higher social wage, but taxing the middle classes significantly more is certainly not the way to go about it. Cosatu, again a beacon of rationality, has forcefully pointed this out.

People say this is unfair. But to frame it in terms of fairness is to suppose you have two viable choices to choose between. That is not the case. The unfairness is at root the lack of growth-boosting reforms since 2009, the lost years of state capture and the conflicting policy motivations now seen from some ministers. This is what creates the unfortunate choice between a step by step approach and a big bang.

But this is all the more reason to push labour-intensive growth reforms faster to expand tax revenues, reduce unemployment and afford a proper sustainable social wage.

Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company.

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