Ending load shedding isn’t enough
South Africa’s state capacity is collapsing, and the Growth Lab at Harvard University has provided a host of solutions to tackle some of South Africa’s biggest issues – including the energy crisis.
According to the researchers, South Africa has two major issues undermining inclusive growth in the country – declining state capacity and spatial exclusion.
Looking at the former, the collapse of South Africa’s has been felt in several industries, including electricity, rail, ports and water, whilst also impacting the functioning of municipal governments.
South Africa has also lost its comparative advantage in generating cheap and reliable electricity through its coal resources, which previously underpinned its competitiveness in energy-intensive industries, such as mineral processing.
The lack of reliable energy supply has hurt the nation’s growth, with the South African Reserve Bank estimating that the electricity crisis is reducing growth by two percentage points.
“But we find that the electricity collapse became binding years before load shedding became as severe as it has been lately, especially for the manufacturing sector,” the researchers said.
Four key causes of the underlying systematic collapse were identified:
- Gridlock in the ruling coalition that prevents action;
- An ideology that justifies excluding society from participating in state-reserved activities,
- Over-burdening of public entities with goals beyond their core missions and capabilities and
- Political patronage that has corrupted both the state and the ruling coalition.
The report also notes that reversing the collapse of state capabilities requires new actions to address the deeper causes that have made state collapse so pervasive.
“We find that ending load shedding is not a sufficient goal; rather, South Africa needs to restore its previous comparative advantage in low-cost and reliable electricity,” the researchers said.
“Until recently, government maintained Draconian restrictions on private electricity provision. Even now, the main way for the private sector to provide electricity is through power purchase agreements with ESKOM or self-generation, rather than through a well-designed market.
“Generation is being constrained by lack of capacity in transmission and storage, but little is being done to promote investments in these areas. Provinces, metros, and municipalities have been restricted from buying power other than from ESKOM.
Until last August, private investment in renewable energy was extremely restricted, with still no viable way for society to invest in transmission or storage.
Although regulatory reform is in the works, the process of establishing a new market has not been treated with the speed that the crisis requires.
Municipal issues
Although several state functions have collapsed over the last twenty years, the researchers said that municipal governments were not set up for success.
“We find that decentralization at the turn of the century loaded numerous responsibilities on municipalities without a path to gaining the needed local capabilities to deliver”
“This problem of ‘premature load bearing’ was especially pronounced in local expenditure responsibilities and the unusual responsibility of municipalities in the provision of electricity and water distribution and fee collection.”
This especially hurt smaller municipalities, with public capacity at the local level also impacted by using preferential procurement systems, which have overburdened local governments.
“The collapsing electricity system has further damaged already weak local fee collection and has created a chain of debts from households to municipalities to Eskom and the need for national bailouts.
“One result of this system of decentralization is that places that were left behind from the modern South African economy two decades ago lacked the effective delivery of public inputs and networks that would allow them to connect and participate in the economy.”
Returning to preferential procurement, the researchers said that the purpose of these rules, as per the Preferential Procurement Policy Framework of 2000, was to enable socio-economic transformation by giving preference to previously disadvantaged groups, SMMES and local production
That said, these systems are not only falling short of their goal but also undermining it in crucial ways.
For instance, rural infrastructure failures due to procurement constraints mean that the very people and businesses that were meant to benefit are excluded and disempowered.
The IMF recently noted that improved procurement practices that were proposed by Treasury in 2015 could amount to 20% of the cost of goods and services procured – roughly 3% of GDP or $12.7 billion.
Solutions
Rebuilding state capacity is, however, possible as long as government leaders are willing to address the four causes of state collapse.
Despite South Africa facing several issues with state capacity, the recent turnaround of the South African Revenue Service (SARS), which has recovered the state’s ability to collect taxes, shows that change can be possible
With this in mind, the researchers provided a host of recommendations for addressing the energy crisis, municipal governments, and the state’s capacity overall:
The Energy Crisis
- Create a functioning market for electricity with the following principles: (1) Greater participation of society in generation, transmission, distribution, and storage; (2) Efficient distribution markets that are not too small to benefit from economies of scale (as many municipalities currently are); (3) Clear rules for all market participants that eliminate conflicts of interest and prevent discriminatory treatment; and (4) Final prices that reflect the marginal cost of production, including intra-day pricing.
- Appoint a reform and unbundling sherpa/Czar to push implementation.
- Remove all preferential procurement requirements for the REIPPP. Develop strategic procurement programs that strengthen industries with clear potential to eventually compete in global markets (and move toward this targeted approach instead of widespread, ineffective preferential procurement).
- Use REIPPP design for investments in transmission and storage. Include transmission and storage (with geographical considerations) in the next REIPPP procurement window.
- Rent existing power plants to other operators incorporating high incentives for efficiency.
- Enable new comparative advantage in green electricity: (1) streamline approval of renewable generation, transmission, and storage projects; (2) promote private green industrial zones powered by renewable energy to attract energy intensive industries that want to decarbonize quickly; (3) explore pumped storage hydropower with Lesotho to facilitate the absorption of more renewable projects
Municipal Governments
- Reassign responsibility for electricity and water distribution to geographically efficient regulated monopolies. Such companies could then collect other fees on behalf of municipalities via their monthly bills.
- Develop public “capability banks” and position national/regional entities as service providers to municipalities for activities where local governments cannot be expected to have local expertise nationwide.
The State’s Capacity Overall
- Unburden Capacity – Expand relaxation of preferential procurement requirements on all SOEs and other public entities.
- Build Up and Protect Capacity – Gradual civil service reform to replace the reliance on cadre deployment. Explore the long-term system of civil service cadres that are recruited nationally but deployed across different municipalities and levels of government.
- Leverage Existing Capacity – Establish clear markets that allow for societal capabilities to help fill supply gaps in network industries.
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