PETER ATTARD MONTALTO: Reform is not a single event but a series of shifts

Posted in: Capital Markets, Economics, Politics, SOEs, South Africa on June 28, 2021


Is the government able to manage a process that demands more and more changes as it unfolds?

This column was first published in Business Day.

As SA takes a tentative step out of the reform darkness into the light there has been rather too much seal clapping in response to the spate of announcements recently. Some perspective is instead required.

First, nothing has actually been “done” yet on each of these reforms.

What we have — and is certainly very important — is three strong political signals on electricity liberalisation, the Transnet National Ports Authority (TNPA) and SAA. In each case it has taken years of “wrong” actions and then hard work to build up a massive pile of evidence to shift the political dial finally. Similarly, deciding after 16 years to corporatise the TNPA is a completely different kettle of fish from the far more politically knotty issue of a total rethink of the skilled immigration system, which is bound up with elements of ANC nationalism and xenophobia.

Still, the early political signals show that — eventually — evidence-based policymaking can win through. Now we need to categorise the reforms by their effects.

Some, like SAA privatisation, are the least consequential. They remove negatives from the outlook — whether that is anticompetitive behaviour or never-ending fiscal bailout risk. This can support sentiment but doesn’t really shift the economy in such a way as to boost potential growth to any great degree.

Others, like the TNPA, have limited direct upside but are enabling factors for follow-on reforms such as private sector concessioning of ports, which will actually shift the doing-business environment port users face. Corporatisation can, if done right (still a big if), start to shift the “blob” mindset inside Transnet that thinks it can regulate its own operations and cares more for its monopoly rents than port users. This type of reform will have eventual knock-on implications to higher potential growth.

The “100MW” issue of wider energy liberalisation is, however, a totally different (electric) kettle of fish. This (when it happens) is literally a bit of paper in the gazette that allows the private sector to suddenly shift its behaviour (within the wider regulatory regime of grid codes etc), and can kick-start massive investment immediately. As such there is upside to current growth and future potential growth.

We need all these sorts of reforms and there are clearly dependencies between them. But only the latter really shifts the dial and is the step that actually creates jobs and industrialisation.

Reform begets more reform. As I outlined in these pages two weeks ago, there are huge knock-on effects and additional reforms that stem from energy sector liberalisation where quick decisions are needed to unlock global funding for SA to support the transition.

Similarly, the detail is crucial — the exact form of the schedule 2 amendment that will enact the electricity liberalisation is not yet known and is contested behind the scenes, while the SAA saga rolls on with who has what money and got what permission when.

The TNPA news highlights that the detail of reform is hard but the government makes its life harder by trying to sidestep rather than dive into issues related to debt and loans. This is what has occurred on the TNPA and is a risk being stored up (and growing) with Eskom. In the TNPA’s case this has meant creating an “independent subsidiary”. The initial idea (for a few years) is to create the same sort of structure with Eskom’s independent transmission system market operator (Itsmo).

Game of pretend

The idea of an independent subsidiary that is wholly owned by a Transnet holding company, with a board that does have a fiduciary mandate to its own mission but also to its shareholder, is a game of pretend. It can work for a time certainly with an active minister in Pravin Gordhan watching over it and an active department, with well-written Chinese wall policies as well as appropriate corporate and shareholder mandates.

But in the long term the risk of such structures is that they fail due to the “Mandela problem” — creating institutional and legal structures for the best of times, not for the worst of times. With the TNPA in a regulatory role this means an entity that can be dragged back towards the views of the holdco rather than the focus of what is best for port users and competitiveness. For Eskom’s Itsmo the issue could be far more serious in terms of the energy grid, its planning, prices and the wider economy.

This is why a full stand-alone Itsmo is needed as fast as possible that reports directly into the department of public enterprises, rather than what will come at the end of this year, which will be a “success” only in being a stepping stone not the required endpoint. This is what global funders waiting to support SA’s transition will be looking for as well as those looking to invest in a liberalised energy market.

The lesson is that reform is not a series of tick box plans but a continual stream of paths with a continual succession of steps required. Some areas of the government get this but most don’t. Moving large, chaotic systems is better when everyone is moving in the same direction and gets the aim (not distracted by political contestation and jockeying, which is about to get worse as we move towards the 2022 ANC elective conference).

The Presidential Climate Change Committee seems to be getting this and is starting to shift the envelope of public debate slowly and onwards to actual shifts in nationally determined contributions (NDCs). Add in the climate act (long awaited, coming slowly) and the idea of guiding carbon envelopes for the whole economy over 30 years can be embedded.

The SA political economy is not used to this level of complexity, interconnectedness of policymaking or required speed. Will it crumble to a bumble-along as usual or rise to the occasion, realising there is no other option? This is the debate that will intensify in the year ahead.

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

 

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