Enoch Godongwana and reform – Jonathan Katzenellenbogen

Aside from Covid-19, South Africa’s economy has been at the centre of a whirlwind. Unemployment is at an all-time high, while proposed policies such as National Health Insurance and Expropriation without Compensation continue to inject fear into potential investors, here and abroad. As freelance journalist Jonathan Katzenellenbogen writes, our newly-appointed Finance Minister, Enoch Godongwana, has “spoken out in favour of prescribed assets, the idea of savers being compelled to partly invest in government bonds.” Aside from this, Katzenellenbogen notes that in his role as a senior party member, he has been close to decisions “giving the go-ahead for proposed legislation on Expropriation without Compensation.” However, in his new role, he needs to provide reassurance to the markets in order to assist the government in borrowing. Because of the negative factors plaguing our economy, business in South Africa needs to be reassured. The financial journalist notes that “government has moved at a snail’s pace on reform, and business sentiment has been depressed.” – Jarryd Neves

Godongwana and reform?

By Jonathan Katzenellenbogen*

Finance Minister Enoch Godongwana spoke out strongly last week about the urgent need for big structural reforms to boost growth.

The appointment as Finance Minister two months ago of the radical trade unionist and the head of the ANC’s Economic Transformation Subcommittee was not a move that could inspire investor confidence. Godongwana has spoken out in favour of prescribed assets, the idea of savers being compelled to partly invest in government bonds. And being in a senior party post, he has clearly been close to decisions giving the go-ahead for proposed legislation on Expropriation without Compensation. In his new job he has to help the government borrow and hence has to give some form of reassurance to the markets

Over the past few months, business has been in urgent need of reassurance. Government has moved at a snail’s pace on reform, and business sentiment has been depressed. Godongwana’s comments were an attempt to lift sentiment and also perhaps to reply to ‘billionaire’ Rob Hersov’s straight-talking about South Africa being ‘uninvestable’.

At the Sunday Times investment conference last week, we heard words from Godongwana, among his first in public since his appointment, that appeared to boost the chance of deep structural reforms for growth. Godongwana’s five areas of reform are the need for ‘a paradigm shift on Eskom’, release of broadband spectrum which could allow lower-cost internet services, cutting the country’s emissions, sorting out logistics, and changing the environment for doing business by cutting red tape.

Most of these were in the National Treasury’s proposals for boosting growth, launched by then Finance Minister Tito Mboweni in 2019, and now jointly run as the Operation Vulindlela programme with the Presidency. These reforms have been on the agenda for at least a decade, if not longer.

Little real progress

Government seems to demonstrate an inability even under the most pressing circumstances to go ahead with even some of the politically least costly of reforms. There has been little real progress on only a few of the 19 policy reforms in Operation Vulindlela that the government says are needed to transform network industries, including electricity, water, transport and digital communications.

One glaring gap in the Godongwana and Operation Vulindlela agenda is the need to change the labour laws to give the unemployed at least a chance of finding work. The other big gap is that no mention is made of the depressing impact on investment of the requirements for empowerment. Government is in denial on the need for reform in these areas, and organised big business to whom it speaks about policy appears not to raise these matters. They simply do not want to be too confrontational. That’s despite one of the world’s highest unemployment rates. Using the expanded definition, which includes discouraged work seekers, it stood at over 44 percent in the second quarter. And empowerment laws are just a hassle for investors, who very rarely want partners who do not add clear value.

Structural reform without addressing the labour laws and the impact of empowerment requirements on investor appetite will fall far short of providing the country with a good growth story.

The sorts of Vulindlela reforms are the ‘structural reforms intended to reduce input costs, lower barriers to entry and increase competition’, according to a summary put out by the Presidency.

Among the Vulindlela reforms, the increased role for independent power producers has certainly been an area of progress, but Eskom remains in a mess and load-shedding continues. The country’s precarious electricity supply remains a constraint on the economy and investment. Water supply is in dire straits because many municipal facilities are poorly run and maintained. Transnet remains bedevilled by the problems of state-owned enterprises, the ports are constrained, the road networks generally poorly maintained, passenger rail services are decrepit, and trucks remain at risk on some highways.

Bold

As reported in Business Day, Godongwana’s statements last week were bold. He said the government wanted to ‘remove all obstacles which impact’ on the ability of business to invest.

His words on Eskom were encouraging, and just may show new thinking in government.  He pointed out that government had spent 13 years trying to fix Eskom. ‘We need a paradigm shift. What has got to be the focus is fixing the electricity supply. Let’s not talk Eskom, let us talk security of supply.’

If the focus is indeed on fixing the electricity supply, privatisation or allowing independent producers to generate increasing amounts beyond the current 2000 MW ceiling is the solution. It might be difficult to sell off the current ageing fleet of dirty coal-powered stations to international investors, but the private sector could build a new nuclear or gas fleet. As these come on line, the existing Eskom fleet could be retired, and Eskom if necessary just left in charge of transmission.

While Godongwana’s short period in Treasury might have brought about his ideological turnaround, it is unclear whether he has the support of the rest of government.

Godongwana’s second area for reform is the release of broadband spectrum as a matter of urgency. This is not in government’s hands, but in those of the regulator, the Independent Communications Authority of South Africa (ICASA), which has sat on this issue for years. The constrained broadband protects the existing large operators by granting them greater pricing power. Additional allocation of broadband spectrum stands to improve the quality of internet services, and lower prices. A series of deadlines have passed for new allocations, but there seems to be no recourse against ICASA.

Godongwana’s other areas of reform – cutting the country’s emissions, sorting out logistics, and changing the environment for doing business by cutting red tape – have also been on the table for years. A significant cut in emissions is probably impossible without dealing with the Eskom mess, closing ageing power stations, and moving to other sources of energy, including nuclear.

Logistics mess

Sorting out the logistics mess of poorly maintained road and rail infrastructure and insufficient capacity at the ports has been on the agenda since 1994. This will require massive financing and can’t really be done until government gets its finances in order.

Finally, cutting red tape is very difficult in a country where the state is for employment creation rather than good governance, and a mass of bureaucrats have a vested interest in form-filling.

All these reforms are in line with the objective of Operation Vulindlela: reducing input costs, lowering barriers to entry, increasing competition, and boosting growth. But the false starts as well as delays and omissions in the agenda show the limits on what the ruling party can achieve.

There is no apparent move to even think about export-processing zones under which the deadening hand of labour laws and empowerment regulations might be lifted on an experimental basis. This could be a useful stepping stone to larger reform efforts. As global supply chains change in the wake of the lifting of international lockdowns, we risk going to a new and damaging isolation from the world economy due to sheer intransigence.

• Jonathan Katzenellenbogen is a Johannesburg-based freelance financial journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Jonathan has also worked on Business Day and as a TV and radio reporter and newsreader.
• The views of the writer are not necessarily the views of the Daily Friend or the IRR. If you like what you have just read, support the Daily Friend. 

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