No-one says that complexity is not hard to deal with, but investors are tired of the roundabout.
This column was first published in Business Day.
Why are the Treasury, SA Reserve Bank and the like lauded for a basic level of competence that is often lacking elsewhere? Why is Operation Vulindlela proving to be effective at removing roadblocks?
The answer may be that they are rare islands of skill in dealing with complexity. Much of the rest of government seems to have a complete allergy to it or misjudges its ability to handle it and ends up tying itself in knots.
Complexity comes in many forms. Political complexity is the ability to balance and manage many stakeholders with conflicting vested interests, knowing when and who to annoy and for what reasons.
Reform or policy complexity is the ability to understand complex systems of interacting dependencies not only in regulatory terms but also in the political economy — how and when to deploy what political capital, and alliances to be made to reach the end goal.
Logistical complexity is the sheer tough slog facing a state that lacks capacity to achieve goals and effect change.
As solving SA’s unemployment crisis or mapping a successful path through the Just Energy Transition is a mixture of all these sorts of complexity, it is even more intricate.
In the policy arena the government’s understanding of complex systems has been tested. The social security green paper was a huge embarrassment precisely because it failed to bridge the gap between the consensus for social security reform, and the complexity of doing so across so many spheres of support required as well as funding it without ignoring any consequences. A paper that actually showed some acknowledgment of the complexity of interactions that have been ongoing with social partners and the challenges of funding could have been engaged with and debated over seriously.
State bank
Spectrum has been eluding policymakers for so long because they have not been strategic enough in the past decade to lace together all the dependencies between the various users of spectrum such as telecoms and broadcasting; how to parcel it out; and how to deal with the consequences, such as the need for set top boxes. A path will be quickly cut on this issue as soon as a strategy that solves these issues is adopted and given political backing.
With a state bank, a topic that seems to be having refreshed interest and momentum in some parts of the ANC, the madness is precisely that those proposing it do not understand the complexity of running a bank, especially one with only one shareholder, and the international rules and norms that apply to it. The madness comprises not looking for the outcomes of better lending penetration of small, medium and microenterprises and the like.
When the government is facing a wall of complexity it likes to take one of two routes (or often both): kick it into the long grass and hope it goes away, or commission a task team and report. Both serve to stretch out the problem through time, perhaps with higher costs or poorer outcomes. Eskom is the classic example.
André de Ruyter is hailed precisely because he can understand the complexity of the reform needed to the electricity supply industry and can map a way through it (and was backed for the role by Pravin Gordhan precisely for this quality). Yet De Ruyter’s ability to understand the issues creates problems with people — certain ministers in particular, but also the corrupt elements of the state-owned enterprises (SOE) swamp — who cannot understand the complexity.
Structural problems
However, he is ultimately bound by so many dependencies that the government must fulfil and simply isn’t — whether that is legislative and licensing issues required to reach independent transmission system and market operator (Itsmo) unbundling by year’s end, or the Treasury waking up and making decisions on deleveraging the balance sheet to allow Eskom the space to borrow afresh (now partly at more concessional rates) to strengthen the transmission grid and smooth the social aspects of the Just Energy Transition.
Eskom’s deep structural problems — this complex web of tariff, debt service costs and indebtedness and future demands it must fulfil — have not been resolved since the war room of a decade ago or since the Eskom task team of the beginning of 2019.
The answers have frequently been provided to all levels of government up to the president. The Eskom task team’s report to the president has been buried, yet it set out very clearly what must be done. Instead, we are stuck on the same roundabout, with Eskom saying the same thing at each six-monthly results update: it is not sustainable, it is not a going concern without bailouts and it must delever, and it must receive a massive equity injection or much higher tariffs.
Investors are now bored of this. No-one says that complexity is not hard to deal with. But it is about grabbing it by the scruff of the neck, taking advice, looking at global best practice and getting on with it.
The fear regarding Eskom seems to be that it is just too hard and SA is not used to these things, whether dealing with creditors or legal documentation on bonds. This is rubbish. Used to dealing with exactly these situations worldwide, investors look at the situation perplexedly. They then look across at the Land Bank and see the past 18 months’ mess that has resulted from what should have been a very easy workout, and roll their eyes. In the Land Bank case we have gone around the roundabout several times and are ending up where we were at the start.
The costs of the Eskom status quo are possibly never fully and transparently laid out: higher tariffs by default feeding through ultimately to hit those who can least afford it, higher tariffs for business leading to slower employment growth, paying more and more in interest bills for Eskom annually while cutting back investments in transmission.
But this is the easy route. Allergic reactions occur taking a more decisive route. We are stuck it seems?
• Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company.
