PETER ATTARD MONTALTO: Eskom crisis risks dimming hope of hitting growth target

Posted in: i-Blog, SOEs, South Africa on March 26, 2019

Long-term shrinking of per capita incomes would have profound fiscal and job-creation implications

This column was first published in Business Day

SA is a complex swirl of emotions: edginess, anger, despair and resignation. Most worrying is that such emotions apply to business too, putting the country at a very dangerous point — there is a risk of abandoning hope.

Hope should be carefully calibrated — both extremes are damaging. Too much of it leads to complacency, of which there was an excess in too many quarters between 2009 and 2018. Growth forecasts were constantly mean-reverting higher to precrisis averages despite the blatant evidence of serious damage being done.

Too much hope can mean people assume other people are doing the heavy lifting of reform and change or that solutions will magically present themselves because SA has been able to deal with its problems in the past. Some of this thinking infects policymakers now.

Panic is a good antidote to excess hope. As I wrote in December, we need to see hands-in-the-air panic on Eskom to drive change and clear political obstacles to taking the necessary decisions that are not being taken.

Moody’s Investors Service is quite clearly showing an excess of hope despite their framework being meaningfully shocked in October 2018 and now after the budget. As such we are unlikely to see any move in the rating level or outlook on Friday — indeed they may not release a report at all.

Just the right amount of hope is a necessary but not sufficient condition for a recovery in growth. Hope is another way of saying that companies and entrepreneurs are not overly risk averse and can take calculated risks with investment in an uncertain environment without derailing due to self-doubt.

Too little hope, and current growth falls and a lack of investment in productivity-enhancing improvements to human or physical capital lowers long-run potential growth.

This is the point at which we find ourselves at risk. Hope slowly faded during the Jacob Zuma presidency and resurfaced with force after the change of presidency in February 2018 and was sufficient to put a floor under growth falling significantly further but was insufficient without actual reform to meaningfully drive growth higher.

There was still a belief — a hope — that long-term potential growth, while driven down from 3.5% before 2008 to 2.0%-2.5%, was possible.

The Eskom situation risks removing this hope and making mean revision views of where the economy will go in future inappropriate. If no way out is seen and business invests even less than it has done in recent years,  meaningful damage will be done to potential growth.

Long-term potential growth of 1.5%-2.0% is very different to 2.0%-2.5% — it’s the difference between per capita growth increasing or not. Per head incomes would steadily shrink over the long term — a continuation of what was believed to be temporary since 2013. This would have profound fiscal and job-creation implications.

This is not to say that realism is not required. Load shedding is the sum of decisions made around Eskom for the past 25 years and the outcome of a standard way of doing business of a parastatal in a neo-patrimonial political economy. State capture only takes a minor part of the blame. Load shedding is unsolvable in the short run based on an interplay of random events triggering boiler leaks in a very fragile system that has not been appropriately maintained.

The government has been right to (just about) admit this lack of power in the short run. However, so much of the rhetoric has relied on blind hope that something is being done without the challenging decisions being taken to actually instil some real and credible hope in business.

Hope could be offered in so many ways, while boosting credibility, providing light at the end of the tunnel.

The department of energy and the National Energy Regulator of SA (Nersa) could declare an emergency roll-out of new small-scale embedded generation (SSEG) regulations to free the private sector to rapidly roll out units of up to 10MW, removing the arbitrary cap of 1MW. There are believed to be about 2GW of such SSEG capacity with applications submitted to Nersa ready to go. This would rapidly close part of the supply gap.

The department could declare an emergency renewable energy independent power producer programme (REIPPP) bidding window with relaxed conditions and take all bids below, say, 65 rand cents per kWh. Many such projects are ready with financing and such a process could force an additional 3GW-5GW of power onto the system, within as soon as 12 months.

The department could then concentrate on looking to gas peaking and battery storage potential in the next five years while Eskom’s older unreliable assets are mothballed and Medupi and Kusile shut down.

Hope ebbs away often when the solutions are easy yet are still not applied. As Carol Paton said in these pages last week, a toxic web of red tape, lack of capacity and inefficiency on top of politicking all keep the solutions from being deployed. Ultimately it is clear there is no panic to deploy political will to provide hope for business.

The risk is then that long-term growth will be 1.5%-2.0%, not 2.0%-2.5%, and that will be woefully inadequate to deal with the unemployment and inequality crises that are so easily forgotten when there is insufficient electricity.

• Attard Montalto is head of capital markets research at Intellidex.

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