A Critical Analysis of MTBPS

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Panel Hosted by Mistra

10 November 2023

Comments by Kenneth Creamer

CRISIS OF LOW GROWTH�MTBPS Projects 0,8% in 2023 (Feb 1,8%), 1,4% for 2024 and 2025

CRISIS OF LOW INVESTMENT�MTPBS talks of increased funding for public sector capital projects and growth enhancing reforms to stimulate private sector investment

Changing our mindset on economic reforms

• MTPBS on electricity and transport – “take into account not just a particular entity, but the transformation of the sector as a whole”
• On Electricity - Balance putting money into extending life of Eskom’s coal fired stations against the need for reform and restructuring of the sector as a whole to enable investment in new technology and new generation, transmission and distribution capacity
• On Rail - MTBPS says ”National Treasury is working with Transnet and the DPE to ensure that Transnet can meet its immediate obligations. Broader reforms of the logistics sector will be guided by the Freight Logistics Roadmap [such as increased competition and private sector involvement].”

Contradictions in our thinking

• It is contradictory to argue that SOC’s must be put under line ministries
• The Energy and Transport ministries should be about economy-wide growth reforms
• They should not be about managing Eskom and Transnet
• Under line ministries reforms are likely to be skewed in the the interests of the SOC’s
• What is the reason for these contradictions:
• Are we wrong-headed? i.e. if we try to fix Eskom and try to make it like it used to be this will not help the SA economy to be more competitive and to grow – rather Eskom must be restructured and made fit for purpose as part of a well-managed just energy transition
• Is it about power, patronage and corruption? i.e. if we can bring Eskom/Transnet under the control of our minister this will give us access to more power and patronage
• At least, the proposed holding company will help to keep sector policy making and SOC operations separate, but the proposal still does not address the core issue of restructuring the SOC’s and making them fit for purpose, and will not avoiding the centralisation of power and the potential for more state capture

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SOC governance should avoid moral hazard

• The problem with blending policy and shareholder responsibilities is that it creates significant moral hazard
• For electricity - what is good policy for an industry experiencing a once-in-a-generation disruption to its business model will not necessarily be in Eskom’s commercial interests.
• In such a context, it’s crucial that the policy Minister is free to make decisions in the interest of the sector rather than to allow the SOC tail to wag the legislative and policy dog.
• Given the size and influence of an entity such as Eskom, it is only natural for a politician to want to control the entity.
• However, in the current context, truly transformative power comes from being able to approach set policy in the interests of economic growth rather than for vested SOC-linked interests .

Well-designed reforms do work to promote growth and job creation

“The recent surge in renewable energy investments most likely explains the recent strong rise in construction employment, which has increased by 108 000 jobs over the past 12 months and by 104 000 jobs in the past quarter” – Kevin Lings from Stanlib responding to Q2 2023 LFS

Reforms have complicated implications – reforms will require more reforms

• As the MTBPS says “new funding models” will have to be developed so that municipalities can continue to earn revenue through the transition to more self generation of electricity be firms and households” (such as connection fees, access to services rather than only use-based tariffs)
• For a restructured Eskom new funding models will also be required (electricity market for a more competitive generation sector, wheeling costs for the transmission and distribution sectors)
• The changes associated with the energy transition will throw up new equity challenges for the electricity supply to poor households (such funding of electricity provision to indigent households as well as the technological possibility of community owned electrification projects)

The MTBPS walks the middle line

• On the left – debt is an artificial constraint, if we spend more we will grow more, we don’t need to borrow we can ‘print money’
• This is an illusory path – what appears to be expansionary will rapidly be contractionary,
• A flirtation with macroeconomic populism will result in reduced capital inflows, rapid currency depreciation, a lack of hard currency for technological inputs, the risk of future debt defaults and ultimately the loss of substantial policy sovereignty as the conditionalities of international financial institutions kick in.
• On the right – government is profligate and in practice political manipulation has already replaced fiscal discipline
• There is risk of this in our future – but in the MTBPS government has shown a commitment to mandating structural reforms as well as restoring fiscal balances,
• The MTBPS comes down in support of some politically difficult decisions to advance growth-enhancing reforms, as well as containing spending,
• But this is all highly contested space and our political class has the potential to continue to destablise our economy through its tendencies to engage in power grabs and the kind of new-patrimonialism that destroys nascent institutions of good governance.