We spend 110 minutes listening to the state of the nation address.
In December of this year, maybe just before the ANC elective conference, we will have had third-quarter GDP and some October manufacturing data and a range of labour market indicators. What will we think of the 110 minutes we spent in February?
My biggest fear here is not that the president can’t give the “right” speech (yes there were some contradictory elements — especially the department of trade, industry & competition agenda of negative reforms versus the positive Operation Vulindlela reforms — but it was broadly “fine”). It is more that the dial is not moving, especially on inequality and unemployment — and that such a long speech indicating so much action (most of it though not all of it “real”) will look decidedly odd when the dial is still not moving in December.
We know the usual reasons: slow or partial implementation, the ossified state, load-shedding and other input factor constraints.
A key example has been the sub-100MW licensing exception gazetted last year. Since then little has actually been rolled out — just six projects in the second half of last year and then all below 10MW. Uncertainty over the process, hurdles still being thrown up with registration looking like licensing and wheeling modalities still not sorted (albeit being worked on) were all partly to blame. It was a classic example of the fact that a whole host of bold-on issues are required to make an initial reform announcement work.
There is no doubt that a huge amount is going on within the machine of the state now — in particular in a ninja-style presidency, which pulls in capacity and funding and goodwill (à la Thuma Mina) from a wide variety of sources. Such a route, however, may strain the relations between the presidency and other departments, though one might see this as a good thing and a fallout of (attempted) positive change. Nevertheless it is a risk to watch.
The real problem, however, seems to be that business and investor sentiment is not shifting in advance of reforms — certainly not on reform speeches such as the state of the nation address — but is waiting for actual implementation (fully, like a large number of 100MW projects being registered) and is also stymied by new issues being thrown up such as the National Prosecuting Authority and its lack of speed or the seemingly total lack of justice served after the July 2021 unrest.
This is of course unusual. Economic cycles that occur due to productivity shocks generally have a strong sentiment kicker early on from animal spirits. SA is not experiencing this and as such it’s a key constraint that the president is concerned with.
A recent paper by Ricardo Hausmann on SA showed yet again that microeconomic issues and their intersection with the political economy were the key constraints on growth, not macroeconomic policy, despite the endless alternative views expressed in these pages.
Perhaps this year, after such a bloated state of the nation address and with the dial still stuck in neutral, we need a fuller explanation of what the microeconomic restrictions are.
My colleague Stuart Theobald started expounding in these pages two weeks ago some of the constraints for infrastructure around the procurement problems that were a key part of this frustration. Ann Bernstein, on the other hand, spoke about the infrastructure pipeline’s lack of movement.
These reports contrasted with the state of the nation’s positive tone and data-heavy section on the subject.
The president still doesn’t realise that the goal here isn’t “infrastructure is happening” but rather it is far faster than before. The former is true, the latter certainly not as we sit down here at 12.5% of GDP investment levels still.
But to continue with Stuart’s chain of thought, I think procurement and especially the Public Finance Management Act and Municipal Finance Management Act are actually a far deeper microeconomic problem here. Entire institutions have been built up around them at every level of government and in the SOEs, which have started complaining about the impact the regime has on their ability to do maintenance in a timely manner.
The Public Finance Management Act also did not prevent state capture yet there seems to be a continual attempt to gold plate it through circulars issues without public comment to try to close every convictable hole. More broadly it has spawned a culture of audit fear and compliance at every level of government. The public–private partnership infrastructure problems under Public Finance Management Act are just one example.
The point here is that even if there was capacity in the government, it would be drowning. Hence development institutions and other outside bodies are a much easier route to funding change, yet this works only in narrow cases.
The Public Finance Management Act and the Municipal Finance Management Act as broad institutional beasts then need a rethink as a microeconomic blockage — a new streamlined system that is responsive, uses modern technology and is enabling rather than blocking non-corrupt activities. Instead, we see little general discussion of them and instead much defence of them (as pieces of legislation) without acknowledging the broader cultural and institutional consequences they have led to.
Thinking more deeply like this beyond the “obvious” can start to unlock things such as the greater involvement of the private sector and NPOs in local government for instance in actually doing things rather than just capacity provision.
This may seem like an obtuse example — and indeed it’s only one of many — but I think it shows we need to look beyond the obvious. Turning this boat around needs to be cognisant of the fact you don’t have the animal spirits kicker and so we need to think more creatively. It’s going to be hard.
Otherwise, come December with so much reform notionally happening we will still be wondering why the dial still isn’t moving.
• Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company. This article first appeared in Business Day.
