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Ramaphosa’s recovery plan: A tipping point for energy and infrastructure – or another missed opportunity?

The central question which ought to be asked of Ramaphosa’s recovery plan is this: Does it chart a new way forward that will lead to the rollout of infrastructure that is economically sustainable and, to use the buzz word, ‘catalytic’?

Ray Hartley

Research Director, The Brenthurst Foundation

Greg Mills

Director, The Brenthurst Foundation

News · Published 3 November 2020

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President Cyril Ramaphosa has tabled his Economic Reconstruction and Recovery Plan (ERRP). At its centre is the rollout of infrastructure and energy. The question is: Will this plan make a difference or is the ERRP just another ill-conceived product of the acronym factory?

Scepticism runs deep. Ramaphosa is the fifth president to promise a massive infrastructure programme to power economic growth. His predecessors all failed to deliver with the notable (and partial) exception of President Thabo Mbeki.

But Mbeki had the hosting of the Fifa World Cup as a hard deadline for fixing roads, public transport and stadiums. Unleashed on the project, the construction companies cut corners, fixed bids and inflated prices, but they delivered on their promises ahead of the kick-off just over 10 years ago. Of course, the value of that particular infrastructure is debatable: it was supposed to be followed by an uptick in investment and growth, which never happened.

When the tournament eventually took place, Mbeki had been benched and replaced by President Jacob Zuma, who took the glory for the decade of wheeling and dealing that produced the spectacle.

It was downhill from there. Zuma destroyed the state’s capacity to project-manage and finance infrastructure by turning state-owned enterprises into contract-management agencies that worked to enrich his family and his faction within the ANC. The project management capacity of state-owned enterprises was decimated and specialist engineers made way for those who could talk the right language and sign the right contracts.

While delivery took place on deadline, the World Cup build was hardly a model of smart development.

The stadiums were not catalysts for growth so much as harbingers of decades of debt. The ratepayers of Cape Town, Port Elizabeth and other cities where new stadiums with no hope of recouping their costs through revenue were built are still paying for them and will for decades more.

The sweeping roads that whisked teams and Fifa boss Sepp Blatter’s limo to and from venues were to be paid for by the imposition of expensive e-tolls, which have failed.

Essentially, we paid for a giant global party; and we were left nursing the hangover.

The other great infrastructure programme that was initiated by Mbeki and then dragged into the Zuma swamp where it emitted the toxic gas of State Capture was the construction of the Medupi and Kusile power stations. They have spectacularly failed in their purpose – to provide uninterrupted low-cost power to the grid to avoid the calamitous load shedding of the mid to late 2000s.

Not only that, but they were conceived as the wind was literally turning against fossil fuels and now stand as concrete evidence of graft and toxic carbon.

Despite the power stations’ failure to accomplish their mission, South African taxpayers are still paying handsomely for them in electricity tariffs and taxpayer-funded government bailouts.

If there were any doubters left, they knew by the time these flawed behemoths choked into life only to splutter into failure, that South Africa’s infrastructure model was fatally flawed.

The lessons are many and stark, but they can be summarised as follows:

  • The government and its state-owned enterprises have lost the capacity to plan, oversee and commission large-scale infrastructure rollout;
  • The existing models for financing infrastructure amount to little more than kicking the debt can down the road for future generations of taxpayers to pick up;
  • Projects in which the private sector brings project management to bear (the stadiums, the Gautrain) produce high-quality – if expensive and ethically flawed – outcomes;
  • Projects where the SOEs and government have taken the lead (Medupi and Kusile) have produced a mountain of corruption and very expensive failure; and
  • The hardware is one thing; the software another. SA apparently lacks a critical mass of skills to run and maintain these expensive assets, at least in the public sector.

The central question which ought to be asked of Ramaphosa’s recovery plan is this: Does it chart a new way forward that will lead to the rollout of infrastructure that is economically sustainable and, to use the buzz word, “catalytic”?

In short: Will it be done on time and on budget? Will it be affordable? Will it spark growth in the economy?

The “Building a New Economy” document says all the right things.

The plan “seeks to engineer a decisive shift in trajectory that enables the country to emerge from the grip of a severe middle income trap characterised by deindustrialisation, falling per capita incomes, entrenched inequality, deepening poverty and historic levels of unemployment, all exacerbated by the effects of the pandemic”.

The pandemic was a crisis, but also “a rupture with the past, and an opportunity to drive fundamental and lasting change”.

And it does not lack ambition. It will, says the document, “unlock more than R1-trillion in infrastructure investment over the next 4 years”.

Two new bodies – Infrastructure SA and the Infrastructure Fund have been established “with the capacity to prepare and package projects”.

The government also promises to change the way projects are done, including the ‘regulatory framework for public-private partnerships under the PFMA [Public Finance Management Act] and MFMA [Municipal Finance Management Act]’.

The idea is to blend low or no-interest finance from those who want to see green development in power generation, for example, with more expensive debt from institutions and private lenders, reducing the aggregate cost of the loans.

Government itself will put up R100-billion to leverage the R1-trillion from other sources.

There are limits to what this sort of blended financing might fund. Building a new coal-fired power station is unlikely to attract any sort of financing right now, blended or otherwise, because lenders – even banks – don’t like the carbon footprint and the risk of failure in light of our recent record. But solar or wind projects would be good candidates.

