Slow coach with candle-sticks story of reform in SA

The latest consensus forecasts make bleak reading. Growth of 2% this year is a little better than economists had expected a couple of months ago, but that’s mainly because 2021 was a little worse. And over the next couple of years the economy is expected to slide back into the 1% range, with the 2-million jobs lost over the past two years not expected to come back soon.

What about those structural reforms? The ones President Cyril Ramaphosa designated as the priorities of his October 2020 economic reconstruction plan? Even if they were implemented tomorrow, they’d take three to five years to have a meaningful effect on growth and employment — which is why the forecasters can’t factor them into the outlook. But the fact is they are not being implemented tomorrow, or even next week.

There’s been plenty of rhetoric and even early signs of progress. But the pace of reform has been glacial. And while there’s sure to be a rush to get departments and state-owned enterprises to come up with stuff the president can talk up in his state of the nation address on February 10, there is little sign of a pickup in pace.

It’s easy to blame his habit of excessive consultation, or the government departments’ woeful lack of capacity or competence. All that is true, and so too is the fierce resistance to reforms that run counter to ideologies, or ruin opportunities for rent-seeking, or both. But perhaps not factored in enough is how profound the changes are that some of these reforms would mean, if taken to their logical conclusion — and how little those supposedly implementing them have really processed or accepted that.

After more than a century of command and control in network industries such as electricity and transport, these sectors are meant to be opening up. This doesn’t simply mean “public-private partnerships”, which are carefully curated by the government; ultimately it means more open, competitive markets, in which private and public sector players participate. Is the government genuinely comfortable with letting go?

Do those tasked with implementing the reforms genuinely believe these will lead to greater public good, to cheaper and cleaner power for consumers, or more cost effective and reliable freight transport? Or are they just going along with the promises to bring in the private sector because the public sector has no money? Some of the resistance might be less about ideology than empires. Tackling those has been an uphill battle.

Two case studies from the president’s priority reform list illustrate how transformative the reform process could and should be — but also hint at the kind of discomfort still holding them back, many years on. One is third party access to rail; the other is the creation of an electricity market. Officials from the joint presidency/Treasury task team, Operation Vulindlela, told Absa clients in a briefing recently that these were among a handful of critical reforms investors could expect to see in 2022. Investors, no doubt, will believe it when they see it.

Even if Eskom and Transnet are on board — as their leaders say they are — the relevant policy departments still have to come up with changes to the rules that genuinely support opening those markets. And then those in charge have to let it happen.

The idea of “open access” to Transnet’s extensive but hugely underutilised freight rail network goes back at least a decade, and it’s in the department of transport’s fiveyear-old rail policy as well as in the president’s reconstruction plan. Private sector rail operators represented by the African Rail Industry Network say there are at least 250 operators keen to put their trains on Transnet’s lines, and to pay a cash-strapped Transnet to do so. Organised business supports the move, with businesses ready to shift tens of millions of tonnes of freight from road to rail and private operators ready to invest tens of billions of rand in new locomotives and other kit.

But someone is less than comfortable with a market in which Transnet still owns the railway lines but no longer has a monopoly on the trains. Transnet certainly claims it supports the move and is working on costing, with a view to signing with private operators from April. But the department of transport has yet to come up with the rail safety legislation needed.

If the transport folk have been tardy about legislating open markets, the electricity folk have been even more so. In 2021, there were two crucial first steps towards reform of the power sector: minerals & energy minister Gwede Mantashe’s (reluctant) agreement to allow private “embedded” generation of up to 100MW without a licence, and the legal splitting out of Eskom ’ s transmission entity. Those are crucial steps towards easing access to the national grid for private power producers who can add much needed capacity and investment.

But they are only first steps. If SA is to benefit in full from opening up access to the grid, it needs to put in place a power market in which the transmission operator buys electricity on a competitive basis from whoever can supply it, in real time, to meet demand. That means ultimately that the government gives up the power to choose who generates our electricity and that Eskom no longer centrally plans whose power is dispatched, or when.

Eskom’s leadership seems open to this. But it’s Mantashe’s department that has to change the legislation to effect that transformation. That legislation was supposed to be approved by the cabinet in December so it could be published for public comment. By all accounts, the amendments to the Electricity Regulation Act the department came up with did anything but relinquish control in favour of an open market. So it’s back to the drawing board on another reform that has long been on the government’s road map.

Instead of making endless promises that pretend everyone is on board, the president would do well to be more honest about how profound the changes are, and how tough the trade-offs — and to tackle the doubters more directly. SA is not going to get higher economic growth without pain. Trying to make nice is bound to ensure the pace of reform remains glacial.