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Decoupling needed

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Decoupling needed

10th April 2015

By: Terence Creamer
Creamer Media Editor

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South Africa’s prevailing electricity shortages, conventional wisdom holds, are not only undermining the country’s actual economic performance, but also its future growth outlook.

South African Reserve Bank governor Lesetja Kganyago summarised this view following the March meeting of the Monetary Policy Committee, saying: “The outlook for the domestic economy remains overshadowed by the electricity supply constraint, which appears to have had an adverse effect on recent economic activity. This constraint is likely to persist for some time, and has resulted in a downward revision of short-term potential output to between 2% and 2.5%.”

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Similarly in his February Budget address, Finance Minister Nhlanhla Nene said that power constraints were holding back growth in manufacturing and mining, were inhibiting investment in housing and raising costs for businesses and households.

Various economic commentators have likewise modelled a percentage point or more lowering of South Africa’s 2015 growth rate as a result of electricity shortages and disruptions and have cautioned that South Africa is likely to be trapped in a low-growth path until an adequate reserve margin is restored.

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It is difficult to argue against this analysis. In fact, I have to admit that I too subscribe to it, especially if past performance is the main indicator of future performance. In other words, if the current impediments to raising short-term supply are not dislodged and if prevailing attitudes of helplessness on the demand side persists, then there is little option but to agree with the assessment that the electricity constraint will continue to suppress growth.

But some experts believe another future is possible; one that decouples the country’s growth performance from its power underperformance.

Former Eskom executive Steve Lennon, for instance, is adamant that South Africa can change the paradigm to one that seeks to grow the economy in spite of the constraint. He points to a number of economies, including China, South Korea and India, that have, in the past, continued to expand strongly despite their energy shortages.

“How is it that there are so many examples of countries refusing to accept power as an impediment to their economies?” Lennon asks, arguing that a mindset change is required.

“We are where we are. Yes, we’ve got to sort out the power supply situation . . . and there is a big opportunity in that to create space for a lot more growth. But to say that, because it’s a problem, we are not going to grow, we are not going to achieve the objectives of the National Development Plan is quite frankly a road to a nonsustainable South Africa.”

This is arguably where the war room could have its greatest influence; by rebalancing the policy, regulatory and legislative instruments in favour of stimulating and incentivising near-term supply and supporting the pulling of the many demand-reduction levers that still exist in a society that has hitherto been accustomed to cheap and abundant electricity.

By so doing, growth can be decoupled from power and new entrepreneurial energies could well be unleashed, particularly in the electricity services sector.

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