This is why the government says it is hoping to provide “a substantial increase in the contribution of renewable energy sources, battery storage and gas technology” to the energy mix. It says that more than half the planned 11,800MW of new generation capacity planned will come from renewable resources.

The government also promises to change the way projects are done, including the “regulatory framework for public-private partnerships under the PFMA [Public Finance Management Act] and MFMA [Municipal Finance Management Act]”.

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This promise to change the way things are done is essential if anything is to be accomplished.

Most recently, the government has shown itself to be slow and indecisive, even in the face of a grave crisis. The recent power emergency is a good case study.

In December 2019, South Africa entered Stage 6 load shedding for the first time. So grave was the situation that the president cut short a trip to Egypt to convene a high-powered meeting of himself, Deputy President David Mabuza, Public Enterprises Minister Pravin Gordhan and Minerals and Energy Minister Gwede Mantashe with the Eskom board at the utility’s Megawatt Park headquarters in Johannesburg.

Swift action was promised to deal with this “emergency”. But it took until February the following year for the government to issue a Request for Information (RFI) to procure additional power for the grid. Then it took until September, more than six months later, for this to be processed and a Request for Proposals (RFP) to be issued for just 2,000MW of power.

This power will only become available in June of 2022 if all deadlines are met.

Still, there are worrying signs that this won’t happen. Transnet, hopelessly out of tune since it was captured and turned into a contract-management company for the Guptas, does not have enough capacity to land the liquefied petroleum gas needed for this programme, no building sites have been identified for the power stations and years of delays are already on the cards for the importation of liquefied natural gas (LNG), which, according to the latest Integrated Resource Plan (IRP2019), should be operational by 2024.

There are other problems with the long-term power procurement model. Private power providers will require Eskom – still the only legal purchaser of electricity – to guarantee buying their output. This will enter the books as a future cost for Eskom which will have to be underwritten by the government. Exactly what this guarantee will amount to depends on the energy mix chosen.

If the government insists, as a recent proposal out of a Cabinet committee chaired by Mantashe has, that coal and nuclear form part of this new build programme, the cost of procuring the energy will go up dramatically.

For example, coal costs three times as much as LNG and nuclear costs more than eight times as much per kilowatt.

Including coal and nuclear makes the whole proposition less attractive to grant money and donors and will make financing more expensive.

While the president is talking about blended finance and renewable energy, his ministers and, presumably, the “war room” headed by his deputy, see energy provision as a way of continuing the statist fantasies of megaprojects in coal and nuclear. Just improve the efficiency of the agency, the thinking goes, and all will be fine.

This is not surprising, for both ideological reasoning and avarice. There are, after all, many politically-connected mouths attached to the old coal network contracts that will squeal to the party for fresh teats once the coal portion is reduced. Renewables don’t have the same contract infrastructure that will offer these networks new sources of rent.

Building new gas, coal or nuclear power stations, on the other hand, requires fuel contracts, fuel delivery contracts, massive build contracts and a plethora of maintenance and other service contracts that will generate new sources of patronage.

The trouble is that under these conditions the energy system is not designed to produce the most efficient outcome. Having a single buyer for power (Eskom) controlled by a single shareholder (government) with a political agenda means that there is no incentive to acquire energy at the lowest cost.

Instead, the cost will be passed on to the consumer and this inflation of the energy price will hobble growth and make the cost of doing business more expensive.

The answer is for there to be competing energy distribution networks rather than the single-buyer model. If it were the case, as it is in some developed countries, that the consumer can shop around for the best-priced and most reliable supplier of electricity, the downward pressure on prices would reduce rents and inefficiencies in the system.

The government says that “the work of restructuring Eskom into separate entities for generation, transmission and distribution continues and will enhance competition and ensure the sustainability of independent power producers going forward”.

But, while there is painfully slow movement to allow private energy generation, there is no movement whatsoever on introducing competition into distribution, which is essential to making energy competitive.

There are encouraging signs that the economic recovery strategy will move away from earlier plans which placed the state at the centre of the economy to a more modern conception where the state seeks to mobilise private sector funds and skills to boost infrastructure.

And, there seems to be an acknowledgment that deep structural reforms, long dismissed as the control fantasies of Western powers, are now necessary and urgent if the economy is to deliver growth and jobs.

Back in June, when the PCERGTP – the Post-Covid-19 Economic Reconstruction, Growth and Transformation Plan – made its appearance, the ANC appeared bent on using the cover of Covid-19 to place the state at the centre of an economy that was mistrustful of business.

We wrote at the time:

There is disdain for business, and the “overestimation of a modernising industrial economy’s ability to correct such structural problems” is a feature of the document. The fact that the addressing of structural problems has been almost wholly in the hands of giant state-owned enterprises that have spectacularly failed to achieve anything except the enrichment of the party elite, appears to have escaped the authors.

Since then, much water – and a forest of paper – has flowed under the bridge.

Let’s hope that there will be a decisive break with the statist inertia of the past and a move towards mobilising the capital and resources of the whole of society to crack the infrastructure and energy problem.

Hope dies, it seems, last.

This was originally published on The Daily Maverick.

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